The Saudi Central Bank (“SAMA”) has issued the rules governing Debt Crowdfunding Activities (the “Crowdfunding Rules”) that can be undertaken by debt crowdfunding companies and their digital platforms. SAMA is vested with the powers of issuing the regulatory framework for financing and financial institutions according to the Saudi Central Bank Law and the Finance Companies Control Law. Article 4 of the Saudi Central Bank Law gives SAMA oversight and licensing powers over financial institutions, including FinTech platforms, in addition to setting out the rules and bylaws that govern their operations. Articles 4 and 5 of the Finance Companies Control Law also prohibits the operations of any financing activities within Saudi Arabia without obtaining a license from SAMA.

• What is debt crowdfunding?

Debt crowdfunding is a form of peer-to-peer financing that allows businesses access to funds through loans provided by individuals or other peer businesses through a platform operated by a crowdfunding company. It gives companies a solution to raise funds through a method that avoids the extensive requirements, process, and contractual restrictions imposed by banks and financial institutions in other financings. Debt crowdfunding is different from equity crowdfunding, which gives the participating financier an equity stake in the borrowing company as opposed to a loan repaid in installments by the borrowing entity.

• The Crowdfunding Rules

The Crowdfunding Rules is indexed into several chapters that cover the licensing requirements for beneficiary entities, the internal organization and governance requirements for these entities, the rules for the operation of their activities, and oversight or supervision rules. The first chapter of the Crowdfunding Rules defines all stakeholders in the process, and the extent to which the rules apply and its general purpose. Crowdfunding activities must be operated through a joint stock company (defined as “crowdfunding company”) using an online or digital platform, such as a website or mobile application. A crowdfunding company is an intermediary between the financier and the beneficiary. The financier (defined as “participant”) may be an individual or a juridical entity. The beneficiary (defined as “institutional beneficiary”) must be a commercial entity registered in Saudi Arabia.

1. Licensing Provisions

• Required documents

In order to get licensed, the debt-based crowdfunding company must submit a request to SAMA, which includes a completed application form, its articles of association, and a list of founding shareholders along with their respective shares. Additionally, the request must include signed Fit and Proper Forms for founding shareholders and board candidates, an irrevocable bank guarantee equivalent to the minimum capital, draft agreements with third parties, a proposed business model, and any other documents required by SAMA.

Furthermore, candidates for senior management positions must meet SAMA’s eligibility criteria, which includes residency, qualifications, and integrity standards.

• Capital requirements and disposal of shares

Article (6) of the Crowdfunding Rules provides that the minimum capital of a crowdfunding company must not be less than SAR 5,000,000. This minimum capital may be adjusted by SAMA based on market conditions and the crowdfunding company’s nature of business or business model.

A written non-objection letter from SAMA is necessary before disposing of significant shareholders’ shares, stakes or shares of indirect ownership that affect 5% or more of the company’s shares or its voting rights.

• Licensing process and timeframe

SAMA will notify the applicants with its initial approval or rejection within sixty working days. Applicants are also required to complete any additional information requested by SAMA within thirty working days. If they fail to do so, this may result in their application being rejected.

For companies that are under incorporation, the founding shareholders must complete the necessary incorporation formalities and engage in debt-based crowdfunding activities within six months from receiving SAMA’s initial approval. This includes providing SAMA with a copy of the company’s commercial register that includes the debt-based crowdfunding activity and a copy of the company’s articles of association. If these requirements are not met within the specified timeframe, the initial approval will be considered cancelled. SAMA has the discretion to extend this period by an additional six months.

For existing companies, they must also submit a copy of their commercial register reflecting the debt-based crowdfunding activity within six months of the initial approval. Failure to do so will result in the cancellation of the initial approval as well. Likewise, SAMA has the discretion to extend this period by an additional six months.

