The Capital Markets (Investment-Based Crowdfunding) Regulations

Section 1. Citation Section These Regulations may be cited as the Capital Markets (Investment Based Crowding) Regulations.

Section 2. Interpretation Section In these Regulations, unless the context otherwise requires— "Act" means the Capital Markets Act; "Authority" means the Capital Markets Authority established under section 5 of the Act; "cooling off period" means a contractual period within which an investor can withdraw from a crowdfunding transaction without any restrictions; "crowdfunding" means the act of raising money from many individuals or entities to either finance a project or business through a crowdfunding platform; "crowdfunding platform" means a website, internet based portal or such other technological application, which facilitates interactions between investors and issuers and other related interactions; "crowdfunding platform operator" means an entity licensed by the Authority to facilitate transactions involving the offer or sale of investment instruments through a crowdfunding platform; "custodian" means a bank licensed under the Banking Act ( Cap. 488 ) and appointed by the Crowding Platform Operator to receive and hold funds raised through the crowding platform; "investment-based crowdfunding" means crowdfunding in exchange for shares, debt securities or any other investment i...

Section 3. Application Section 3(1) These Regulations shall apply to an investment-based crowdfunding platform established, maintained or operated in Kenya. Section 3(2)(a) the platform is established in Kenya; Section 3(2)(b) the platform is located outside Kenya but actively targets Kenyan investors as provided for under sub-regulation (3); or Section 3(2)(c) the key components of the platform when taken together are physically located in Kenya even if any of its component parts, in isolation, is located outside Kenya. Section 3(3) For purposes of these Regulations, a crowdfunding platform operator located outside Kenya shall be considered as actively targeting investors in Kenya if the operator, or the operator’s representative, promotes crowdfunding activities either directly or indirectly in Kenya. Section 3(4) A crowdfunding platform operator deemed to be actively targeting investors in Kenya for purposes of these Regulations shall be required to obtain a license from the Authority. Section 3(5)(a) advertising the crowdfunding platform, investment instruments that are subject to the crowdfunding or the issuer hosted on the platform in any publication or electronic media in Ke...

Section 4. Licensing requirement Section 4(1) A person shall not establish, maintain or operate an investment based crowdfunding platform unless that person is duly licenced as a crowdfunding platform operator by the Authority. Section 4(2) A person who contravenes sub regulation (1) commits an offence and is liable to the penalty prescribed in section 34A of the Act.

Section 5. Application for licence and accompanying documents Section a certified copy of certificate of incorporation;

Section 6. Eligibility for licensing Section is a company limited by shares;

Section 7. Criteria for licensing Section has complied with the licensing requirements set out in regulation 5;

Section 8. Rules for the operation of business Section criteria for on boarding its users including issuers and investors;

Section 9. Grant of a license Section 9(1) The Authority shall, if satisfied that the applicant has met all the requirements for licensing and upon payment of the fees set out in the Third Schedule, grant a licence to operate as a crowdfunding platform operator. Section 9(2) The crowdfunding platform operator shall be required to pay an annual regulatory fee as set out in the Third Schedule. Section 9(3) A licence granted shall remain valid unless suspended or revoked by the Authority as specified under regulation 11.

Section 10. Denial of grant of license Section 10(1) The Authority shall not refuse to grant a licence without first giving the applicant an opportunity to be heard. Section 10(2) If the Authority, after hearing the applicant, refuses to grant a licence, it shall communicate the decision to the applicant within fourteen days of the decision, stating the grounds for refusal. Section 10(3) An applicant aggrieved by the decision of the Authority may appeal against such refusal to the Capital Markets Tribunal within fifteen days of communication of the decision.

Section 11. Suspension, restriction or revocation of a licence Section The Authority may suspend, restrict or revoke a crowdfunding platform operator’s licence in accordance with sections 26 of the Act.

Section 12. Cessation of business Section A crowdfunding platform operator shall not cease to operate as such without prior thirty days’ notice in writing to the Authority who may impose any terms and conditions to ensure orderly cessation of business of the crowdfunding platform operator.

Section 13. Eligible issuers Section 13(1) A micro, small or medium enterprise incorporated in Kenya with a minimum of two years’ operating track record and a good corporate governance record shall be eligible to raise funds through a crowdfunding platform in exchange for the issuance of an investment instrument. Section 13(2) Despite sub-regulation (1), start-ups with a good operating track record and a good corporate governance record shall be eligible to raise funds through a crowdfunding platform.

Section 14. Fundraising limits Section 14(1) The aggregate amount that may be raised by an eligible micro, small and medium enterprises or startup within a twelve months period shall be a maximum amount of Kenya shillings one hundred million. Section 14(2) A crowdfunding platform operator may apply to the Authority for a no-objection where an issuer seeks to raise more than the set maximum amount within the given duration. Section 14(3) The Authority may issue a no-objection to raise additional funds subject to such conditions as may be imposed from time to time.

