United Arab Emirates: DFSA Regulations On Cross-Border Crowdfunding

Last Updated: 8 January 2019
Article by STA Law Firm
Most Read Contributor in United Arab Emirates, September 2019

In the wake of the 2008 financial crisis, when access to capital became difficult, the concept of Crowdfunding emerged. Crowdfunding, an outcome of the modern sharing economy, is a loaded term where old and new meanings have come up to describe similarly or the same activities. Simply explained, crowdfunding is a way in which people, organizations and businesses can obtain funding for their projects by raising money from a large number of people (the crowd) through the medium of licensed online platforms. It thus involves three parties:

  • The operator of the platform
  • The party receiving the funds
  • The Party providing for the funds

Kinds of Crowdfunding

There are different types of crowdfunding:

  • Donation - Non-profit organizations use crowdfunding platforms such as Classy, Razoo, Fundly, Crowdrise to gather donations for charitable purposes. Platforms such as GoFundMe and YouCaring cater to individuals who wish to raise money for resolving personal problems.
  • Reward/Royalty
  • Loan Crowdfunding - Where the person providing the funds enter into a loan agreement with the person to whom the funding is provided; and
  • Investment Crowdfunding (Such as equity-based) - Where the person funding, purchases an interest in the company in the form of shares, debentures or sukuk from the person who receives the funding.

A global consensus has emerged on the regulation of only loan and investment crowdfunding since the other types do not typically involve any activity that can be termed as financial services.

Why is Regulation a necessity?

Crowdfunding, though advantageous for the modern economy, carries with it several risks including the risk to:

  • Money laundering, which may result in the confiscation of assets
  • Failure or default by either the platform or the project owner, resulting in potential loss of the investment
  • Fraud and embezzlement of funds invested
  • Legal risks
  • Credit and investment risk in loss of investment
  • Lack of transparency or irregular, incomplete, inaccurate, misleading information regarding the hazard or return.

Crowdfunding in Dubai

Small and Medium-sized Enterprises (SMEs) comprise about 50% of the UAE GDP; however, these businesses rarely receive credit facilities from conventional banks. This is because conventional banks are often apprehensive of the SMEs' limited asset pool or the short record of proven company operations, leaving them unwilling or unable to extend loan facilities to SMEs. In such a situation, crowdfunding has emerged as the most used route for these enterprises to receive funding. This is why in recent years, UAE has witnessed the rapid growth of crowdfunding platforms based in or focusing on UAE and other GCC countries. Aflamnah, launched in Dubai in 2012, focuses on locally produced films and Eureeca launched in the following years, was the first Equity Crowdfunding to be licensed by DFSA to operate with a representative office in DIFC. Humming Crowd Realty was the first real estate platform focused in UAE.

With this rapid growth of crowdfunding through a plethora of platforms in Dubai, the need to regulate risks and protect the rights of the parties became a necessity.

The Dubai Financial Securities Authority recognizing the significance of SMEs for UAE economy predicted the growth of importance of crowdfunding and came up with a regulatory framework in 2017, for loan and investment crowdfunding, making UAE the first GCC country to take the initiative of regulating the crowdfunding arrangements. This regulation by DIFC was also the means to facilitate the growth and development of the FinTech industry in UAE as well as the MEASA regions.

DFSA Regulations

The Regulations form a part of DFSA Conduct of Business Module under S.11 and governs both Loan Crowdfunding and Investment Crowdfunding platforms. The primary aim of these regulations is to encourage the growth of the Financial Technology (FinTech) Industry by ensuring clear governance and necessary protection for the parties. Theyaloformalize the DFSA's approach towards regulating crowdfunding platforms which had operated through interim arrangements from 2016.Though the regulations apply to both Investment and Lending Crowdfunding, a certain type of regulations has also been placed.

The following are the essential aspects of the regulatory framework that needs to be complied with by the operators of crowdfunding platforms:

1. Regulated and Unregulated Crowdfunding

Certain crowdfunding services such as donation or reward crowdfunding need not be authorized. To avoid the risk of confusion amongst Clients of Authorized services, the operator should not provide regulated and unregulated crowdfunding services from the same legal entity and should use separate legal entities if it wishes to carry out both services.

2. Advertisement of Proposals

The operator is prohibited from advertising specific lending or investment proposals to those who are existing clients. In such an event, the offer shall be considered as an "offer of securities to the public" which shall require a prospectus to be issued as under DFSA laws.

However, there is no restriction on the operator from generally advertising crowdfunding services to potential clients.

3. Use of other platforms

It is the responsibility of the operator to restrict a borrower or issuer from obtaining funds from another crowdfunding platform during the period of commitment. This restriction is intended to prevent Borrowers/ Issuers from making different terms of the offer in different platform, causing confusion for the Lenders/Investors and potential arbitrage by the Borrower/Issuer.

4. Information and Disclosures

To reduce the risk of investors/lenders and to promote transparency in the operation of crowdfunding platforms, the DFSA requires the operator to provide the following disclosures and information on its website regarding its services:

Disclosure of Risk

As already seen above, crowdfunding carries with it several risks to the potential clients who lend/invest their money. In order to inform these clients about the potential risk, the DFSA requires the operator to disclose the risks the lenders/investors may be exposed to and laid down the following four express statements which have to be necessarily included in the operator's website:

  • Lender/investor may lose all/any part of their money or experience delays in payment.
  • Borrowers/issuers on the platform also include new businesses which carry with it the risk of failure; as a result, a loan/investment with such a venture may involve high risks
  • The lender may not be able to transfer their loan, or the investor may not be able to sell their investment when they wish to or at all
  • If the operator, for any reason, ceases to carry on its business the lender/investor may lose their money, incur costs, experience delays in getting paid.

