The Regulatory Framework for Crowdfunding In Nigeria

INTRODUCTION

Every business requires funds for its day-to-day running, such funds are popularly known as Capital. Generally, Capital means any financial resources or assets owned by a business or Organisation that are useful in promoting development and generating income. Capital is used to provide ongoing production of goods and services to make profit. Capital is an integral part of running and growing a business.

It should be noted that Capital has several meanings in different contexts; it could refer to funds raised to support a particular project, it could represent the accumulated wealth of a business represented by its assets excluding liabilities, and so on.

There are several ways of raising capital for a business or project, they include:

• Personal funding
• Funds from family and friends
• Funds from Investors
• Crowdfunding
• Loans from banks and private individuals

The quest for ease of access to funds by making use of the internet has led to the concept of crowdfunding. In this article, we shall be focusing on crowdfunding as a means of raising capital for a business organization, as well as the body and laws regulating crowdfunding in Nigeria.

MEANING OF CROWDFUNDING

Crowdfunding is the use of small amounts of capital from various individuals to finance a new business venture. Crowdfunding takes advantage of the easy accessibility of vast networks of people through social media and crowdfunding platforms, to bring investors and entrepreneurs together, with the possibility of expanding the pool of investors beyond the traditional circle of owners, relatives, friends, and venture capitalists[1].

Crowdfunding is the use of small amounts of money, obtained from many individuals or organizations, to fund a project or a business through an online web-based platform. It is simply when a crowd funds your business instead of a few investors. When financing a particular business or project, there is often the need to ask a few people for a large sum of money, crowdfunding uses this same idea, with the internet at its disposal to reach many people to donate small amounts for the progress of the business or project. By receiving a large cash inflow, the necessary funds to facilitate such business or project are acquired.

As earlier mentioned, crowdfunding campaigns are done via internet platforms and through social media. The campaign stipulates the monetary goal and specifies the timeframe for such achievement. According to Kendrick Nguyen, Crowdfunding works for most businesses at different stages, but the companies that have the most successful campaigns tend to have the largest and most engaged communities behind them[2].

Crowdfunding takes place online via different platforms. For a particular investment scheme to qualify as Crowdfunding, such must take place on a website and the offer to finance the business or project must be made to the public.

There are different types of crowdfunding, in this article, we shall focus on four (4) types of crowdfunding, they are;

1. Donation-based Crowdfunding
2. Reward-based Crowdfunding
3. Debt Crowdfunding
4. Equity Crowdfunding

Donation-based Crowdfunding is a form of campaign where people give money to a particular cause or project for nothing in return. For example, where a business creates a campaign to purchase certain equipment for the company, the individuals that give money are doing that just to support the business and not for a share in the profits nor a payback.

Reward-based Crowdfunding is a form of Crowdfunding where the investors get something in return for their money. Such a reward would be dependent on the amount donated. They may receive discounted goods and services, coupons, branded t-shirts, and so on.

Debt Crowdfunding is an arrangement where numerous investors receive the money invested with interests. This form of crowdfunding is also known as Peer-to-Peer lending. It gives room for lending money without going through banks and other financial institutions. The interest received is particularly important, it is the main benefit for the investors. Another benefit derived by the investors is the satisfaction that they have contributed to the success of a business and/or project.

Equity Crowdfunding is where investors contribute funds in exchange for shares or a small stake in the business or project.[3] This allows companies that are not listed on the stock exchange to invite the public to invest in its shares. Out of all crowdfunding models, equity-based Crowdfunding produces the largest number of funds raised on a per-project basis although this has been the slowest type to grow because of regulatory restrictions.

Examples of Crowdfunding sites include:

1. GoFundMe
2. Porkmoney
3. Kickstarter
4. Farmcrowdy
5. LendingClub
6. ThriveAgric
7. Indiegogo

REGULATIONS GUIDING CROWDFUNDING IN NIGERIA

Technological growth and economic developments have made the world a global market. In Nigeria, one of the main challenges of startups is the unavailability of funds to enable such business function. They are often faced with restrictions in raising funds and depend mainly on family, friends, bank loans, and venture capitalists. The high-interest rates on bank loans and difficulty in getting venture capitalists have led businesses to explore other means of funding their projects. Equity crowdfunding has become an integral part of the financial market as it provides start-ups with a cost-effective strategy for raising funds.

There is a need to pay attention to the funding, growth, and development of startups in the country. The regulator of the Capital Market, the Securities and Exchange Commission is saddled with this responsibility.

Other statutes governing businesses and companies in Nigeria have made provisions relating to Crowdfunding. It is pertinent to state that under the Investment and Securities Act, 2007, Section 67(1) provides that:

“(1) No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with anybody corporate for a fixed period or payable at call, whether bearing or not bearing interest unless the body corporate concerned is-

• A public company, whether quoted or unquoted and the provisions of Sections 73 to 87 of this act are duly complied with; or
• A statutory body or bank established by or pursuant to an act of the National Assembly and is empowered to accept deposits and savings from the public or issue its own securities (as defined under this Act), promissory notes, bills of exchange, and other instruments.”

