The past decade ushered in a plethora of developments in the technology space in Nigeria. Technology companies are increasingly emerging to disrupt traditional business models in different sectors of the economy particularly in Agriculture where crowd-funding is most used.
Perhaps, it was in light of the above that the Securities and Exchange Commission (“SEC”) released its draft guidelines on crowd-funding in May 2020. The SEC has now updated the guidelines by publishing its Rules and Regulations on Crowd-funding (“the Regulations”) on 21 January 2021. Please note that the SEC is empowered to regulate on securities in Nigeria by the Investment and Securities Act (“ISA”) 2007.
What is Crowd-funding?
According to the Regulations, “Crowd-funding entails raising funds to finance a project or business from the public through an online platform”. It is essentially an alternative to raising funds from venture capitals, private equity and other investors. This must be distinguished from where a public company is listed on the stock exchange and trying to raise capital by selling its shares. Private companies cannot raise shares from the public or be listed on the Stock Exchange; they typically raise capital through private placement and targeting private entities.
The process in a typical crowd-funding transaction is as follows:
Highlights of the Regulations
- Participants in a crowd-funding transaction include the following-
Fundraisers: They are the initiators of the transaction and are usually a private company or a Micro Small and Medium Enterprises (“MSMEs”). Public companies, companies that are listed, structured in a complex manner.
Crowd-funding Intermediaries (“CFIs”): These are corporations registered with the SEC, to facilitate transactions involving the offer or sale of securities through an electronic platform called the “Crowd-funding Portal” (“CFP”).
A CFI may operate the CFP by facilitating crowd-funding transactions through the CFP. This means that anyone who intends to raise capital by crowd-funding must go through a CFI to raise the capital. However, CFIs are prohibited from the following activities:
- Where more than 5% of an Issuer’s securities are controlled by a related party or employee of the portal, such an Issuer must not be granted access to the CFP.
- Granting financial aids or assistance to investors with respect to an offer hosted on the CFP.
- Paying finder for recruiting investors or providing information for investors.
Please note that only registered entities with the SEC as an Exchange, Dealer, Broker or Alternative Trading Facility may register as a CFI. Where the intending entity is a Dealer, such is granted the status of a “Restricted Dealer” and cannot engage in other capital market transactions going forward.
Crowd-funding Portals: These are web portals, mobile applications, or other modules facilitating interaction between fundraisers and the investors. In addition, all CFPs must display a warning statement on the home page of the portal, subscription landing page, and all application forms for investing, to warn the investors of the risk of investment.
The definition of CFPs covers three broad categories:
- CFPs with platforms operating in Nigeria;
- CFPs operating outside Nigeria but targets Nigerian investors; and/or
- CFPs with platforms which when taken together with other components are physically located in Nigeria.
Investor: They purchase the investment instrument that is issued in a crowd-funding transaction. Investors must complete a form acknowledging that the risks, benefits and protection measures attached to the transaction were made known to them. They are classified into three types namely:
- High-Net worth Individuals (“HNIs”).
- Qualified Institutional Investors e.g. Funds, Wealth and Asset Management firms etc.
- Retail Investors: This covers the general public as differentiated from HNIs.
Custodians: They are Deposit Money Banks or other financial institutions that hold the funds contributed by the parties. They facilitate the aggregation of the funds raised.
- Crowd-funding Limits
Investors in crowd-funding transactions cannot invest more than 10% of their net salaries into crowd-funding. This rule excludes HNIs whose incomes have no limits. There are also some measures of limits imposed on fundraising- such that total amounts raised within a 12 month period must not exceed N100 Million, N70 Million and N50 Million for medium, small and micro enterprises (“MSMEs”).
- Regulatory Requirements and Conditions
The SEC has the monopoly of regulatory power on securities in Nigeria. As such, all participants intending to float a crowd-funding transaction must be registered with the SEC. Note that the SEC reserves the right to approve and reject registration bids in line with the eligibility criteria outlined in the Regulations. Some of these eligibility criteria are set below:
- Fundraisers must be entities incorporated in Nigeria with an operation span of at least two years or have technical partners who meet the 2-year operational requirement.
- CFIs operate the web portals used in the transactions. As such, they must be registered and also have their web portal registered with the SEC with a minimum paid-up capital of N100 Million amongst other documents and conditions.
- Custodians: They must be registered with the SEC and also maintain a separate trust account for each round of funding on their platform.
- Digital Commodities Investment Platform (“DCIP”): These are platforms that connect investors to specific agricultural or commodities projects for the purpose of sponsoring such projects in exchange for a return. Existing DCIPs before the Regulations must apply to the SEC for a letter of “no-objection” to continue their operations.
The SEC notes that failure to comply with the provisions outlined in the Regulations may attract a fine of not less than N1,000,000 (One Million Naira Only) and a daily fine of N10,000 (Ten Thousand Naira Only) for every day that the violation continues. It should also be noted that the SEC reserves the right to revoke the registration of a CFI or CFP where they fail to maintain the CFP for 6 months or flout any of the provisions in the regulations.
Conclusion and Recommendations
It is quite laudable that the SEC has proactively reacted to crowd-funding in Nigeria by publishing these Regulations. This will drive increased economic activities and provide alternatives of funding to entrepreneurs. However, the Regulations have not made elaborate provisions on Return on Investment (“ROI”) and how it should be paid; save the provision on Risk Disclosure.
Furthermore, while the limit on investment ascribed to the three classes of investors is a great addition, there ought to be provisions on recovery of funds where the entities or the entire scheme fails. The SEC should provide more clarity on these concerns in subsequent publications.
Credit: Ibrahim Moshood, Associate, Centurion Law Group