Colombia’s regulator aims to make crowdfunding platforms more like capital markets for SMEs, through a new regulation
Two years after releasing the first regulations for crowdfunding in Colombia, the country has hardly any fintechs in this niche.
But that is set to change after the latest update to the regulations, which raises the cap on financing through crowdfunding platforms. Now, the market is set for growth, dynamism and maturity, say industry players.
After the first rule came into force, “many people interested in establishing platforms were hampered,” said Jorge Padilla, lawyer and author of the book Crowdfunding. “The government’s attitude is increasingly aimed at making regulation more flexible, which is the best way to regulate these phenomena: through principles, and not restrictive norms,” he added.
The new guidelines are far from the regulatory stance of 2018, according to experts. The old restrictive attitude has given way to flexibility, in a country where access to credit is still a feat. 62% of micro, small and medium sized businesses do not have access to loans.
Now, the law allows for businesses to borrow up to US$ 13.7 million through crowdfunding platform, up from US$3 million previously, making these platforms more akin to mini capital markets.
By giving SMEs greater incentives to enter and request collective funding, more platforms will be motivated to open and scale their operations, say industry sources.
“The capital markets were designed only for large corporations, which issue shares or debt, and for institutional investors to participate in the market. But not for MSMEs,” says Edwin Zácipa, general director of Colombia Fintech, identifying an opportunity in the credit market.
The update to crowdfunding regulations is just one part of a series of legal changes in the Colombian financial markets in recent years. The Government has introduced regulations that authorize digital onboarding and identity validation processes, and created the framework for a regulatory sandbox, which will help new business models get a hold in the industry.
There is also a regulation of digital payments that will modernize low-value payment systems so that bank and non-bank players can operate in the sector without conflicts.
These regulations, which have evolved together with new financial technological tools, have aroused the interest not only of the local ecosystem – but also of international companies that are lining up to participate in the new scene.
But for the crowdfunding market in the country to be truly successful, regulation must allow other forms of crowdfunding, says Zácipa.
Current regulations only regulate debt and equity – and there is only on such company in the market currently: a2censo, part of the Colombian Stock Exchange (BVC). There are other unregulated platforms in the country, such as Vaki, a donation and reward crowdfunding, and others, including Aruma and Finnova, have requested permission to operate.
“There is still no talk of crowdfunding of assets, donations, rewards,” says Zácipa. “Although these businesses don’t need to be monitored, the platforms will always seek to diversify into other business models. So there should be a review of how to further expand crowdfunding with different activities.
“Today it is rare to find that someone has invested in crowdfunding, or that a MSME is thinking of seeking financing in one,” he added.
Obtaining an authorization to operate in Colombia is not very fast either, Padilla said, so he anticipates that new collaborative financing platforms might enter the market next year.
For the lawyer, the growth of the sector will also strengthen as the platforms, and the companies that receive financing, earn the public’s trust by honoring their commitments over time. Clear rules should also be deployed for all actors in the funding process, including investors.
“It is important that they know that every investment carries a risk, in case some project does not become successful, because not all will be.”
The Colombian crowdfunding platform, a2censo, says it aims “to simplify the stock market”, connecting supply and demand of resources from investors to companies, and eliminating barriers between parties.
Publishing a company on the platform takes around 3 to 5 weeks, as a result of the documentation that needs to be presented; however, the collection process can be much faster – often just hours, says Lina Parra, director at a2censo.
“We have achieved collections in 1 hour 20 minutes, which was a renewable energy project. But we have also had projects that have taken 60 to 90 days on the platform. It depends on the amount and the project. ”
Still, it’s still expensive for companies to raise capital this way, says Juan Manuel López, a financial institutions regulation specialist. “The complete chain needs to be more connected. From wanting to participate to actually participating can take 2 to 3 months can pass, although it depends on how ready the company is.”
Since its launch in November, a2censo has facilitated just over US $ 1 million in financing, from more than 1,300 investors into 23 companies. It expects to reach $2.5 to $3 million dollars by the end of 2020.
“We are in a process of modernizing the financial system. This has been a year of an avalanche of regulatory changes,” says Zácipa.
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