• License validity and renewal

SAMA may conduct verification checks to ensure compliance before granting the license. The license issued by SAMA is valid for five years and can be renewed through a request made at least three months prior to its expiration. SAMA retains the right to revoke the license for reasons such as providing false information or upon a written cancellation request from the company. The associated fees include SAR 5,000 for license issuance and SAR 2,000 for any renewal or amendment.

2. Internal Organization

The debt-based crowdfunding company is required to establish comprehensive internal policies and procedures approved by the board, covering areas such as governance, credit, risk management, compliance, conflict of interest, and human resources. The company must ensure its technical systems meet operational needs and adhere to best practices as outlined by SAMA. Additionally, robust information technology systems must be designed to ensure data safety and confidentiality, with regular assessments against recognized technical standards.

To protect information security and combat financial crimes, the company must comply with SAMA’s regulations and the legal requirements of the Anti-Money Laundering and Combating Terrorism laws. It must follow the Rules on Outsourcing set by SAMA and establish a comprehensive risk management policy that addresses various risks, including credit, market, operational, legal, reputational, technological, cybersecurity, and fraud risks.

The company is required to appoint certified external auditors with SAMA’s approval and ensure that at least 50% of its employees are Saudi nationals at the beginning of its operations. The Saudi nationals’ percentage of employment must increase yearly by 5% until it reaches 75%.

3. Activity Provisions

The debt-based crowdfunding company is mandated to establish a comprehensive due diligence program for participants, which includes policies for Know Your Customer (KYC), information security and data privacy.

For institutional beneficiaries, the company must assess creditworthiness by checking credit records, documenting approvals, and registering credit information with licensed bureaus. Clear and transparent methods for evaluating creditworthiness must be approved by the board and reviewed annually. Service agreements concluded with participants and institutional beneficiaries must be detailed, specifying contract terms, finance amounts, fees, and dispute resolution mechanisms.

There are important restrictions on the size of finance provided by participants, as well as the leverage determinants of the crowdfunding company and the beneficiary. These restrictions can be summarized as follows:

1. The total finance provided through the platform of a debt-based crowdfunding company must not exceed forty times its capital.
2. The finance provided to micro, small, and medium enterprises must not exceed SAR 7.5 million. Companies that operate real estate activities are exempted from this restriction, as well as any other specific exemptions given by SAMA.
3. A participant must not have a concentration of more than 25% of the financing provided to any beneficiary.
4. Except for qualified participants, the financing provided by any participant on a given platform must not exceed SAR 250,000. We think that this restriction should have encompassed the participant with any platforms in Saudi Arabia, rather than a specific platform. This would be in line with the aim behind the restriction.

Fundraising periods are capped at 60 days, with strict procedures for handling participant funds and repayments. The company must clearly disclose risks associated with crowdfunding, the nature of its services, and provide essential information about institutional beneficiaries, including financial statements and project details. Measures to manage conflicts of interest are required, ensuring fair treatment of all participants. The company must refrain from providing advice on projects displayed on its platform and prevent board members and major shareholders from participating in financing unless specifically allowed by SAMA.

4. Supervision and Compliance

The debt-based crowdfunding company is required to provide SAMA with any necessary data, information, and documents as specified by SAMA’s regulations. This includes granting SAMA staff and appointed auditors’ access to facilities, documents, and data related to the company’s operations. Any refusal to comply with these requests is considered a violation of the Crowdfunding Rules.

Concluding Remarks

The Crowdfunding Rules in Saudi Arabia represents a pivotal step towards modernizing the financial landscape by enabling debt-based crowdfunding activities under a robust regulatory framework. As the sector continues to grow, adherence to these regulations will be essential for maintaining trust and confidence in crowdfunding as a viable financing alternative to businesses in Saudi Arabia. Ultimately, the Crowdfunding Rules enhance access to capital for businesses while encouraging a broader investor base, contributing to economic diversification and growth in the Kingdom.

Authors: Ashraf Hendi, Partner, Head of Banking & Finance and Farida Koura, Associate