Earlier this year, Mary Uduk; the Director-General of Nigeria’s Securities and Exchange Commission (SEC), announced the commissions’ intention to introduce a framework that would regulate crowdfunding for micro, small and medium-sized enterprises (MSMEs) within the country. A year later, the commission has put forward its newly proposed rules for crowdfunding operators in a draft published on their official website.
The Need for Crowdfunding in Nigeria
Crowdfunding is a means of raising capital by pooling funds from several individuals and investors. The commission’s new guidelines define it as “the process of raising funds to finance a project or business from the public through an online platform.”
For many startups within Nigeria, crowdfunding has become a significant avenue for raising much-needed capital. These businesses, which are typically registered as private limited liability companies, are restricted from selling shares to the public under current legislation and likewise face difficulties accessing more traditional lending options due to the steep financial demands.
The potential of crowdfunding to the MSME sector has already been illustrated globally. There are currently over a 1000 crowdfunding platforms available worldwide, and as at 2019 an average of $16.2 billion was raised in North America through crowdfunding platforms, as well as an estimated $6.48 billion in Europe
In Nigeria, the potential of crowdfunding is most clearly evidenced in the agriculture sector, where agri-tech platforms like Farmcrowdy and Thrive Agric, allow individuals to invest in Nigeria’s agriculture industry and support local farmers, all while getting returns on their investments.
The SEC’S Proposed Changes
Until now, crowdfunding platforms in the country have been mostly self-regulated. The commission, however, justifies its intervention on the grounds of fraud prevention and investor protection. In line with this, it has rolled out registration requirements for crowdfunding platforms, an eligibility criteria for MSMEs looking to participate, restrictions on the amount of securities that can be traded, and many other changes. We’ve summarized the most significant parts of the proposed legislation below; you can access the draft in full here
Registration for Crowdfunding Portals
Although crowdfunding platforms currently operate with little regulatory intervention, the SEC has opined that these platforms are participating in the capital market, and as such should be regulated. The new guidelines now require all crowdfunding platforms to be registered as “Restricted Dealers” before they are legally permitted to operate. This registration, however, comes at a hefty price; platforms are required to have a capital requirement of at least ₦100 million to be eligible for registration.
The commission has also addressed an existing loophole where crowdfunding companies targeting Nigerian startups could be registered in foreign countries and avoid Nigeria’s regulatory framework altogether. The guidelines provide an all-inclusive definition of crowdfunding portals to include platforms located outside Nigeria that actively target Nigerian investors.
Eligibility for MSMEs and Limits on Capital Acquisition
The guidelines begin by stating that only MSMEs incorporated in Nigeria with an operating track record of at least 2 years are eligible to raise funds through crowdfunding. It also imposed restrictions on the amount of securities that can be offered and sold by MSMEs stating that the maximum amount raised in a period of 12 months (a year) should not exceed:
i) ₦100 million for medium enterprises
ii) ₦70 million for small enterprises
iii) ₦50 million for micro-enterprises.
Exemptions for digital commodities
Although the proposed rules place a cap on the maximum amount of securities to be offered by MSMEs, it makes special provision for portals operating as digital commodities investment platforms. It goes on to define them as digital platforms that connect investors to “specific agricultural or commodities projects for the purpose of sponsoring such projects in exchange for a return”. This could mean that in essence agri-tech crowdfunding platforms and those who deal in cryptocurrencies may be exempt from the limitations.
The commission also aims to officially introduce a cooling-off period of 48 hours from the date of the close of an offer, within which investors can withdraw their offers.
What are the Consequences?
The proposed regulations are yet to be passed as formal legislation, and right now only serve as a draft of intended changes going forward. For now, the most obvious obstacle is the registration capital requirement of at least ₦100 million, which a lot of crowdfunding startups in the country may struggle to obtain.
This disruption could have potentially negative consequences, different from those envisioned by SEC which hoped to take a page from countries like the US and UK, who have seen significant growth across several industries due to the influx of capital from crowdfunding. As the future of crowdfunding in the country hangs in the balance, there is no denying its potential for MSMEs that may have no other substantial options for capital. It is in the best interests of a growing economy that this not be stifled.