UAE Introduces New Regulation on Loan Based Onshore Crowdfunding

First time in history, the UAE Central Bank (CBUAE) has launched a new Regulation of new activity on “Loan Based Crowdfunding” in mainland UAE that spells out the rules for issuing Crowdfunding Licenses under the CBUAE.

Crowdfunding is the method of raising funds usually through the licensed online platforms to financially support projects, ventures and charities. It aims to amass small funds from a large number of individuals or organizations who invest in crowdfunding projects for a potential profit and reward.

Crowdfunding is typically technology-driven alternative finance of crowdsourcing that is witnessing rapid growth worldwide for both investors and businesses. The online crowdfunding platforms act as intermediaries raising funds from people instead of conventional sources of funds such as banks, mutual funds etc.

The regulation, currently in force was released recently and published in the official gazette on 28th of October 2020.

The CBUAE launched this regulation for loan based Crowdfunding Platforms (CFPS) operating in onshore UAE to license and regulate online platforms connecting lenders and borrowers. It also aims to support administering the resulting loans.

Equity and donation-based crowdfunding investment platforms are exempt from this regulation.

This Crowdfunding Regulation is fairly wide in scope and encompasses companies that are not based in the UAE if

• Incorporated or hosted in the UAE
• Use an address in the UAE for correspondence
• Provide Crowdfunding to the clients residing in the UAE

Crowdfunding platforms located outside the UAE including those based in the Dubai International Financial Centre (DIFC) and Abu Dhabi Global Market (ADGM) also come under the purview of this new regulation.

The crowdfunding company needs to be a company incorporated in the UAE under the Commercial Companies Law excluding Joint Partnership and Simple Commandite Company.

Depending on the category of license, there is a capital requirement of AED one million or AED 300,000. The crowdfunding company also needs to submit a bank guarantee equal to the value of the paid-up capital.

The same level of governance rules and oversight applies to a crowdfunding company as that of a regulated financial entity including the management fit and other appropriate criteria, internal controls, risk management, auditing and conflict of interest.

The crowdfunding companies must comply with all the applicable Emiratization requirements as and when required.

Every platform engaged in loan-based crowdfunding is categorized based on annual cumulative loans facilitated that dictates minimum capital requirement and are

• Category 1 with AED 5 million cumulative loans facilitated in a year
• Category 2 of smaller platforms with less than AED 5 million cumulative loans facilitated in a year

The borrower in crowdfunding activity needs to be a UAE registered company and can not be an individual, sole proprietorship or a company registered outside the UAE.

The regulation doesn’t impose any restrictions on the lenders onboard, however, grouped the lenders based on the financial status as

• Retail lender and not a market counterparty
• A market counterparty with evidence of assets exceeding AED 2 million outside of the primary residence with a self-attestation of being a market counterparty

The regulation imposes various obligations on the crowdfunding company such as assessing the suitability of lenders, anti-money laundering, borrower diligence and risk assessment through loan administration.

The regulation also specifies clear disclosure requirements for both the borrowers and lenders.

Individual and cumulative lending limits are also imposed for retail or market counterparty lenders as well as borrowing limits, AED 10 million per borrower in any financial year.

The crowdfunding funds must be held in segregated accounts with the UAE banks subjected to regular audits.

The regulation is a welcome move for the UAE’s financial industry and would increase the funding options for customers.