Financial Promotions made by Crowdfunding Platform Operators

The Crowdfunding regulatory framework was launched in the Dubai International Financial Centre (DIFC) by the Dubai Financial Services Authority (DFSA) in 2019. During the course of 2023, the DFSA carried out a thematic review on Financial Promotions made by Crowdfunding Platform (CF) Operators. The objective of this exercise was to assess whether CF Operators are adhering to the Financial Promotions Rules, by communicating to clients in a clear, fair, and non-misleading manner. Upon conclusion of the thematic review, the DFSA made several key observations. Our top 8 key takeaways of these are set out below:

1. It was observed that not all staff within CF Operators understood, or properly implemented Financial Promotions Rules. It is imperative that all staff within the CF Operator are trained in, and properly implement the Financial Promotions policies, procedures, systems and controls.

2. Marketing efforts directed at Professional Clients often did not align with the DFSA Rules. This was evident in the failing to prevent the distribution of material intended for Professional Clients to non-Professional Clients. Promotional material directed to Professional Clients must include a statement indicating that the material is exclusively intended for Professional Clients.

3. The absence of a structured formal review and approval process for Financial Promotions was noted. CF Operators must establish a comprehensive review and approval process to ensure regulatory compliance and alignment with investor protection requirements, and record steps carried out as evidence.

4. CF Operators lacked a process for monitoring and reviewing existing Financial Promotions as well. The obligations set out in key takeaway 4 are an ongoing requirement.

5. Financial products promoted by CF Operators which were not launched as planned continued to be displayed on the Firms’ platform and website. It is imperative that CF Operators promptly remove any product that fails to launch for any reason.

6. Findings showed that no established policies and procedures were in place to assess whether third-party services providers promoting on behalf of CF Operators, were doing so in line with DFSA Rules. The use of third-party providers does not alleviate the Firm from ensuring that activity is carried out in accordance with the DFSA Rules.

7. Concerning performance and forecasts, CF Operators have an obligation to present all facts in a clear, fair and easy to understand manner. These facts should not be misleading in any way. The review found that CF Operators:
• Failed to present a fair and balanced view i.e. projections were displayed in gross returns without accounting for associated costs or net returns.
• Failed to identify the source of information from which past performance was derived.
• Failed to provide key facts and assumptions underlying the projections.
• Would often use the terminology “secondary market” as a transfer facility, which is misleading to Clients.
• Failed to provide prominently displayed appropriate risk warnings associated with the Product.

8. Despite being outside the scope of the DFSA’s CF regime, it was observed that some promotions were of global real estate investment opportunities. It is imperative that Firms understand the limitations of the DFSA Rules with respect to the locality and type of real estate that can be offered by a CF Operator.

While these insights provide valuable considerations for regulatory compliance, it’s crucial to note that the findings outlined here are not reflective of the practices of all CF Operators. Staying vigilant in adherence to the Financial Promotions Rules, implementing comprehensive review and approval processes, and ensuring transparency in communication remain imperative for the responsible and compliant operation of Crowdfunding Platform Operators.

If you are a CF Operator in need of regulatory compliance support, we can help! Please contact us at [email protected].