Investing assets in crowdfunding platforms that further economic and social needs may well be the preferred next-generation alternative asset class for retirement funds, but South African regulation is not yet up to speed.
By Deirdre Phillips, senior associate at Bowmans
While retirement funds across Africa have started to invest in alternative assets classes, such as private equity, it remains to be seen whether South African retirement funds are permitted (or even willing) to be a little more ‘innovative’ by choosing crowdfunding platforms as an alternative asset class.
The asset-spreading requirements of private retirement funds are governed by Regulation 28 to the Pension Funds Act. It sets out the various categories of assets a retirement fund may invest in, as well as the asset-spreading limits. For example, a retirement fund may invest up to 10% of its assets in private equity and up to 2.5% of its assets in ‘other’ assets not specified in the schedule to Regulation 28. It could be said then, that investments in crowdfunding, bitcoin and cryptocurrencies fall under other assets.
Crowdfunding is generally understood as an online web-based platform where amounts of money are obtained from individuals or organisations to fund a particular project or venture. Crowdfunding platforms include loan-based crowdfunding (also known as peer-to-peer lending) and investment-based crowdfunding (or equity-based funding).
In loan-based crowdfunding, individuals or organisations lend money for a financial return in the form of interest payments and the repayment of the capital amount borrowed. Investment-based crowdfunding is about investing in debt securities or unlisted shares in new or existing businesses. If the business succeeds, then the value of the business increases and so does the value of the shares in that business.
Opening up new options for retirement funds
A vast number of retirement funds offer member investment choice and are obliged to take environmental, social and governance factors into account when investing fund assets. Bearing this in mind, crowdfunding could potentially be a viable option for funds looking to diversify their investments or seeking innovative alternative investment vehicles to meet membership needs. Investing assets in crowdfunding platforms that specialise in, for example, facilitating urban or infrastructure development may well be the preferred next-generation alternative asset class.
Although the Financial Services Board (FSB) has said it would look into the regulation of loan-based and investment-based crowdfunding in South Africa, no policy document or draft regulations have yet been published on dealing with crowdfunding.
There is currently no specific crowdfunding regulation in South Africa, although aspects of other financial services legislation would apply to certain aspects of crowdfunding activities. The FSB has advised that any person interested in participating in crowdfunding activities should contact it beforehand to establish whether the activity falls within the scope of any current regulations (such as the Banks Act, Financial Advisory and Intermediary Services Act, Collective Investment Schemes Act, National Credit Act, etc).
One wonders if the Registrar of Pension Funds would permit a retirement fund to invest in crowdfunding platforms as an alternative asset class, and if so, whether the fund would need to comply with any requirements before investing in a crowdfunding platform.
For now, it appears that the FSB is still grappling with crowdfunding, and retirement funds either do not consider crowdfunding as a viable alternative asset class or are adopting a wait-and-see approach.