The Securities and Exchange Commission (SEC) says it plans to introduce crowdfunding in Ghana by next year.
The capital markets regulator expects to establish a framework for commencement of the services by 2021 and hopes to have a system up and running, backed by the requisite legislation.
Crowdfunding is a relatively new means of sourcing both debt and equity financing for promising start-up and early-stage private enterprises.
It involves 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 crowdfunding websites to bring investors and entrepreneurs together.
This has the potential to increase entrepreneurship by expanding the pool of investors beyond the usual circle of owners, relatives and venture capitalists, through a channel that is much more informally structured than the Ghana Stock Exchange (GSE) and even the Ghana Alternative Market.
This would make it attractive to micro, small and medium-sized enterprises, which could use it to raise finance quickly from astute investors willing to put their money into promising new enterprises without going through a long, time-consuming regulatory process.
Emmanuel Ashong- Katai, the SEC’s head of policy, research and IT, said the framework being designed by the SEC aims to ensure that investors are protected from fraudulent entrepreneurs. It will 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 which is minimal but effective with regard to basic investor protection.
Crucially, the SEC’s regulatory framework requires that specialist financial firms be licensed to provide crowdfunding services. This will entail bringing potential investors together with deserving entrepreneurs, and ensuring that beneficiary enterprises are managed responsibly to meet their obligations to crowd-investors.
Financial analysts and business development experts agree that, where properly implemented, crowd financing has the potential to transform the MSME landscape in Ghana, which is dominated by enterprises which 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, have limited its use primarily to the trading sector and provision of bridging, working capital for enterprises in other sectors.
The terms of microfinance credit have often led to repayment defaults and a consequent loss of collateral, ultimately culminating in total business failure.
Crowd financing, however, will offer, at low cost, long-term capital in the form of equity to micro, small and medium-sized enterprises (MSMEs). Even debt financing will be offered at much lower cost than through microfinanciers.
Crowdfunding is one of the fastest-growing business financing modes in the world, and is being used to raise hundreds of millions of dollars annually in many countries around the globe.
It often offers 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 $10, but he raised more than $55,000 from 6,911 backers.