The Dubai Financial Services Authority has issued the first set of rules to govern loan-based and investment-based crowdfunding platforms, the first such set of rules in any state that belongs to the Gulf Co-operation Council.

New rule 2.2.10D in the general (GEN) part of the DFSA's rulebook dictates that only a body incorporated under the Dubai International Financial Centre's Companies Law can perform the financial service of operating a crowdfunding platform. Under no circumstances must a crowdfunding operator manage assets, give advice about financial products or credit or manage a collective investment fund. It must also avoid operating a platform that facilitates investments in warrants, certificates, units, structured products or derivatives.

The operation of a loan crowdfunding platform will apply to such crowdfunding services as peer-to-peer (P2P) lending, peer-to-business (P2B) lending and business-to-business (B2B) lending. COB Rule 11.3.5, however, requires a borrower to be a body corporate. With investment crowdfunding, instead of the platform facilitating a loan, it helps someone issue an investment to an investor. Under Rule 2.2.10F, it can only help do this with shares, debentures or 'sukuk' and not derivatives or any of the other aforementioned complex investments.

According to rule 2.5.3, the operator must not provide credit through its platform; by rule 2.9.9 he/it must not use it to arrange deals in investments; and he/it also should not use it to operate an Alternative Trading System.

Rule 2.2.2 delineates two kinds of crowdfunding platforms: those for loans and those for investments. A firm can be said to operate a loan crowdfunding platform if it is operating an electronic platform (which could be a website or any other form of e-media) that brings potential lenders and borrowers together; and if it administers a loan agreement that results from its operation of that platform. If it also helps any lender to transfer his rights and obligations under such a loan agreement, that activity is also counted as part of the operation of a loan crowdfunding platform. The firm can be said to operate an investment crowdfunding platform if its platform brings together potential investors and entities that wish to obtain funding for a business or project, resulting in an investor making an investment with the firm that requires funding; and if it administers an investment that results from operating the electronic platform. If it also helps an investor to sell such an investment, that is also counted as part of the operation of an investment crowdfunding platform.

An electronic platform “administers a loan agreement” if it provides information or performs other duties under the loan agreement on behalf of the borrower or lender; takes steps to obtain the repayment of the loan; or exercises rights or performs obligations under the loan agreement on behalf of the borrower or lender. It can be said to “administer an investment” if it provides information or performs other duties relating to the investment on behalf of the issuer or investor; takes steps to obtain the payment of any amount payable by the issuer to an investor; or exercises rights or performs obligations relating to the investment on behalf of the issuer or investor.

Under Rule 2.29.1, a platform operator is required not only to bring lenders and borrowers or investors and issuers together, but also to administer a resulting loan agreement or investment, perhaps on the platform itself or perhaps using a firm with which it has an arrangement. Sometimes, he/it might also help lenders or investors to transfer their rights and obligations under a loan agreement to another lender or to sell their investment to another investor. Other types of crowdfunding such as ‘reward crowdfunding’ (i.e. where a financial contribution is made in anticipation of a benefit in existing or future goods or services) and ‘donation crowdfunding’ (i.e. where contributions are made in support of a social cause) are not usually to be included in these rules (unless, of course, loans or investments are involved). A crowdfunding loan agreement cannot be a debenture.

By Rule 2.2.8, each crowdfunding operator requires an endorsement on its licence to deal with HNW and other retail clients if it carries on its activities with a borrower or lender, or an issuer or investor, who is himself an HNW/retail client. It will also need such an endorsement if it holds or controls clients' assets, according to Rule 2.2.10A.

Exclusions

A platform operator cannot be licensed as a crowdfunding operator if he/it is him/itself the sole lender or the sole investor on the electronic platform. If the operator is the sole lender providing the loans (e.g. if it is a credit provider and provides an electronic facility for use by its clients) it is not to benefit from the rules. If the operator lends or invests, he/it is likely to be performing the financial service of "providing credit or dealing in investments as principal" and will require authorisation for that activity from the DFSA.

Conduct rules

Every platform operator will have to comply with the DFSA's AML rules, imposing "know your customer" controls on clients who are borrowers or lenders or issuers or investors. In the case of investment crowdfunding, the issuance of investments may result in the application of the provisions of the Markets Law and associated regulations (such as market abuse rules) or, if an offer is not an exempt offer, prospectus requirements.

Crowdfunding risk disclosure

According to COB Rule 11.3.1, every operator's website must display a prominent notice that explains the main risks to lenders or investors of using a crowdfunding platform, warning them that they might be paid late or lose their money, or that borrowers might want to invest their money in risky new businesses, or that the lender may not be able to transfer his loan, or the investor may not be able to sell his investment at the right times or at all. Sites must display information about default or failure rates and a long list of data-nuggets regarding the nature of the service.

These must explain how the platform functions; how and by whom the operator is remunerated, including fees; any financial interest the operator has that may create a conflict of interest; what makes a borrower or issuer, or a lender or investor, eligible to use the service; the minimum and maximum amounts, if any, of permitted loans or investments; what, if any, security is usually sought from borrowers or issuers; limits for individual loans or investments and limits that apply over any 12 month period; what will happen if loans sought by a borrower or funds sought by an issuer either fail to meet, or exceed, the target level; the steps the operator will take if there is a real change in a borrower’s/isuer’s circumstances; its policy for dealing with overdue payments or defaults; AML/information security policy; which jurisdiction’s laws will govern the loan agreement between the lender and borrower; and safeguards for clients' assets that the operator holds.

Rule 11.3.4 dictates that no operator is allowed to provide both regulated and unregulated crowdfunding services. This is because some crowdfunding services (such as the aforementioned 'reward' and 'donation' crowdfunding) may not need to be authorised.