Furthermore, in order to facilitate the assessment of risk by Lenders/investors, with regard to lending and investing on the platform, the operators are required to disclose the default rates of loans by borrowers and the failure rates in relation to issuers where they default on payments, becomes insolvent, wound up or cease to carry business.

Service Disclosures

To provide an understanding to the Lenders/Investors and Borrowers/Issuers regarding the terms of how the platform operates, the operator is required to disclose information about its operating module such as:

  • Details of
    1. How the platform functions
    2. Regarding the remuneration of the operator for the services provided
  • Financial interest of operators or Related Party that may create a conflict of interest.
  • Eligibility criteria for Borrowers/Issuers or Investors/Lenders to avail the services.
  • Minimum and the maximum amount
    1. of loans/investment that may be sought for
    2. amounts that may be lent/ invested including individual loans or investment and limits that apply over a period of 12 months
  • Type of security sought from borrowers/issuers and when it might be exercised and any limitations on its use
  • When and how the lender/investor may withdraw commitment
  • Consequence when loan/fund sought for fails or exceed the target level
  • Steps were taken by the operator concerning any material change in borrower/issuer's circumstances and the rights of Lender/Investor in such a situation
  • Operator's method of dealing with overdue payments or default by Issuers or Borrowers.
  • Applicant laws and jurisdiction
  • Arrangement and safeguards for Client Assets held or controlled by the operator
  • Facility of transfer of loans or sale of investments and the conditions and risks involved
  • Contingency arrangements for the orderly administration of loans and investments if it ceases to carry on business
  • Steps taken by the operator for
    1. the security of information technology systems and data protection
    2. preventing illegal activities such as money laundering

Due Diligence

The Regulations restrict the Operator to permit only body corporates to use its services as Borrowers/Issuers. Along with this to ensure that the business carried out by the Borrower/Issuers are in accordance to the laws in its jurisdiction, the DFSA requires the Operator to take at least the minimum steps of due diligence on borrower/issuer including disclosing the identity and details of its incorporation with its credentials, details including domicile of its directors, officers and controllers; the financial strength and past performances including credit history; valuation of the business and current borrowing or funding levels with its sources.

The Operator is also required to disclose in its website information regarding the Borrower/ Issuers including the name of the body corporate, its directors, officers, and controllers; place of incorporation and domicile of its representatives; description of the business carried out; most recent financial statements; valuation of the business and its current borrowings with sources and liquidity. A detailed description of the business proposal along with the target level of funds required should also be provided. In case of loans or debentures, the interest rates, duration, and other rights need to be specified and with regard to shares the rights such as voting, dividend and such need to be specified. The Operator shall also disclose whether any security is provided and the circumstances and limitations of its use. The results of the due diligence carried out by the operator as well as the limits, and the grading method needs to be specified on the website for the information of the Lender/Investor.

Type Specific Requirements

Loan Crowdfunding: with regard to loan crowdfunding, the operator must ensure that when a loan is advanced using its service, a written loan agreement in accordance with the provisions of the law must be made between the parties setting out the terms of the loan including terms of interest, repayment, rights, and obligations of the parties.

Along with this, lending limits of $ 5,000 for any single borrower and $50,000 in any calendar year has been placed on the Retail Client.

Investment Crowdfunding: the Operator must require the Investor to sign a risk acknowledgment form for every investment made using the operator's platform confirming the knowledge of the risk. The operator should also provide a cooling off period of at least 48 hours for the Investor where he may withdraw his commitment without any penalty or explanation.

Impact on financial technology (FinTech)

The emergence of Financial Technology or more commonly known as FinTech has rapidly changed the financial services industry. DIFC, in this regard, has chosen to update itself and occupy a pioneering role in both the regional and global market. The Government of Dubai is not only the founding member of the Global Blockchain Council but is continuously looking for new opportunities in the financial industry to implement the Blockchain technology. Though being a conventional financial and professional services community, DIFC has been actively evolving itself to accommodate the FinTech.

The recent regulatory framework of crowdfunding by DFSA discussed in this article has helped tremendously in the development of FinTech ecosystem in the Middle East and South Asia (MESA) region. Along with this, DIFC also introduced the first fintech accelerator in the region FinTech Hive as its innovative strategy to make Dubai the hub and beacon for international businesses. On its Investor's Day, over 300 stakeholders formed the audience where 11 start-ups from the accelerator's initial programme presented their ideas and products. DIFC recognizing the importance of innovation has focused on tackling emerging markets such as artificial intelligence, the blockchain, and robotics.


The Dubai Financial Services Authority has undoubtedly taken a leap forward through its regulatory measures by ensuring transparency in crowdfunding platforms and protecting the rights of the "crowd" who invest or lend their money in such platforms. As a result, Dubai has not only catered to the financial needs of the SMEs but also opened up to investment in new innovations in the Financial Technology. Thus, by choosing not to follow the developed markets but paving its own path, Dubai has set itself apart and as a pioneer globally for Financial Technology, proving that it indeed a leader with a bright future.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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