1 October, 2020

Why Investments Need To Be Regulated

In 2018, ICOs (Initial Coin Offerings) raised around $7.8 Billion (USD). This is remarkable because, at the time, it was still very unclear where they fell in the hierarchy of investment and most countries had no specific laws addressing ICOs. It was the wild wild west. 

At first glance, ICOs are a good way for startups and small businesses to raise the needed capital to aid growth or launch innovations as these businesses typically find it extremely difficult to raise traditional capital. 

However, there has been a proliferation of scam ICOs such that as at late 2018, investors were recorded to have lost close to $100 million to fake or poorly managed ICOs. Investopedia reported that around 80% of ICOs that year were scams. These are startling statistics especially when you consider the long term effects of these issues.

By 2019, ICO fundraising had plummeted almost 95% to a mere $371 million. By contrast, the more traditional and properly regulated equity fundraising space raised $2.8 Billion in the same year.

What went wrong?

The problem can be traced to the lack of a proper framework for managing ICOs and the general lack of regulations resulting in an abuse of the funding tool.

When instruments like ICOs are abused, everyone suffers for it. Small businesses can’t access capital, leaving roughly 5% of businesses that manage to successfully raise capital every year. And the businesses most affected by these are, you guessed it right, in Africa. 

Each time you make a legitimate investment, you are enabling a business to expand, create value and, in effect, create wealth in the society. 

Our reality, unfortunately, makes it extremely important that capital market activities are regulated one way or the other to keep them healthy & boost investor confidence by providing certain protections against bad-faith players.

Crowdfunding & Regulations in Africa

The past 6 years have seen an explosion in the popularity of crowdfunding in Africa in general and in West Africa in particular. 

Some of the more prominent platforms are:

  • Farmcrowdy (Nigeria)
  • Cofundie (Ghana)
  • Agrilet (Nigeria)
  • FINT (Nigeria)
  • Complete Farmer (Ghana)
  • Growforme (Ghana)

But none of these platforms is regulated by the SEC in any of their respective jurisdictions because there are currently no crowdfunding regulations in West Africa. 

Recognizing the importance of having some form of the regulatory cover has led many of these platforms to try to hack their way through the process. From partnerships with licensed fund managers & custodians to incorporating as multi-purpose co-operative societies. 

However, long term growth will be extremely difficult without clear SEC regulations for crowdfunding; the consequence of this being a stunt the growth of the sector in the region.

 

As someone who runs a crowdfunding platform in Ghana, I speak with customers and leads every day and the one thing that stands out is the extreme lack of confidence they express in innovative investment opportunities even if these investments could potentially provide better returns, mainly due to the bad experiences recorded in the industry over the past few years.

While it is true that governments can sometimes wield regulations like a blunt instrument, when they get it right, it has enormous potential to completely transform a sector or even birth new ones.

In 2012, US President Obama signed the JOBS Act – an act that has been credited with kickstarting the modern crowdfunding era. Since then, crowdfunding pioneers like Fundrise, Crowdstreet, Republic.io etc have all launched and taken very unique approaches to crowdfunding, proving that its a viable business model when it is put under the necessary controls.

The legal backing of the JOBS Act let these companies operate openly which gave them greater access to a larger customer base. It also allowed them to innovate and grow fast which is critical for a crowdfunding business. 

Regulations always play catch-up to innovation, this is the way it has and always will be. However, for innovation to achieve its full potential, there is a necessity for regulatory bodies to move with the times and provide the right regulatory backing needed for businesses in the 21st century to do what businesses do best: create value.

Bottom Line

Regulations, especially for investment businesses, might seem like a bottleneck but they are a critical piece in the puzzle and, when applied correctly, can allow these businesses grow significantly faster than they typically would because they lend an air of legitimacy and help to promote investor confidence. They allow the business to innovate, help to protect both the business and the investor which in turn boosts both internal and external confidence in the economy of the country keeping the capital markets healthy. 

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