Crowdfunding In Bahrain

The Kingdom of Bahrain ("Bahrain") has become the second country within the Gulf Cooperation Council, after the United Arab Emirates, to allow crowdfunding. Crowdfunding is the use of small amounts of capital aggregated from a large number of individuals to finance a business venture. In this article we will provide an overview of Crowdfunding and its regulation in Bahrain.

Conventional Financing Based Crowdfunding Business ("CFC") Person to Business (P2B) is a lending e-platform which takes place on an online portal, through which people lend money to businesses, for the purpose of gaining a financial return in the form of interest payment and a repayment of the principal sum (loan amount) over a pre-specified period of time. CFC Platforms may raise funds for borrowers based in Bahrain or abroad, subject to regulation.

Regulations and licensing

The new Crowdfunding regulations issued by the Central Bank of Bahrain ("CBB") create a legal framework for loan crowdfunding (both conventional and Sharia compliant) while providing governance for financial technology or FinTech businesses and protection for their customers. The regulations are aimed at helping small and medium size enterprises and start-ups to get access to alternative forms of funding when more traditional funding options are not available.

Firms operating an electronic platform in relation to lending must be licensed in Bahrain, as 'operators of P2B Conventional Financing-based Crowdfunding Platforms', under the CBB Rulebook Volume 5 - Financing Based Crowdfunding Platform Operator. The minimum capital requirement for these CFC Platform Operators is Bahraini Dinars ("BD") 50,000 to be maintained on an on-going basis. This is new type of license. A CFC Platform Operator is not permitted to engage in Business to Business (B2B), Business to Person (B2P) or Person to Person (P2P) lending.

Category of investors and borrowers

Retail investors are not permitted to participate in finance-based crowdfunding given its high-risk nature. Only expert and accredited investors are allowed to provide loans through these platforms while the borrowers must be small or medium sized business with paid-up capital not exceeding BD 250,000.

Under a CFC agreement (entered into between the CFC Platform Operator and the lenders), lenders are restricted to lending not more than 10% of their net assets to any single borrower. All lenders intending to participate in a CFC Platform must fill out the 'Self...