The Central Bank of Bahrain (“CBB”) has issued new regulations applicable to crowdfunding platform operators following a comprehensive review of the existing regulations, which were first issued in 2017. The new regulations contain rules regarding equity-based crowdfunding and financing-based crowdfunding and are covered under Crowdfunding Platform Operators Module (Module CFP). Module CFP can be found under CBB Rulebook – Volume 5: Type 7 – Ancillary Service Providers.
The new regulations include principles governing the conduct of operations by the platform, rules on platform offers and disclosures, avoiding conflicts of interest, due diligence of borrowers/issuers through Know Your Customer (KYC), segregation of client money from platform operators and other measures to ensure safe operation of the activity. Additionally, the new regulations require the crowdfunding platform operators to ensure suitability of the products being offered on the platform to retail clients.
Commenting on the new regulations, Director of Regulatory Policy Unit – Mrs. Shireen Al Sayed, said
“The CBB strives to continuously review all regulations and directives related to the provision of financial services in the Kingdom of Bahrain in order to update and enhance them in line with the developments in the financial sector. Furthermore, due to the increased demand for introducing new financing products to serve SMEs and start-ups, the CBB has been keen to review the crowdfunding platform operator regulations to be in line with the economic recovery plan for the financial sector in terms of providing a conducive environment for crowdfunding platform operators. The evolving business models such as crowdfunding will potentially provide new alternative sources of funding for new businesses and start-ups and serve as a catalyst for growth of such businesses. The new regulations are principles-based, simple, easily understood and contain the minimum safeguards to ensure the crowdfunding platforms do not pose excessive risk to the financial sector.”
Commenting on the new directives, Ms. Yasmeen Al-Sharaf, Director of FinTech & Innovation Unit said “Crowdfunding provides a viable alternative to tap into a new source of funding for start-ups and new companies. FinTech solutions have the potential to enhance capital flows to the economy commensurate with the growth and expansion plans of entrepreneurs through this new source of funding, thereby, helping to develop the businesses of these start-ups. The CBB will continue to explore and develop new financial tools for emerging business models to keep pace with the needs of the local market, as well as to support and encourage efforts to create new services that match the evolving trends in the field of financial technology.”
Many international jurisdictions see crowdfunding as an innovative way to facilitate funding for small and medium sized enterprises and seed capital to start-up companies, with a goal of promoting economic growth. In addition, other benefits of crowdfunding may include:
· Convenience of online platform;
· Lower cost of capital/high returns;
· Cost efficiency of relatively simple infrastructure;
· Portfolio diversification; and
· Increased competition in a space traditionally dominated by a few providers.