Section 15. Prohibited issuers

Section 16. Eligible investors Section sophisticated investors; and

Section 17. Permitted investment instruments Section Investment instruments allowed for purposes of crowdfunding under these Regulations include shares, debt securities including bonds or debentures or any other instruments as shall be approved by the Authority from time to time.

Section 18. Offering document Section 18(1) A crowdfunding platform operator shall develop a standardized offering document for entities offering securities, which shall have the disclosures set out in the Fourth Schedule and shall be submitted to the Authority not later than forty-eight hours prior to publication. Section 18(2) The crowdfunding platform operator shall make available the offering document through the crowdfunding platform to the investors at least fourteen days before the commencement of the offer period. Section 18(3) The issuer and the crowdfunding platform operator shall not avail the offering document on any other communication medium other than the crowdfunding platform on which the issuer intends to offer its securities. Section 18(4) A person who makes a false or misleading statement in form or context in an offering document knowing the statement to be false or misleading shall commit an offence and is liable to the penalties under the Act.

Section 19. Requirements for issuers Section clearly outline, in the offering document, investors’ rights and ownership of the investment instruments to be issued;

Section 20. Crowdfunding transaction Section 20(1)(a) the period in which the offer shall remain open; and Section 20(1)(b) the threshold amount for the offer to be deemed a successful offer. Section 20(2) Where an issuer is unable to meet the prescribed minimum threshold for the targeted amount, the offer shall be withdrawn and the crowdfunding platform operator shall effect a refund of the monies to the investors within forty-eight hours and the costs for such refunds shall be fully borne by the issuer. Section 20(3) Where an offer is withdrawn under sub regulation (2), the issuer may only commence a fresh crowdfunding offering not earlier than ninety days after the said withdrawal. Section 20(4) Where the crowdfunding transaction is successful, the crowdfunding platform operator shall make the funds available to the issuer within five business days after the close of the offer. Section 20(5) The crowdfunding offer by the issuer shall include a contractual right of a cooling off period allowing the investor to withdraw an offer or agreement to purchase the investment instrument by delivering a notice in the manner prescribed by the crowdfunding platform operator within forty-eigh...

Section 21. Use of funds Section 21(1) The crowdfunding platform operator shall take reasonable steps to ensure that the funds raised through its platform are used for the stated purpose. Section 21(2) An issuer who uses the proceeds for any other purpose other than that stated or a purpose related thereto commits an offence and shall be liable to the penalties prescribed under the Act.

Section 22. Transaction fees Section A crowdfunding platform operator shall, in addition to any other fees that they may charge for use of their platform, levy a transaction fee as specified in the Third Schedule for each successful crowdfunding transaction facilitated through its platform which amount shall be payable and remitted to the Authority directly within thirty days of such transaction.

Section 23. Restrictions on crowdfunding platform operator Section 23(1)(a) raising own funds through its own platform; Section 23(1)(b) offering investment advice; Section 23(1)(c) handling investor funds; Section 23(1)(d) promising a guaranteed return to investors; and Section 23(1)(e) promising a guaranteed outcome of the offer to the issuer. Section 23(2) An issuer shall not host an offer concurrently on multiple crowdfunding platforms.

Section 24. Requirements of the trading facility Section 24(1) A crowdfunding platform operator may operate a trading facility for the transfer of the crowdfunded investment instruments originally offered on the crowdfunding platform. Section 24(2)(a) have in place transparent rules and procedures for fair and orderly trading on the crowdfunded investment instruments; Section 24(2)(b) inform its platform users on the nature of the facility, including applicable fees; Section 24(2)(c) provide prospective investor(s) intending to buy the investment instruments availed on the facility with information that was availed to the earlier investors and information on the performance of the investment availed on the facility; and Section 24(2)(d) ensure that the prospective investor(s) affirms to the risk acknowledgment form under regulation 29. Section 24(3) The Cabinet Secretary shall formulate such rules as may be required to regulate such trading activities.

Section 25. Requirements for the crowdfunding platform operator Section discharge its duties as required by these Regulations in relation to a crowdfunding transaction;

Section 26. General obligations Section 26(1)(a) how the platform operates; Section 26(1)(b) users rights and responsibilities; Section 26(1)(c) eligibility criteria for prospective issuers and investors; Section 26(1)(d) investor education materials; Section 26(1)(e) complaint handling and dispute resolution procedures; Section 26(1)(f) disclaimers and limitation of liability, highlighting the platforms legal liability for damages incurred by its users; and Section 26(1)(g) related fees and charges for using the platform. Section 26(2)(a) to establish custodial arrangements as required by these Regulations; Section 26(2)(b) to monitor and ensure compliance of its rules; Section 26(2)(c) to take reasonable steps to prevent fraud and ensure compliance with these Regulations and relevant laws; Section 26(2)(d) to maintain a register and records of all investors and issuers including details of the management of all issuers and details of investor holdings; Section 26(2)(e) to avail any relevant document or information to the investor upon request; Section 26(2)(f) to notify the Authority immediately of any material changes that may occur during operations which would affect its autho...

