Extending Equity Crowdfunding Beyond Canada’s Borders

How Canadian investors can help grow social enterprises in Kenya

This executive summary lays out highlights from the report Extending Equity Crowdfunding Beyond Canada’s Borders: How Canadian Investors Can Help Grow Social Enterprises In Kenya, written by Max Bell School Master of Public Policy students as part of the 2021 Policy Lab.

Access the summary and presentation below, and read their full report here.

Small and early-stage companies in many developing countries, particularly in Sub-Saharan Africa, are in need of investment to deliver impact to their communities. Underdeveloped capital markets and limited number of traditional paths to capital have left gaps in access to much-needed funding in these emerging markets. These gaps present a global opportunity for new and innovative methods of raising capital to connect investors with emerging markets.

Equity crowdfunding (ECF) is the fundraising of small amounts of capital from a large number of investors for a business venture. Investors have direct interests in the success of the companies they hold an equity stake in. Cross-border ECF is a potential pathway for capital to flow from investors in developed countries such as Canada, to small and medium enterprises (SMEs) in developing countries. It has the potential to stimulate innovation and reduce poverty in the developing world. This is an innovative mechanism that aligns with Canada’s commitment to the UN’s Sustainable Development agenda by leveraging support from private investors who are risk tolerant.

This brief examines the potential for cross-border ECF from Canadian investors to Kenyan SMEs as a representative case and assesses the feasibility of this type of investing for development purposes. Kenya faces significant socioeconomic challenges but has high potential moving forward owing to its rapidly growing population and place as one of the fastest-growing economies in Sub-Saharan Africa.

The regulatory landscape presents challenges for cross-border ECF, particularly in Canada. Securities regulation in Canada falls under provincial jurisdiction without a unified national regulator. Efforts to create a single regulator have been confronted with challenges concerning federalism and protecting regional capital markets. A cooperative federalism approach is constitutional, but faces challenges of legitimacy with Quebec and Alberta firmly opposed to delegating their power to a national regulatory body. Despite this, there is a degree of regulatory coordination through national and multilateral instruments.

The provincial securities commissions are self-funded and independent Crown corporations that are each accountable to their respective Ministers of Finance and to the public via the provincial legislature. Policy change is driven by the needs of Canadian investors and the regulators’ primary responsibility is to protect investors from risk.

To distribute securities within Canada, issuers must publicly file a comprehensive and detailed disclosure document called a prospectus. This policy exists to ensure investors have access to all of the information they need in order to make informed investment decisions and ensure that issuers are held accountable for their disclosures. Small and early-stage businesses may not have the capacity to prepare a prospectus and comply with ongoing disclosure requirements, so regulatory exemptions exist to help companies raise funds without the time and expense of preparing a prospectus. The current prospectus exemptions in Canada are not well suited to the needs of Kenyan SMEs. Amending the prospectus exemptions in Canada could be a potential mechanism to facilitate cross-border ECF.

Regulatory frameworks vary from country to country according to shifting priorities. Investor protections like restricted marketing and promotional offers, limited access to fundraising platforms, and other regulations to which platforms must adhere also vary across jurisdictions. Many countries worldwide, including the UK, the EU, and the US, have developed policy and regulatory frameworks that have created a more enabling CF environment. Innovation and enterprise creation have been significantly boosted in these countries as a result. In order to determine the impact of each approach on their respective markets, it is crucial to examine them. Countries can avoid creating barriers to their economic growth and development by identifying which regulations are most conducive to growth and which ones are too restrictive. There is potential for Canada to learn how to address CF regulatory barriers and gain insight into best practices.

In a similar fashion to the Canadian system, CF in the EU was underdeveloped and fragmented. In the past decade, various member states had introduced minor regulations tailored to their local markets and investor needs to encourage the use of CF services within their borders, which made cross-border investments very difficult.

Since September 2015, it was determined in Europe that crowdfunding could offer potential economic growth and increased competitiveness. European officials have then worked actively on harmonizing regulations and addressing existing barriers. The adoption of the Regulation on European Crowdfunding Service Providers (ECSP) for business in November 2020 created one of the most harmonized regulatory environments for CF. As a result of the ECSP, lending activities and equity-based crowdfunding are regulated uniformly across the EU. Furthermore, the act introduced a passport system that facilitates cross-border operations. Although the regulatory environment in the EU differs from the Canadian environment, there is potential for Canada to adopt a similar passport system.

