1. In consequence of the advances in the digital space, social lending, also known as Peer to Peer (“P2P”) lending, has assumed significant development, with the rise of platforms, such as Lending Club in the USA and Zopa in the UK. Similar P2P platforms have been established in South Africa such as RainFin (Pty) Ltd (“RainFin”) and Lendico S.A (Pty) Ltd. These sites are essentially digital money market places that match borrowers directly with lenders. By eliminating the banks in the middle of the transaction, interest rates can be more favourable for borrowers and for those investors willing to provide the funds concerned.

2. RainFin facilitates the online auction process by connecting borrowers with lenders. The borrower will initiate the auction by submitting a loan application, which in due course will be accepted by the lender(s) who made the best offer(s). The minimum value of the loan arising from the loan agreement made by a borrower via RainFin online is R100. There is no maximum lending amount but RainFin, currently, requires that the total value of the obligations arising from the loan agreements made by one lender on the RainFin platform shall not exceed R500 000, if the lender is not a registered credit provider with the National Credit Regulator (“NCR”).

3. P2P platforms have experienced rapid growth in South Africa due to its ability to easily access the domain of small and medium enterprises (“SME”). Larger financial institutions are reluctant to serve SME’s due to the high costs associated when assessing the business in order to provide funding. CEO of Rainfin, Sean Emery, says Rainfin can make accessing small enterprises and their loan origination highly competitive. Since the launch of the Rainfin platform in 2012, it has diversified R140 million to approximately 340 SME’s at an average loan of just under R500 000.

4. Despite the popularity of these P2P platforms, there are concerns regarding the rate of unsecured lending in South Africa, which has resulted in an increase of credit regulation. On 11 November 2016, the credit industry of South Africa will be dramatically transformed, with the introduction of a new lending threshold under the NCA. The Minister has determined a new threshold amount, by notice in the Government Gazette, of zero rand, for purposes of determining whether a credit provider is required to be registered in terms of the NCA.

5. The new lending threshold will without a doubt make it harder for crowdfunding platforms to operate within the jurisdiction of South Africa and significantly impact the SME market. Individuals seeking to provide credit on P2P platforms to small business or individuals will be discouraged due to requirement of having to register as a credit provider.

6. Another major problem in South Africa is the absence of regulation concerning crowdfund platforms that offer equity based finance. Equity crowdfunding platforms provide investors with opportunities to invest in companies in exchange for a percentage of equity through regulated online platforms.

7. Certain South African crowdfunding firms applying to the Financial Services Board (“FSB”) for the issue of a licence in terms of FAIS, have apparently been informed by the FSB that crowdfunding falls outside their regulatory net. On 15 October 2015, the FSB released a statement in response to media reports that Scott Picken, CEO and co founder of Wealth Migrate was recently awarded an FSB licence “The Financial Services Board (FSB) has noted recent claims that an entity called Wealth Migrate holds an FSB licence. Wealth Migrate is said to be involved in so called crowd funding. The FSB would like to clarify that it does not have any record of the entity, and has not issued a licence to Wealth Migrate. The company is also not a juristic representative of an authorised financial services provider. Crowd funding is an activity that falls outside of the regulatory net of the FSB.”

8. Wealth Migrate sent the following response to the FSB statement “Wealth Migrate is a global company which operates in various markets. Wealth migrate do not currently have a SA FSB license, however, we are in the process of applying. We view the South African market as a great opportunity and will inform you as soon as we receive our license.”

9. FSB spokesman Lesego Mahigo says the FSB is engaging with the African Crowdfunding Association to determine which of its activities fall within the regulated activities and how best these can be accommodated in the current regulatory regime .

10. It would seem from the aforesaid statements, that crowdfunding remains a foreign concept in South Africa, with particular emphasis on the lack of understanding of equity based crowdfunding, and the FSB has, thus far, not sought to enforce FAIS in that arena. This, notwithstanding, the practice of crowdfunding is apparently gaining popularity in South Africa with the rise of platforms, such as CrowdInvest and Thundafund.

11. Crowdfunding in South Africa will continue to gain popularity as an alternative method of funding to traditional financial intermediary such as a bank or other financial institution. Crowdfunding is facilitating the growth of SME’s which is vital for job creation and economic growth. It would seem that the South African regulatory bodies have been short-sighted in overburdening the unsecured lending market with regulation, particularly, in the scope of P2P lending platforms and underperforming in assessing the appropriate framework for equity based crowdfunding to be regulated within.