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The UAE government’s move to regulate crowdfunding platforms in the country is a recognition of this important source of financing for startups and will go a long way in aiding entrepreneurs to seek relatively cheap capital while giving an opportunity for investors to deploy their savings in new businesses in a regulated environment.

By entrusting the Securities and Commodities Authority (SCA) with the responsibility to regulate and govern the activities of crowdfunding platform operators, the government has added a strong institutional layer scrutiny, reinforcing confidence to crowdfunding and an ecosystem of entrepreneurs and investors who are part of that.

The recorded history of crowdfunding traces back to 1997, when a British rock band Marillion raised $60,000 to fund their reunion tour through online donations from fans. Inspired by this innovative method of financing, a number of crowdfunding platforms sprang up across the world, and in the last decade, it has become a legitimate and popular route to financing a new venture.

Startups usually don’t have access to traditional institutional sources of funding such as banks or capital markets. To a great extent these get their early stage funding from family and friends or through startup funds, angel investors and venture capitalists. Again, it takes a lot of convincing for these class of investors to commit their money in a mere idea that has not been tested in the market.

This is where crowdfunding comes as a democratic source of venture financing. Typically, when a business idea is floated by an entrepreneur and seeks crowdfunding, she/he is putting the idea up for voting and it automatically turns out that every penny invested in the project is a vote of confidence in that idea. Additionally, the public interest in the project and the publicity the crowdfunding attempt attracts are bound to generate awareness and market for the product or service planned.

Going beyond its role as a funding source, crowdfunding bonds investors with innovators, ultimately creating a society that appreciates and supports new ideas.

For UAE, a nation that has always encouraged and fostered business ventures, crowdfunding is an ideal fit for its strategy of supporting innovation. Of course, a regulatory framework would clearly set the rules, support investor confidence and help to weed out potential fraudsters.