2. 2. Objectives Of The Private Financing Platform Framework
Private Financing Platforms (“PFPs”) are online platforms that allow private companies, such as start-ups and small and medium enterprises (“SMEs”) from early to pre-IPO stage, to source financing from private and institutional investors to launch and scale their businesses.
PFPs can play an important role in improving access to alternative financing for startups and SMEs, which are key engines of economic growth and diversification in the MENA region. PFPs may include equity funding, private placement and invoice financing platforms that leverage data and technology to unlock new ways of raising money for small businesses from professional investors such as high net worth individuals, private equity, venture capital, family offices, accelerators / incubators and angel investors.
Notwithstanding the benefits of a PFP Framework to the financing ecosystem for startups and SMEs, there are risks associated with PFP Transactions that include, but are not limited to, the following:(a) Loss of capital: PFPs will mainly attract start-ups and SMEs that have no or very little established track record, for which the observed failure rate is generally high.(b) Lack of liquidity: In the absence of a ready secondary market for PFP Transactions, clients face the risk of not being able to exit their PFP Transactions or having to transfer them at a significant discount.(c) Lack of information: There may not be sufficient information on the start-ups and SMEs (“PFP Prospects”) seeking financing through the PFP to enable clients to conduct proper due diligence and make fully informed investment decisions.(d) Platform failure: Clients of a PFP may not be able to readily recover their assets in the event that a PFP Operator that handles Client Assets fails and becomes insolvent.(e) Conflicts of interest between the PFP Operator and clients: The remuneration of a PFP Operator is typically linked to the amount of funds raised so the interests of a PFP Operator may be more aligned with those of the PFP Prospect than those of its client providing financing.
In light of these considerations, the FSRA has developed a proportionate, risk-based PFP Framework that facilitates access by start-ups and SMEs to alternate sources of funding, rather than traditional channels, while applying the necessary regulatory safeguards to ensure they operate in a safe and sound manner to protect their clients.