As one of the few countries that regulate non-conventional ways of funding, the UK has the most developed ECF industry in the world and has also paved the way for loan- based crowdfunding. CF is more “principle-based in the UK,” which has allowed for its regulatory framework to evolve in collaboration with various stakeholders. Through its landmark reform legislation, the Financial Services and Markets Act 2000 (FSMA), the UK’s regulatory body, the Financial Services Authority (FSA) (later the Financial Conduct Authority), was established and a host of other regulations which allowed for the growth and expansion of the CF market. Compared to other regulatory bodies, the FCA’s oversight of ECF is relatively relaxed.

In the US, similarly to Canada, a restrictive ECF regulatory framework has largely prevented the expansion of their markets, especially their extreme investor protections, which had severely constrained ECF platforms. Several significant changes have been made to further advance the ECF industry. New securities regulations were adopted after the passing of the JOBS Act in 2012, by the US’s regulator (the Securities and Exchange Commission (SEC)) in 2015 and recently with modifications to Regulation CF in 2020. Changes include limiting increases and “test the waters” provisions which allow companies to build crowdfunding pages where they can share information with investors before fundraising.

Kenyan SMEs, the investment recipient identified in this brief, exhibit strong potential to make a profit as they serve the country’s vastly growing population. Social enterprises belong to the SME sector. They aim to address the country’s socio-economic challenges alongside profits, and they are fast-growing. High unemployment rate among young people is one of these challenges. Food insecurity and lack of access to health services for residents of rural and urban slum areas are other major challenges that the country has been facing.

There is a need to empower social enterprises to solve these societal issues. Many of them have already contributed to lowering unemployment among young people by hiring and training them with employable skills such as computer usage and customer services. Moreover, start-ups with a focus on digital innovation such as telemedicine can especially make meaningful impacts.

However, a lack of capital and investment has been Kenyan SMEs biggest struggle which limits their ability to make bigger changes. It is also hard for small companies to obtain loans as banks perceive them as highly risky entities, although many of them do make a profit and create jobs. The current foreign direct investment and loan options for SMEs have been inadequate in closing the financial gap. This calls for alternative finance solutions such as cross-border ECF to help social enterprises grow and in turn better help Kenya achieve SDG Goals.

Kenya is the most active crowdfunding nation in East Africa due to its relatively advanced economy, infrastructure, internet connectivity, and mobile money use. Most of the funds in crowdfunding in Kenya comes from funders outside of the country. This indicates the appetite for diaspora investment in crowdfunding in the region. ECF, however, accounted for only 1 percent of Kenya’s crowdfunding ecosystem in 2016, while donation-based crowdfunding accounted for around two-thirds of market activity.

The low uptake of the equity-based model is primarily due to the lack of a regulatory framework in Kenya. Despite the slow development of a national regulation, the Kenyan government and its Capital Markets Authority (CMA) have been favorable to the prospects of ECF. They have partnered with the foreign funded African Crowdfunding Association (AFCA) in developing ‘ACfA Label Framework,’ a localized regulatory framework for securities-based crowdfunding. Yet, at the end of the donor funding in 2020, it is doubtful to what extent that the Label framework will be operationalized.

In the absence of a regulatory framework, ECF platforms in Kenya have operated through the de-facto tolerance of the regulator. Generally, the lack of regulation means no restrictions in investing in ECF. In 2019, CMA launched a Regulatory Sandbox, which is at the final stage of developing a Regulatory Framework for Debt-Based Crowdfunding Platform in Kenya. However, currently, it is unclear whether the in-development Regulatory Framework will encompass the equity-based model.

Overall, we found no formal regulations in Kenya that prohibits investment flow from ECF. The Kenyan government is actively seeking to draw foreign investments as part of its national development strategy of becoming a middle-income industrialized country with the ‘Vision 2030’. As such, the country’s Investment Policy 2019, the Companies Act 2015, the Investment Promotion Act 2004, and the Foreign Investment Protection Act 2012 were developed to create a conducive regulatory environment for foreign investment. However, these legislations do not specify provisions related to cross-border equity investments of small amounts and the extent of regulatory protection for such investment remains unclear.

