Regulations for crowdfunding in Nigeria are long overdue and SEC’s new rules will need intermediaries to have ₦100 million paid-up capital.

When Sim Shagaya’s uLesson raised $7.5 million, most of the money came from four investments. By contrast,  Eversend, the “neobank for Africans” raised $1 million from a large number of people through equity crowdfunding. 

Crowdfunding allows a person or company to get money by seeking small amounts from a large number of people rather than looking for large amounts from one or two people. Equity and debt crowdfunding are typically great ways for small and medium businesses to raise money.  

A crowdfunding portal
A crowdfunding portal

However, over the past few years in Nigeria, there have been calls for crowdfunding regulations. Such regulations aim to protect investors who sometimes lose their money to unlicensed market operators. Quite a few companies pose as investment and trading companies, collect money from thousands of investors and promptly disappear. Regulations will stop things like this and provide clear guidelines for genuine companies looking to raise funding.

SEC’s new rules for crowdfunding

In April 2020, the Securities and Exchange Commission (SEC) released an exposure draft with guidelines for investors and crowdfunding operators. It was the first attempt at creating real guidelines after years of talking about it. 

While those drafts were a step in the right direction, the SEC finally released new rules for crowdfunding operations in Nigeria last month. It has kept many of the rules from the draft and has clarified some parts that raised eyebrows. 

Only an MSME incorporated in Nigeria with a minimum operating track record of two years can raise funds through a crowdfunding portal operated by a registered crowdfunding intermediary. When businesses meet this criterion, there’s a fundraising limit. Medium enterprises cannot raise more than ₦100 million, while the amount is set at ₦70 million for small enterprises and micro-enterprises cannot raise more than ₦50 million. 

Interestingly, these limits do not apply to commodities investment platforms (CIPs). CIPs connect investors to specific agricultural or commodities projects for the purpose of sponsoring such projects in exchange for a return.

Regulations for crowdfunding portals

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

– SEC General provisions on Crowdfunding portals 

Timi Agama, the head of registration, exchanges, market infrastructure and innovation at the SEC, told TechCabal that the rationale behind the guidelines is investor safety. 

The new regulations mean that businesses like PiggyVest, Pettysave, FarmCrowdy and ThriveAgric will have to be registered as crowdfunding intermediaries. Another requirement which was retained from the draft regulations last year is a minimum paid-up capital requirement of N100 million. While PiggyVest will have no problems with the paid-up capital since it has a microfinance bank licence, smaller companies may have to merge to meet the requirements. 

But the SEC will not speak on any company’s decision to merge. According to Timi Agama, “that’s a business decision. Ours is to provide a minimum requirement. We’re looking at what will stand the test of time. We look at what forms of tech would you require, how are you going to pay them, is it sustainable. It’s in sustainability that you find protection.”

It will help to know that startups are also on top of the situation as far as the new regulations are concerned. According to Odun Eweniyi, a co-founder of PiggyVest, there will be no big changes to their investment feature “Investify.” “We will acquire any required licence that allows it to continue to run uninterrupted. So our legal team is currently determining that and if we need it, we will apply for it.” 

There are more responsibilities for crowdfunding intermediaries such as verifying the legitimacy of the businesses on its portal, educating investors and risk disclosures. According to Rule 12 of the new SEC Crowdfunding Rules, “a Crowdfunding Intermediary shall carry out due diligence on prospective fundraisers intending to use its portal.”

This provision will ensure that intermediaries will take some measure of responsibility if they list fundraisers that go on to default on their obligations to investors. This has become more important as bad actors have started to take advantage of the “investment wave.”

Keeping out bad actors 

For years, fraudulent companies posing as investment companies have ripped off Nigerians through crowdfunding schemes. Some of them, like MMM, with no stated investment objectives, can easily be identified as Ponzi schemes. 

But since the crash of MMM, bad actors have become more sophisticated. Many pose as legitimate investors or traders even though there’s little information about what and how they trade. 

This Nairaland thread of the experiences of several people who claim to have lost money to a company they call MBA Forex has shown the need to keep out bad actors from crowdfunding. The new SEC regulations state that companies with no specific business plan or a blind pool cannot raise funds through a crowdfunding portal. 

Importantly, it also restricts “complex structures” from raising funds from the public. According to the regulations, “a complex structure is an entity without immediate transparency of ownership and/or control thereby making it difficult to immediately ascertain the beneficial owners of the entity.”

Protections for investors 

One of the problems with investing in Nigeria is that many investors are often unaware of the associated risks. This is why the SEC requires every crowdfunding intermediary to ensure every investor affirms a risk acknowledgement form. The investor will show that he understands the risk element of the investment and that the portal will not be responsible if the investor loses all or some of the money invested.

It sounds ominous but the regulations also state that the investor has a contractual right to withdraw from an offer or agreement to purchase the securities. All the investor needs to do is give notice to the funding portal up to 48 hours before the close of the offer. The investor must then receive the amount he was debited within 48 hours. 

Also, investors can rescind their investment if there is a material adverse change prior to the closing date of the offer. This kind of change would be one that affects the project or the fundraiser.

Find the full SEC guidelines here.

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