On 14 November 2021, the Omani Capital Market Authority amended the Executive Regulations of the Capital Market Law to permit the operation and use of crowdfunding platforms in Oman, subject to the conditions set out in the Rules for Crowdfunding Platforms. In this article, we provide a high-level analysis of the Rules for Crowdfunding Platforms.
On 14 November 2021, the Capital Market Authority (the CMA) issued Decision No. 151/2021 amending the Executive Regulations of the Capital Market Law (Decision No. 1/2009, as amended) (the “Executive Regulations”). Decision No. 151/2021 came into force on 22 November 2021.
Decision No. 151/2021 specifies the activity of crowdfunding as a regulated activity by the CMA and companies operating crowdfunding platforms are considered to fall under the broader category of “companies operating in the field of securities”. Decision No. 151/2021 further provides that Omani registered companies or branches of foreign companies must hold a licence issued by the CMA in order to undertake activities of providing and operating a crowdfunding platform.
On 21 November 2021, the CMA via Decision No. 153/2021 issued the Rules for Crowdfunding Platforms (the “Rules”), which came into force on 22 November 2021. We anticipate that the CMA will issue additional decisions, forms, guidance and instructions in respect of the Rules.
An Operator (defined as a “legal person licensed by the CMA to carry out the activities of crowdfunding platform”) is permitted to invite investors and donors from inside or outside Oman and to provide funding through the platform to any company or commercial enterprise inside or outside Oman in accordance with the terms and conditions prescribed in the Rules. Pursuant to the Rules, the CMA currently only authorises an Operator to carry out one or more of the following four types of crowdfunding, subject to obtaining a licence:
The Executive Regulations prohibit the Operator from collecting funds for lending purposes. In addition, the Rules restrict Operators from:
(a) investing in funding applications on behalf of any person;
(b) providing direct or indirect financing to investors or Applicants for Funding. However, Operators are allowed to invest in any crowdfunding requests presented on their platforms.
The Rules provide that funding collected through a platform may only be granted to companies and commercial projects, but not to individuals. As an exclusion to the foregoing, the following entities are prohibited from obtaining funding through a crowdfunding platform:
(a) Public joint stock companies;
(b) Companies and commercial projects that do not have specific business plans; and
(c) Non-profit organisations and associations.
The investment limits invested through crowdfunding platforms depend on the category of investor. The Rules categorise investors as follows:
(a) Sophisticated Investors:
(1) units of the State’s administrative apparatus;
(2) entities licensed by the CMA including capital market institutions, companies operating in the field of securities, insurance and Takaful insurance companies;
(3) financial institutions licensed by the Central Bank of Oman;
(4) pension funds;
(5) a company or an investment fund with total assets exceeding RO 1,000,000 (or its equivalent in a foreign currency);
(6) high net worth individuals:
(i) an individual whose personal assets or joint assets with his or her spouse exceed RO 500,000 (or its equivalent in a foreign currency), excluding the value of the individual’s primary residence;
(ii) an individual whose gross annual income in the last twelve months is not less than RO 30,000 (or its equivalent in a foreign currency); or
(iii) an individual who, jointly with his or her spouse, has a gross annual income in the last twelve months exceeding RO 50,000 (or its equivalent in a foreign currency).
(b) Angel Investors:
(1) an investor whose personal assets exceed RO 300,000 (or its equivalent in a foreign currency);
(2) an investor whose gross annual income in the last twelve months is not less than RO 20,000 (or its equivalent in a foreign currency); or
(3) an investor who, jointly with his or her spouse, has a gross annual income in the last twelve months exceeding RO 30,000 (or its equivalent in a foreign currency).
(c) Retail Investors: investors who do not fall within the definition of an Angel Investor or a Sophisticated Investor.
With the exception of equity crowdfunding, any category of investor may invest in any investment note of any Applicant for Funding hosted on the platform, after submitting a declaration disclosing the category of investor to which the investor belongs, subject to the following investment limits:
(a) Sophisticated Investors: no restrictions on investment amounts;
(b) Angel Investors: no restrictions on investment amounts; and
(c) Retail Investors: a maximum of RO 20,000 at any period of time.
Any investor may invest in equity crowdfunding, after submitting a declaration disclosing the category of investor to which the investor belongs, subject to the following investment limits:
(a) Sophisticated Investors: no restrictions on investment amounts;
(b) Angel Investors: a maximum of RO 100,000 within a twelve-month period; and
(c) Retail Investors: a maximum of RO 3,000 per Applicant for Funding, with a total amount not exceeding RO 20,000 within a twelve-month period.
