In our last post, we dipped our toes into the Iran Alternative Investment ecosystem with a hint of listed VC funds, their laws, regulations and in general the imposed provisions on said investment funds. We are now to explore more about a very new scheme introduced, officially, just recently by Iran Fara Bourse. Although there were some old practices on this instrument in form of social and charity events, however, its conjugate with a capital market face is something that shall be considered as a toddler with lots of unknowns and question marks yet. Yes, we are talking about the “Equity Crowdfunding”!
The history of crowdfunding in Iran Alternative Investment ecosystem, in its charitable look, dates back to ages ago when people threw “Golrizan” for unintentional inmates or low-income families to raise funds subsidizing their financial situation. The scheme got stronger when regular annual charity events became a routine in Iranian nation and for some time we do have several humanitarian movements supporting the unfortunates in each and every aspect.
That aside, the concept of raising funds through the crowd and sharing the stake in projects is totally new and it happened while policymakers realized that the idea based projects and startups need more than just a regular VCs to cover their needs. By ratifying the equity crowdfunding directive on securities and exchange organization of Iran based on the capital market act, Iran Fara Bourse is now in charge of the execution. Considering the fact that the whole scheme should have got localized, there are some differences with International practices. It shall be noted even before this directive the equity crowdfunding was happening in dedicated platforms, however, the investors’ pool was limited to angels and sophisticated individuals. Despite the fact that there is still some time for everything to be in place, we are going to depicture all the hidden sides of IFB’s bylaw in this article.
The first thing that is the source of many controversies is the “CrowdSafe” itself. The Iranian version is called “Electronic Certificate – from now on EC” and it has its differences with its international analogue. The EC does not have to be filed with SEO and it could be transferred only with regards to an SEO directive soon to be published. As of today, there are no reachable schemes for the secondary trades of ECs and investors shall hold to their investment up until the occurrence of a trigger event (like an IPO or acquisition). This is the “bottleneck” for now which will lean the participation somehow to the experts’ side. The ECs will enjoy provision of “valuation cap” or “discount” like the global standards.
The second in line is the crowdfunding platforms. In order to establish one, the founders shall acquire a license from IFB. Also, a platform needs a sponsor/agent, a legal person with financial institution license (issued by the SEO) or a legal entity who uses a financial institution as a proxy to initiate crowdfunding processes. It is possible for either the sponsor/agent itself to run a platform or to get into an agreement with one providing these services. The bottom line is that a licensed financial institution shall be there. It may be needed for the financial institution to make amends to its articles of association (AoA) in order to be ready to utilize crowdfunding schemes. The below image demonstrates the interrelations better:
There are some general provisions to each and every crowdfunding campagin:
- The sponsor shall provide IFB with its every CF projects;
- Banks, credit and financial institutions, listed firms on TSE or IFB are not allowed to utilized any CF schemes;
- The sponsor shall provide its performance report along with annual audited financial statements to supervision committee no later than 4 months after the FY ends;
- All payments shall be carried out via domestic reputable payment portals;
- The maximum cap for fundraising through a CF campaign is IRR 20 bn (USD 470 K @ USD/IRR 42,560);
- The sponsor shall not have more than IRR 200 bn (USD 4.7 mn @ USD/IRR 42,560) open campaigns at a time;
- Founders shall bring at least 10% of required funds themselves;
- The maximum cap for individual participation shall be no more than 5% of total campaign figure;
All in all, considering all the impediments and unknowns, the crowdfunding real practices has a long way ahead of its maturity in Iran Alternative Investment road. However, the steps taken so far, are considered as good enough for starters and there is a bright future for crowdfunding amid the nation. Taking a hard look at Iranian Startups and their never-ending thirst for more funds, this could be the skeleton key they needed to expand in a proper way.
In the coming parts, we are going to dig deeper into CF campaigns and show how are the real practical operations work.