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Business News of Monday, 6 July 2020

Source: Goldstreet Business

SEC to introduce crowd funding in Ghana

The Securities and Exchange Commission is far advanced with its plans to introduce crowd funding in Ghana.

The capital markets regulatory institution expects to have established a framework for its commencement imminently and hopes to have it up and running, backed by the requisite legislation as early as next year, despite the inevitable delays in developing it caused by the impact of the COVID-19 pandemic.

Crowd funding is a relatively new means sourcing both debt and equity financing for promising start-up and early-stage private enterprises Crowd funding is the use of small amounts of capital from a large number of individuals to finance a new business venture.

It makes use of the easy accessibility of vast networks of people through social media and crowd funding websites to bring investors and entrepreneurs together, with the potential to increase entrepreneurship by expanding the pool of investors beyond the traditional circle of owners, relatives and venture capitalists, through a channel that is much more informally structured than the Ghana Stock Exchange and even the Ghana Alternative Market.

This would make it attractive to micro, small and medium-sized enterprises, who could use it to raise needed finance quickly from astute investors willing to put their money into promising new enterprises without going through long, time consuming regulatory processes, while still enjoying substantial protection from financial malfeasance on the part of the entrepreneurs being invested in.

Emmanuel Ashong- Katai, SEC’s head of policy, research and IT explains that the framework being designed by SEC aims to ensure that investors are protected from fraudulent entrepreneurs and would enjoy some level of good corporate governance, thus limiting their risk exposure to the usual business risks faced by direct investors in financing private enterprise. This requires a regulatory framework that is minimal but effective with regards to basic investor protection.

Crucially, SEC’s regulatory framework requires that specialist financial firms will be licensed to provide crowd funding services, which will involve bringing together potential investors and deserving entrepreneurs, and ensuring that beneficiary enterprises are managed responsibly so as to meet their obligations to crowd-investors.

Financial analysts and business development experts alike agree that properly implemented, crowd financing has the potential to transform the MSME landscape in Ghana, which is dominated by enterprises that lack access to adequate funding from formal financial intermediation sources such as banks and the stock exchange.

While the microfinance industry was established to solve this problem, a combination of excessively high lending rates and very short loan tenors, as well as poor risk management practices and outright financial malfeasance by micro-financiers has limited its use primarily to the trading sector and provision of bridging, working capital for enterprises in other sectors.

The terms of micro-finance credit has often led to repayment defaults and consequent loss of collateral ultimately culminating in total business failure.

Crowd financing, however, will offer low cost, long term capital in the form of equity to MSMEs and even debt financing would be offered at much lower cost than through micro-financiers since by bringing investors and entrepreneurs into direct contact, financial intermediaries who demand wide interest margins – ostensibly to compensate them for high credit risk – would be eliminated.

Crowd funding is one of the fastest-growing business financing modes in the world, now being used to raise hundreds of millions of dollars annually in many countries around the globe, and often offering entrepreneurs much more money than they seek.

For instance, one of the more amusing projects to receive funding was from an individual who wanted to create a new potato salad recipe. His fundraising goal was US$10, but he raised more than US$55,000 from 6,911 backers.

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