PLC Exclusion From Capital Market Crowdfunding Sparks Concern For Startups, MSMEs

Ethiopia’s proposed crowdfunding regulatory framework has drawn sharp industry concerns, with experts warning that restricting eligible fundraisers strictly to share companies could lock out a vast majority of startups and micro, small, and medium-sized enterprises (MSMEs).

The debate took center stage during a public consultation organized by the Ethiopian Capital Market Authority (ECMA), where stakeholders questioned whether the current eligibility threshold adequately accommodates early-stage businesses. The public consultation on the draft Crowdfunding directive was held on Thursday at Skylight Hotel, Addis Ababa.

Under the draft directive, enterprises must be incorporated and registered as share companies under Ethiopia’s Commercial Code to qualify for crowdfunding. Analysts note this requirement risks marginalizing private limited companies (PLCs), which remain the predominant corporate structure for small businesses and tech startups across the country.

Biniyam Kebede, a senior security rating officer at Wegagen Capital, pointed out that international crowdfunding models accommodate diverse corporate forms, arguing that a share-company-only rule excludes a substantial share of Ethiopia’s MSME sector.

“I don’t believe most MSMEs have a corporate-level organized quality of governance at a share company level, unless they are already big startups at a business level,” Biniyam said.

Echoing these concerns, Behailu Tesfahun of Alpha Advocates LLP questioned whether early-stage businesses organized as PLCs can realistically leverage crowdfunding. While acknowledging that allowing PLCs to raise equity from the public directly conflicts with Commercial Code provisions and would necessitate legal reform, Behailu questioned whether alternative arrangements—such as debt-based instruments—could bridge the gap.

Responding to the critiques, Solomon Bekele, a senior legal adviser at ECMA, explained that the inclusion of PLCs was thoroughly examined during the drafting phase, but immovable legal bottlenecks remained.

Solomon noted that the Commercial Code limits PLC membership to 50 shareholders and prohibits them from issuing transferable securities—safeguards incompatible with equity crowdfunding, which relies on pooling capital from a large retail base. Furthermore, because PLCs are not legally mandated to establish a board of directors, public fund governance and management would be severely compromised.

For PLCs eager to tap into alternative digital financing, Solomon suggested that converting into share companies and establishing formal governance structures is the viable legal pathway forward.

The draft directive outlines structured boundaries for digital capital formation, setting annual fundraising ceilings across three distinct tiers: ETB10 million for Category One, ETB25 million for Category Two, and ETB50 million for Category Three, subject to an overarching EB50 million cumulative cap across all crowdfunding platforms.

To protect retail participants, the framework limits individual retail investments to five percent of an investor’s annual net income per offering, capped at 10 percent cumulatively per annum across all platforms.

For businesses attempting to raise debt financing, the rules are stringent: issuers must provide three consecutive years of audited financial statements prepared under Accounting and Auditing Board of Ethiopia (AABE) standards, prove ongoing profitability and positive cash flows, and submit comprehensive cash-flow forecasts covering the instrument’s tenure.

When questioned about the absence of mandatory credit ratings for debt offerings, Solomon explained that ECMA could not enforce the requirement due to the current absence of active credit rating agencies in Ethiopia. However, he revealed that the Authority anticipates market entry following ongoing discussions with international agencies. In a subsequent confirmation to The Reporter, Solomon noted that several rating agencies have expressed keen interest in entering the Ethiopian market, though licensing timelines and formal applications remain pending.

Beyond corporate eligibility, the consultation addressed structural questions concerning the division of supervisory responsibilities between ECMA and licensed crowdfunding intermediaries, ongoing reporting obligations for successful issuers, cross-border investments, and growing stakeholder interest regarding frameworks for interest-free crowdfunding.

The directive remains open as a draft framework as the Authority reviews stakeholder feedback before finalization.