Wednesday, March 23, 2022
Zawya - UAE approves crowdfunding: New law, benefits, restrictions; all you need to know
Vijay Valecha, Special to Zawya March 23, 2022
The UAE government on Sunday approved the use of crowdfunding to assist small and medium enterprises to access funds.
This new fundraising method will open an additional avenue for SMEs to tap funds to grow their business.
Data provided by Khalifa Fund shows that approximately 50 to 70 per cent of the SMEs' applications for funding are rejected by conventional banks. Loans to SMEs account for just four per cent of the outstanding bank credit in the UAE, well below the Mena average of 9.3 per cent. Therefore, this new government initiative is the need of the hour to support the critical sector of the economy.
What is crowdfunding?
It is a way of raising money to finance projects and businesses. It enables fundraisers to collect money from a large number of people via online platforms. A modern and innovative way of sourcing funding for new projects, businesses or ideas, crowdfunding enables interaction between fundraisers and the crowd.
How does crowdfunding work?
Some crowdfunding campaigns offer an incentive, such as special access or pricing at the launch of a product. When setting up a crowdfunding campaign, people need to set a fundraising goal, which is usually the amount they need to get the project off the ground. What crowdfunding essentially does is eliminate the back-and-forth between entrepreneurs and investors. Entrepreneurs can take their offer directly to the public to seek financial support from people who are interested. In other words, the waiting period between having an idea and raising the funds to make it a reality is significantly reduced.
What are the benefits of crowdfunding?
An active crowdfunding campaign is a good way to introduce a venture’s overall mission and vision to the market, as it is a free and easy way to reach numerous channels. Many crowdfunding platforms incorporate social media mechanisms, making it painless to get referral traffic to the website and other social media pages. It not only allows an entrepreneur to present a business and product, but it also gives them the ability to share the message and the purpose behind it. Launching a crowdfunding campaign gives an entrepreneur the ability to pre-sell a product or concept that they haven’t yet taken to market. This is a good way to gauge user reaction and analyse the market in order to decide whether to pursue or pivot on a given concept.
What kind of projects are usually funded under crowdfunding?
Creative businesses in blockchain, NFTs, Art find crowdfunding easier to raise funds. Even companies following Islamic finance principles can raise funding in a Sharia-compliant way through this method.
Are there are any restrictions on who can involve in crowdfunding?
Generally, there are no restrictions and anyone can invest in a Regulation Crowdfunding offering. Because of the risks involved, investors have a limit in how much they can invest during any 12-month period. The limitation on how much they can invest depends on their net worth and annual income.
Under the UAE’s new law on crowdfunding, which sectors will benefit the most?
Blockchain businesses, NFTs, Art and Shariah could benefit significantly from the new law. It will allow cooperatives to benefit from the advanced services provided by the UAE’s financial markets in terms of transparency, flexibility and speed of procedures, and will also enhance the economic return on cooperative activities.
What are the pros and cons of investing in crowdfunding?
One of the most attractive features of crowdfunding platforms is that they set the bar relatively low when it comes to minimum investment thresholds. Crowdfunding has the potential to be a lucrative bet for investors. Depending on the type of investment involved, it’s possible to match the market or even beat it. In the real estate sector, for instance, investors may be able to watch the investment grow and see annual returns of 12 to 14 per cent.
Crowdfunding has injected a new degree of transparency into investing that investors don’t always get with other kinds of investments. When investing in a startup, for example, an investor can get the full rundown on the company before ponying up any cash.
What should a new investor take into account when investing in crowdfunding?
The reputation of the person who is raising funds, their track record, educational/technical capabilities, the presence of other prominent investors is key factors.
What are the platforms available for crowdfunding in UAE?
Aflamnah, Eureeca, Humming Crowd Real, Durise, Beehive, Yomken and Zoomaal are some of the platforms available.Source: