Crowdfunding your property - waiting on the law

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Globally, crowdfunding is estimated by Massolution, a US-based consultancy specialising crowd solutions, to have been worth some $34bn in 2015. Crowdfunding for real estate stood at $2.5bn.

Financing property through crowdfunding, through sites such as The House Crowd or Crowd a House in the UK, has not made notable inroads in South Africa as yet. It faces numerous obstacles, but South Africans have used crowdfunding adeptly to raise funds for charity and for business finance. The country also has a tradition of cooperative, trust-based savings schemes, in the form of stokvels and burial societies.

No specific prohibitions

There appear to be no specific prohibitions on crowdfunding property purchases in South Africa. At present, however, South Africa lacks a dedicated regulatory system for crowdfunding. Legal and industry commentators argue that crowdfunding schemes and their participants are governed by a spread of commercial legislation. South African law places a high premium on the rights of consumers, and crowdfunding projects would need to operate with this in mind.

The type of crowdfunding scheme envisaged – raising funds as donations, as loans, or as equity, and whether the recipient is an individual or a company – would impact on what laws might apply.

For example, in a recent contribution, Kevin Allen of Wealth Migrate points out that equity-based crowdfunding would be subject to such legislation as the Consumer Protection Act and the Protection of Personal Information Act. Since crowdfunding has also shown itself able to draw funds from across borders, regulatory issues on cross border capital movement could come into play – both in South Africa and in investors’ home countries.

Other legislation with an impact includes the Companies Act, the National Credit Act, the Banks Act and the Collective Investment Schemes Control Act. Frequent changes in South Africa’s regulatory environment have been a long-standing grievance for businesspeople. The same might prove to be true of crowdfunders.

Lending thresholds

Concerns have been expressed that changes to lending thresholds in terms of the National Credit Act would require prospective crowdfunding lenders to register with the National Credit Provider.

Potential crowdfunders thus risk landing on the wrong side of laws that were not designed to deal with the business.

But crowdfunding holds significant potential to bring small-scale investors into the property game. This could be quite revolutionary, helping to broaden South Africa’s asset base. For this to happen, we urgently need a simple, dedicated legal and regulatory framework that both encourages crowdfunding, and protects against its abuse.