To help policymakers and ECF organizers better evaluate the feasibility of cross-border ECF, this paper assesses risks and ways to mitigate them if investing in Kenyan SMEs. Overall, there is a modest, acceptable level of risk to invest in Kenyan SMEs based on a high level of investor confidence, relatively stable political system, solid legal protection for foreign investors of big- scaled investment but an unclear one for investors of SMEs.

Commonly perceived risks of investing SMEs in Kenya include limited ways to raise funds, theft by employees, low-quality management, and lack of access and insights to the global market. In addition, regulators around the world are also concerned about failure of crowdfunding platforms, information asymmetry, and investor inexperience. To mitigate these risks, three strategies are needed to protect ECF investors: conduct due diligence of each business by carefully validating them; display everything that investors should or want to know about each business on the ECF platform, including potential risks; and encourage investors to diversify their investment and only putting down the amount that they can afford to lose.

The brief also illustrates a positive outlook of expanding the impact investment space to include Canadian retail investors, possibly through cross-border ECF. The benefits of investing in Sub-Saharan Africa are seen and taken by accredited investors, but this investment space has been limited for retail investors. Should it be open to them, it is possible that they will be interested in getting involved, as the number of retail investors tremendously grew since the COVID-19 pandemic; and that Canadians tend to align their investment with their values and ethics and care about social impacts that companies make.

Particularly, the Kenyan diaspora is a population among retail investors that would likely invest in Kenyan SMEs through cross-border ECF. Not only do they have inherent knowledge about the overall environment in Kenya thus are competent in recognizing trustworthy enterprises, but the diaspora community is also socially and emotionally connected with their home country and has a track record of helping businesses back home. If informed well, they could be among the first Canada-Kenya ECF investors and serve as an example for other retail investors.

Summary of Recommendations:

The research and analysis from this brief underpin the following six recommendations for policymakers, advocates of ECF and international development specialists. The recommendations target at facilitating the flow of capital from Canadians to Kenyan SMEs through cross-border ECF:

  1. Advocate for revisions to Canadian securities regulation prospectus exemption pathways in order to better facilitate cross-border ECF. The two prospectus exemption revisions with the greatest potential to enable cross- border ECF are amending the start-up crowdfunding exemption to allow foreign business to be eligible to use it and opening up the accredited investor exemption to allow individuals to qualify as sophisticated investors through criteria other than financial wealth.
  2. To better understand what policy changes would best address the needs of Kenyan businesses, the diaspora population in Canada, and the broader Canadian public, further and more targeted research should be conducted to assess the appetite for investment in this market and the need for fundraising in the form of ECF.
  3. To address a major concern of the regulators - information asymmetry, which is an unfair situation for investors, ECF platforms must maximize details about each fundraising business based on due diligence assessments, inform potential investors about the risk of investing in SMEs in emerging markets, and provide a space for investors to share experience with each other.
  4. As a way to attract investors, mitigate investment risks and sustain platform operation, advocates of the cross-border ECF should seek blended financing support from the Government of Canada and from international organizations. Cross-border ECF fits well with the Government’s approach to innovative financing (including blended financing) for sustainable development.
  5. Showcasing social impacts and reporting them back to investors are key to gain and retain investors. More Canadian investors are taking Environmental and Social Governance into account when making investment decisions, and impact investors generally expect to see impacts after a period of time. Thus, it is important to display fine, compelling details of the businesses on the ECF platform while also establishing evaluation strategies to track their progress for reporting purposes.
  6. Donation crowdfunding catered to the Kenyan diaspora can be explored as an alternative in supporting Kenyan SMEs, while the current challenges of ECF are being addressed. Donation crowdfunding’s less complicated regulatory requirements, easier communicability, and existing familiarity within the diaspora mean that it can immediately capitalize on the Kenyan diaspora’s interest to contribute to their home country through direct project investments.

Download the full version of this report here.

This Policy Lab was presented by our MPPs on July 15, 2021. Watch the video below:

About the Authors

Asif Khan

MPP Class of 2021

Camilla Liu

MPP Class of 2021

Danielle Appavoo

MPP Class of 2021

Photo of Yvette YakibongeYvette Yakibonge

MPP Class of 2021




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