A lot has changed since the digital revolution began in the 1980s with the launch of the ‘Internet’. Subsequently, technological developments on the back of the Internet – such as mobile devices, social media networking, big data, clouds services among others – have led to disruptive experiences to our traditional, pre-Internet ways of work and life.
Equally, activities of private companies including their ability to raise funds to support their operations have not been left out in these technological advancements. The development of new Internet-based platforms is ensuring easier, faster and broader access to alternative funds for businesses across the world.
However, private companies in Ghana are currently unable to do so due to our existing restrictive regulations to participate in these new opportunities for funding either as equity or debt.
In this article, I shall evaluate the new innovative funding platform – crowdfunding, the existing legislative framework for funding private companies, and offer some recommendations for legislative interventions that stay ahead of the technological curve.
Crowdfunding – Types, Benefits and Risks
Ethan R Mollick defined crowdfunding as “the efforts by entrepreneurial individuals and groups – cultural, social, and for-profit – to fund their ventures by drawing on small contributions from a relatively large number of individuals using the Internet”. This involves the use of Internet-based digital and payment platforms to raise funds. In the process, a unique platform is created linking fund/capital seekers to fund/capital givers in real-time, expanding the scope of funding beyond national borders.
The underlying practice of crowdfunding is not new except for its mode of delivery – the use of Internet-based technologies.
The Bank of Ghana in its ‘Crowdfunding Policy’ brief of February 2021 succinctly traced the evolution of crowdfunding when it said: “Crowdfunding has evolved from the localised collection of funds to support business ventures or individuals in communities, to a global platform where funds are solicited through the Internet and social media for a similar agenda of funding projects”.
Broadly, there are two models of crowdfunding – investment and non-investment. Investment crowdfunding can be categorised into lending-based products (involving peer-to-peer (P2P) lending and social lending) and equity-based products (where fund givers exchange funds for shares – equity). On the other hand, non-investment models include reward-based and donation-based crowdfunding products.
In Ghana, the Bank of Ghana has classified crowdfunding products into four (4) main categories: namely Donation, Reward, Equity, and Debt/Peer-to-Peer lending. Drawing on its mandate following the enactment of laws promoting reforms in the financial services sector, the Bank of Ghana has provided a policy guideline for the licencing of Donation and Reward Crowdfunding products going forward.
Currently, no policy guidelines exist for the regulation of crowdfunding products which could be of immense benefits to private companies in their financing efforts – Equity and Debt/Peer-to-Peer lending in Ghana.
The high consumer confidence and adaptiveness to innovative developments in digital finance and mobile money make crowdfunding a more attractive vehicle for funding private companies than traditional venture capital, angel funding, etc. With the changing financial service landscape anchored on technological advancements like mobile money, banking innovations and secured 3rd party payment platforms, private companies have the enormous advantage of securing funding from diverse and dispersed funders through crowdfunding products.
As an alternative financing model, crowdfunding also offers the benefits of securing capital at lower cost, business exposure and promotion through multiple platforms – and in some instances serving as feedback on a company’s product or service and building an online community of support.
Nonetheless, crowdfunding is prone to fraudulent cyber activities – permitting fraud through the creation of fake profiles or misrepresentations, data breaches, money laundering among others. Also, the opportunity for in-person engagements leading to investment is lost – posing the risk of limited operational understanding of the related businesses before investment decisions are made.
The Legislative Framework for Raising Funds by Private Companies in Ghana
A Private Company can raise capital/funds through equity or debt – short or long-term. By equity fundraising, shares are issued to funders in return for their investments with entitlements/benefits guaranteed by law. Similarly, a private company can use debt financing arrangements such as loans, debentures etc to secure credits/funds for its operational activities on terms permissible by law.
However, a private company’s ability to utilise equity or debt fundraising mechanism is not without prohibitions and restrictions. Generally, the Companies Act, 2019 (Act 992) prohibits a private company from making an invitation to the public to acquire shares or debentures of the company. Equally, a private company cannot make an invitation to the public to deposit money for fixed periods or payable on call, whether bearing or not bearing interest. Further, a private company is restricted to a specified number of shareholders and debentures (50) unless within the exceptions of the law.
In clear terms, a private company is prohibited from making an invitation to the public for any funding need, and is restricted to not more than 50 shareholders and debenture holders at a time unless it converts into a public company.
Circumstances constituting an invitation to the public have been provided for in Act 992 to include an offer or invitation to make an offer advertised or disseminated in Ghana by a newspaper, broadcasting, cinematograph, electronic communication, or any other means (media)
The limitation of the discussion to these considerations of Act 992 is because the current prohibitions and restrictions are the exact permissible means of activating a crowdfunding product either as equity or debt/P2P lending for private companies. To leverage crowdfunding – equity or debt/P2P, a private company will be engaged in making an invitation to the public. Further, the potential reach (funders) may exceed 50 people.
Therefore, a private company cannot enjoy the benefits of or participate in crowdfunding because the primary legislation – the Companies Act – prohibits the raising of funds in the manner defining crowdfunding products.
Further, the current absence of a policy guideline or regulation on using crowdfunding products for public companies implies that even where a private company converts into a public company, the limitations on its ability to derive benefits from and participate in crowdfunding products will remain.
The Way Forward
In the year 2020, the Securities and Exchange Commission (SEC) announced it would introduce a crowdfunding framework this year, aimed at ensuring investor protection from fraudulent entrepreneurs. The framework is anticipated to provide guidelines for the acquisition of licences for the provision of crowdfunding services – as alternatives to structured markets like the Ghana Stock Exchange (GSE) and Ghana Alternative Market (GAM).
While all these efforts to provide policy guidelines like the Bank of Ghana has done for banks and other financial institutions is commendable, a licencing regime for equity and debt crowdfunding products should be structured to allow not only public companies to enjoy or participate in any licenced crowdfunding product. However, the considerations should extend to working on a policy guideline that allows private companies to also participate without necessarily converting into public companies; and where such considerations will result in the amendments of our Companies Act, 2019 (Act 992) to remove the prohibitions on private companies, SEC must pursue stakeholder engagements to achieve same.
Crowdfunding has become a financing tool many Startups, Small and Medium Enterprises can leverage to grow and expand. Therefore, any policy guideline to regulate equity and debt crowdfunding products in Ghana must balance the need for these businesses to remain private and still benefit or participate in an open communal funding initiative.
Technology continues present limitless possibilities. We must continue to adapt to the changes technological advancements will bring our way. In seeking to regulate the use of technology and provide a structured system for its secured deployment, we must seek a balance between the old and new.
Therefore, as we expect the policy guidelines from SEC on equity and debt/peer-to-peer lending, SEC must seek to ensure the rollout of licenced crowdfunding products does not result in the mandatory conversion of private companies into public ones. At least, private companies must be permitted to leverage crowdfunding products while remaining private companies – and where the Companies Act must be amended to expressly permit these, it must be amended.
About the Author
RICHARD NUNEKPEKU is the Managing Partner of SUSTINERI ATTORNEYS PRUC, a client-centric boutique law firm specialised in transactions, corporate legal services, dispute resolutions and tax.
Richard is also a research and teaching assistant for the Commercial Law Course at the Faculty of Law, Ghana Institute of Management and Public Administration (GIMPA). He will welcome other views through [email protected]