We understand from Article 128(bis) of the Executive Regulations that an Omani registered company or branch of a foreign company may carry on the commercial activity of crowdfunding. The minimum share capital required for an Oman registered company to undertake such activity is RO 25,000. With respect to branches of foreign companies, the Executive Regulations or the Rules do not specify the minimum share capital, if any, required from the foreign company.
An Omani registered company or branch wishing to undertake the commercial activity of crowdfunding platform must satisfy all other conditions provided in the Rules and the Executive Regulations and submit an application to the CMA which must include, amongst other things, the following documents:
(a) the approval of any other relevant regulator(s);
(b) proof that it is not under liquidation and does not have any pending litigation in any court of law;
(c) proof that its assets have not been placed under judicial control, whether inside or outside of Oman;
(d) a written undertaking which provides, amongst other things, that:
(i) the electronic systems used by the Operator are safe, efficient and reliable and that they were tested and checked according to internationally acceptable standards;
(ii) it has sufficient financial, human, technical and other resources to manage its operations;
(iii) it has adequate measures in place to ensure the security of information systems, systems capacity, business continuity plan and procedures, risk management, data integrity and confidentiality, record keeping and audit trail, for daily operations and to meet emergencies; and
(iv) sufficient IT and technical support arrangements.
The CMA has exempted applicants from paying the CMA fees until the end of 2022. As of 1 January 2023, the one-time fee for the licence will be RO 150,000. The fee to undertake the activity will be RO 5,000 payable once.
The Executive Regulations prohibit Operators from engaging in any other commercial activity.
Operators are under several obligations under the Rules, including those under Part IV of the Executive Regulations. Operators have obligations to both their regulator (i.e. the CMA) and users of their crowdfunding platform. The Rules define a user as an investor, donor and an Applicant for Funding.
The Operator’s obligations to the CMA are listed in Article 19 of the Rules. These are in addition to the Operator’s obligations under the Executive Regulations. The obligations are several but examples of these are that the Operator must:
(a) exercise due diligence when carrying out its business and activities;
(b) obtain and maintain investors’ risk declarations prior to investing through the crowdfunding platform;
(c) ensure that the fundraising limits imposed on the Applicant for Funding and the investment limits (where applicable) imposed on the investors are not breached;
(d) have written procedures in place in respect of, among other things, the rights and obligations of users, its fees, and risk statement. It is to be noted that investing through crowdfunding carries risks and such risks will vary from platform to platform and from the type of crowdfunding offered through each;
(e) exercise due diligence and perform KYC checks;
(f) have in place procedures to monitor anti-money laundering, counter terrorism financing and the like in respect of all users and comply with applicable anti-money laundering legislation;
(g) ensure that the disclosure documents of the Applicant for Funding are accurate, fair and not misleading;
(h) reject applications if these violate Omani laws or breach the interests of investors; and
(i) have in place adequate procedures to monitor and manage conflicts of interest.
The Rules also place certain obligations on the Board of Directors of an Operator, including:
(a) immediately notifying the CMA of any irregularity or breach of any law or regulation, or a material change in the information submitted to the CMA, as required under the laws, or becoming aware of any matter which has, or is likely to have, an adverse impact on the Operator’s ability to meet its obligations or carry out its functions in accordance with the Rules;
(b) identifying and managing risks associated with its business and operations.
Similarly, the Operator owes obligations to the investors investing through the crowdfunding platform. Generally, the Operator’s obligations to investors include:
(a) to treat investors fairly, with honesty, integrity, equality, not be discriminated against, and to avoid conflicts of interest;
(b) to prioritise the interests of the users of the platforms over personal interests or interests of third parties;
(c) to keep disclosed information and data confidential;
(d) to inform investors of any material adverse change to the proposal of the Applicant for Funding, such as, the discovery of false or misleading statements in offer disclosures, or of a material omission, or where there is a material change or development in the circumstances relating to the offering or the Applicant for Funding; and
(e) to publicly disclose through the platform if the Operator or any of its directors, shareholders or employees hold shares in an Applicant for Funding or pay a referrer or introducer, or receive payment in any form in connection with an Applicant for Funding hosted on its platform.
