Funding your business is a critical part of your growth journey, and in Saudi Arabia, banks are often the first port of call for borrowing funds. Banks, however, have been restricting lending to private businesses globally, and Saudi Arabia is not an exception. To the contrary, bank credit availability to private business in Saudi Arabia can be rather limited. That’s why a business may wish to explore alternative funding sources. In this article, we will explore the different funding sources available and discuss some of the legal implications of each.
What Type of Alternative Funding Sources are Available in KSA for early stage growth?
Saudi Arabia’s venture stage ecosystem is rapidly maturing, and as such, the choice of alternative funding sources available to businesses continues to expand. It’s essential to keep in mind that for in-KSA enforceability, Shari’a compliance may be a legal requirement for recovery of profit charges or “interest”.
Angel investors are customarily high-net worth individuals who provide capital to entreprenerus during the life of their ventures in exchange for an ownership stake in the business. This type of funding is often more readily available than traditional bank loans and can be used to fund the launch and very early stages of growth of a business.
Legal Consideration: Documentation in angel investment transactions is key, and while some angel investors can be qualifying or accredited investors, they may not be sophisticated. Therefore it is very important that the transaction documentation is prepared by specialists to protect both parties, and to take into consideration the private placement nature of the offering securities given applicable laws. It is also essential to perform due diligence on the investor and ensure that they qualifying or accredited investors.
Venture Capital (VC)
Venture capital is a form of capital provided by specialist investment funds (referred to as venture capital funds) to businesses in exchange for equity. VC is typically available from after the proof-of-concept stages of a business, through advanced scaling stages.
Certain venture capital funds provide debt financing, which can help businesses looking to finance working capital or other aspects of their capital requirements, but without parting way with equity. Customarily venture debt is available to companies that received institutional venture capital equity investments.
Legal Consideration: Both forms of venture capital financing are considered to be private placements or financing, and as such special legal attention should be given to documentation to ensure that they are drafted in line with applicable laws. Additionally, businesses looking to receive venture capital should carryout internal legal and compliance review in preparation for investor legal due diligence.
Additionally, debt funding is likely to be subject to the borrower providing security to the lender, and the perfection of such security. The borrower should consider carefully the scope of security and its ability to perfect the security in favour of the lender, especially if the lender is a foreign party, which is customary.
Equity crowdfunding is a form of funding provided by a large group of investors, including retain investors, through a platform in exchange for a share of the business’ equity.
Legal Consideration: Under Saudi law, equity crowdfunding is permitted, subject to certain restrictions. Fundraising must occur via a platform licensed by the Capital Market Authority (CMA).
Debt crowdfunding is where investors provide funds in exchange for a fixed return. This type of funding is often used by businesses to meet their short-term cash flow needs or finance a specific project. In Saudi Arabia, two debt crowdfunding platforms recently received licensed from the Saudi Central Bank (SAMA) – Forus and Tameed.
Legal Consideration: In 2021, SAMA issued a new set of regulations that clarify the legal requirements for debt crowdfunding platforms. The platform must be registered with and regulated by SAMA, submit periodic financial statements, and establish a risk management system. If you choose debt crowdfunding, you must ensure that the platform you use is fully compliant.
Alternative funding sources are worth considering if you’re looking to finance the launch or growth of your business. However, it is crucial to consider the legal implications of each type of funding before selecting an option. It is also possible for you to utilize a number of funding options in tandem. In Saudi Arabia, angel investment, venture capital, equity crowdfunding, and debt crowdfunding are all viable options for businesses looking to raise capital, but each with its own set of legal implications.
To discuss the legal implications of the options suitable to you, contact our team.