Section 27. Obligations on risk disclosures Section risk warning on investing through the platform;

Section 28. Cautionary statement Section 28(1)(a) to all visitors to the site of the home page of the platform; Section 28(1)(b) to every investor, on the subscription landing page of the issuer; and Section 28(1)(c) on all application forms for investing through the platform. Section 28(2)(a) investing in the issuers hosted on the platform may be high risk investment; Section 28(2)(b) investors must be in a position to bear the risk associated with the loss of investment without undue hardship; and Section 28(2)(c) investors must read the information carefully and may seek independent financial advice.

Section 29. Risk acknowledgement form Section 29(1)(a) understands that the proposed investment is a risky investment; Section 29(1)(b) has ability to absorb the complete loss of the amount invested; Section 29(1)(c) understands that they may not be able to sell the securities, or investment instruments; Section 29(1)(d) has been provided with the required disclosures for the offer; and Section 29(1)(e) understands that crowdfunding investments are not covered by the Investor Compensation Scheme under the Act. Section 29(2) The information in the risk acknowledgment form shall be provided in a manner that is clear and easily understood by all investors. Section 29(3) The information in the risk acknowledgment form shall be written in such a manner as to be capable of being read with reasonable ease by the investor. Section 29(4) The crowdfunding platform operator shall obtain and retain the self-declared risk acknowledgement forms from the investors prior to them investing on a crowdfunding platform.

Section 30. Due diligence Section 30(1) A crowdfunding platform operator shall carry out due diligence on prospective issuers and investors intending to use its platform. Section 30(2)(a) conduct background checks on the issuer and investor; Section 30(2)(b) determine the level of sophistication of the investor; Section 30(2)(c) conduct fitness and probity checks on the directors and management; Section 30(2)(d) interrogate the information in the issuer’s disclosure documents lodged before they are made accessible to investors through the platform; Section 30(2)(e) ensure their compliance with anti-money laundering rules in place; and Section 30(2)(f) ensure compliance with the disclosure requirements.

Section 31. Operation of trust account Section 31(1) A crowdfunding platform operator shall appoint a custodian to hold in trust any funds raised through the platform. Section 31(2) The custodian shall establish and maintain a separate trust account for each funding round on its platform with a financial institution duly licensed and approved by the Authority as a custodian.

Section 32. Duties of a custodian Section opening and maintaining a segregated account in the name of each issuer for the exclusive benefit of each issue; and

Section 33. Data protection and privacy Section shall establish appropriate safeguards for ensuring the integrity of the information received and published;

Section 34. Record keeping Section 34(1)(a) a detailed list of all the issuers and investors; Section 34(1)(b) evidence of individual holdings of each investor; Section 34(1)(c) a record of past and present holders of the crowdfunded investments and their holdings; and Section 34(1)(d) a transfer journal or log recording the transfer of the crowdfunded investments. Section 34(2) All records shall be kept for a period of at least seven years from the date which the information was lodged in the portal.

Section 35. Continuous reporting Section 35(1)(a) details of the issuers and amounts raised through its platform; Section 35(1)(b) statistics on investor profiles and investment trends; Section 35(1)(c) a quarterly monitoring report on the use of proceeds; and Section 35(1)(d) any other information as the Authority may require from time to time. Section 35(2)(a) on a quarterly basis management accounts for each quarter; and Section 35(2)(b) audited annual accounts within four months following the end of its financial year.

Section 36. Inspections Section The Authority may carry out inspections on a crowdfunding platform operator or on any of its facilities satisfy itself as to the integrity of the platform, financial soundness and stability, risk management and its control systems.

Section 37. Offence Section Any person who contravenes the provisions of these Regulations for which no penalty is provided, that person shall be liable, upon conviction, to the penalty specified under section 34A of the Act and general damages where applicable, for any loss occasioned to the other party.

Section 38. Applicability of capital markets laws Section the Capital Markets (Conduct of Business)(Market Intermediaries) Regulations (LN. No. 145/2011);

Section 39. Transition provision Section Any person operating an investment-based crowdfunding platform or holding itself out as a crowdfunding platform operator prior to the commencement of these Regulations shall obtain a license within twelve months after the commencement of these Regulations.