Also, under the Companies and Allied Matters Act, 2020 Section 22(5) provides that:

“A private company shall not, unless authorized by law, invite the public to

• Subscribe for any share or debenture of the company; or
• Deposit money for fixed periods payable at call, whether or not bearing interest”

From the above provisions, only Public Companies whether quoted or unquoted can invite the public to acquire or dispose of their securities. Private Companies are expressly excluded from engaging in Crowdfunding in Nigeria as it has been expressly stated that they should not involve in equity crowdfunding which revolves around inviting the members of the public to donate funds in return for a stake in the Company.

On 15^th August 2016, the Securities and Exchange Commission (SEC) released a statement that was duly signed by the Director-General, suspending any crowdfunding activities as a result of legal challenges as the Capital Market Regulations and Laws did not anticipate crowdfunding activities, neither did they make such provisions for it.

On the 21^st Day of January 2021, the Commission issued new rules, one of which bothers on Crowdfunding: the rules apply only to Investment-Based Crowdfunding. It defined Investment-Based Crowdfunding as the process of raising funds from the public through an online portal in exchange for shares, debt securities, or other investment instruments approved by the Commission. This has revoked the statement suspending Crowdfunding activities in the country.

According to the rules, the key Players in a Crowdfunding process are:

1. Crowdfunding Intermediary: An entity organized and registered as a corporation to facilitate transactions involving the offer of securities or investment instruments through a Crowdfunding Portal.
2. Fundraiser or Issuer: This refers to the originator and maker of the investment instrument to be issued.
3. Crowdfunding Portal: This is the website, platform, application, or other similar modules that facilitate interactions between Fundraisers and the investing public.
4. Investor: This is any person that seeks to make or has made an investment in an investment vehicle.[4]

The rules provide that all Crowdfunding Platforms must be regulated by SEC. It provides that:

 “Every portal that facilitates, operates, provides or maintains interactions between fundraisers and investing public (crowd) in Nigeria for the purpose of an investment-based Crowdfunding shall be operated only by an entity registered as a Crowdfunding intermediary.”[5]

Rule 6 and 7 of the Rules on Crowdfunding, 2021 provide for the requirements and criteria of registering a Crowdfunding Intermediary. It should be noted that such registration does not come cheap. The fees are as stipulated in the Schedule of the Rules.

Also, the rules allow Micro Small and Medium Enterprises (MSMEs) incorporated as a company with a minimum of two-years operating track records to raise funds through a Crowdfunding Portal operated by a registered Crowdfunding Intermediary in exchange for investment instruments. It also gives room for incorporated MSMEs with less than two-years operating track records, but which has a strong technical partner that possesses a minimum of two years of track-records or has a core investor.[6]

The obligations of the Crowdfunding Intermediary include:

• Disclosure and prominent display of relevant information relating to the portal and its use.
• Saddled with carrying out investor education programs.
• Verification of the accuracy of the disclosure document lodged by each fundraiser and make such accessible on the portal.[7]
• To carry out due diligence on prospective fundraisers.[8]
• Monitor and report the conduct of the fundraisers and take the necessary actions against misconduct.[9]
• Protect the users’ data and their privacy.[10]
• Issue publications and acknowledge warning statements.[11]
• Implementation of the policies relating to the operation of the portal.[12]

The rights of an investor under the rules include:[13]

• Right to a cooling-off period within which investors may withdraw their investment. This period is within the time of investment till 48 hours to the close of the offer.
• Where proceeds have not been transferred to the fundraiser and there is a material adverse change affecting the project or the fundraiser, the investor can within seven (7) days from the date the material adverse change became public, rescind the investment.
• Where an investor cancels the offer or agreement to purchase securities, all funds must be refunded or released to the investor within 48 hours of the request to cancel.

Note that the following entities are prohibited from raising funds through a fundraising portal:

• Complex Structures
• Public listed companies and their subsidiaries.
• Companies with no specific business plan or a blind spot.
• Companies that propose to use the funds raised to provide loans or invest in other entities.
• Other entities as may be specified by the commission.

CONCLUSION

The new SEC Rules on Crowdfunding is a welcome development in Nigeria. It provides a reliable and well-regulated channel through which businesses can raise funds from the public while the investors are also well protected to prevent exploitation. It has made crowdfunding a practical way to raise capital in the country. Due to the fees involved in registration, where startups cannot meet the requirements of the new regulation, they could partner with another body, and operate as technology providers to these registered bodies.

It is however recommended that provisions of the Companies and Allied Matters Act, 2020 and the Investment and Securities Act should be amended to give room for private companies to utilize equity crowdfunding in getting funds for the running of their business.

[1] https://www.investopedia.com/terms/c/crowdfunding.asp accessed 22nd February 2021.

[2] https://www.businessnewsdaily.com/4134-what-is-crowdfunding.html accessed 24th February 2021.

[3] Ukcfa.org/what is crowdfunding accessed 23^rd February 2021.

[4] Rule 1, Rules on Crowdfunding, 2021

[5] Rule 5(a), Rules on Crowdfunding, 2021

[6] Rule 3, Rules on Crowdfunding, 2021.

[7] Rule 11, Rules on Crowdfunding, 2021

[8] Rule 12, Rules on Crowdfunding, 2021

[9] Rule 13, Rules on Crowdfunding, 2021

[10] Rule 14, Rules on Crowdfunding, 2021

[11] Rule 16, Rules on Crowdfunding, 2021

[12] Rule 17, Rules on Crowdfunding, 2021

[13] Rule 22(b)-(d), Rules on Crowdfunding, 2021