In addition to the above, the Operator must comply with the requirements regarding the funds raised from investors or donors for the Applicant for Funding and kept with the Operator. The Operator must:
(a) ensure it has adequate systems and controls in place to maintain accurate and up-to-date records of the money held and ensure that such money are properly safeguarded from inappropriate use by its officers and are segregated from its own bank accounts;
(b) establish and maintain one or more escrow account(s) in a bank licenced by the Central Bank of Oman, or where an Islamic investment note is offered through the platform, a Shariah-compliant account with a licensed Islamic bank is opened and maintained;
(c) immediately or at the latest within five business days, return the money to the investors or donors where the fundraising campaign is unsuccessful. The same applies where the Applicant for Funding withdraws its application, or fails to meet its obligations or the funds exceed the target amount; and
(d) transfer the funds raised to the Applicant for Funding where a fundraising campaign is successful. The release of funds to the Applicant for Funding must only be done after the Operator provides a written statement to the CMA confirming that the amount sought was raised, all legal requirements and obligations have been satisfied and that there was no material adverse change relating to the offer during the offer period.
A juristic person seeking funding through a crowdfunding platform (“Applicant for Funding”) must submit sufficient information and documents to the Operator, including the following:
(a) information describing the key characteristics of the business and the Applicant for Funding;
(b) information explaining the purpose of the fundraising, target funding amount, target offering period and the minimum required percentage of the raised funds from the target funding amounts;
(c) information relating to the business plan of the Applicant for Funding, if any;
(d) financial statements.
During the offering period, the Applicant for Funding must also disclose through the platform the following data in accordance with the rules and procedures of the Operator:
(a) information relating to it, its management, financial statements, business plan, purpose of requesting crowdfunding, target funding amount, proposed offering period and the required percentage of acceptance (if any);
(b) data or information requested by the investors, or errors or adverse material changes to the Applicant for Funding or its project;
(c) rewards or potential investment risks; and
(d) exit procedures from any investments (to the extent there are any).
The Applicant for Funding must enter into an agreement with the Operator and pay the Operator’s fees, as determined by the Operator.
Any information submitted or disclosed to the Operator must be true and accurate, otherwise the Applicant for Funding risks being liable. The obligations of the Applicant for Funding do not stop when the Applicant for Funding is successful in its fundraising; the Applicant for Funding must thereafter keep its investors informed through effective, transparent and regular communication, and keep them updated on the progress of the business, its financial position, and utilisation of the funds raised.
The amount the Applicant for Funding may request through the crowdfunding platform depends on the period the Applicant for Funding has been in existence. Where an Applicant for Funding has been in existence for a period of less than twelve months, the maximum requested funding amount is RO 100,000. If the Applicant for Funding has been in existence for a period of twelve months or more, it may request funding amounts exceeding RO 100,000.
Two of the priorities of Oman Vision 2040 are:
(a) economic diversification and fiscal sustainability: a diversified and sustainable economy that is based on technology, knowledge and innovation, operates within integrated frameworks, ensures competitiveness, embraces industrial revolutions and achieves fiscal sustainability; and
(b) the private sector, investment, and international cooperation: an empowered private sector driving a national economy that is competitive and aligned with the global economy.
The offering and use of the crowdfunding platforms is expected to lead to the growth of Oman’s GDP, increase in entrepreneurship, lead to the creation of jobs, enhance competition, and increase in investment, research, development and innovation. Start-ups and SMEs will be able to kickstart their projects through alternative means of funding rather than through traditional banking methods and this will likely lead to innovating projects spring into life.
Via a public announcement dated 3 March 2022, the CMA announced that it granted a licence to the first crowdfunding platform Operator in Oman who is licensed to offer both equity and peer-to-peer crowdfunding.
We expect the number of crowdfunding platforms operating in Oman to increase in the near future.
We further expect that the CMA and, potentially, other regulators in Oman will amend the existing legal and regulatory framework to promote and develop more fintech products to enhance innovation in the financial and capital market sectors through the use of blockchain technology. This will very likely attract both local and foreign investors.
Originally published in The MENA Business Law Review No. 02/2022.
You can download the electronic version of the magazine for free here: https://www.lexis.ae/2022/07/04/out-now-mena-business-law-review-no-02-2022/
This article has also been published on Lexis Middle East (accessible to subscribers only): https://www.lexismiddleeast.com/magazine/MENABusinessLawReview/2022_June_11/