Nigeria crowdfunding rules proposed by SEC

The Fintech industry in Nigeria has witnessed considerable growth over the last couple of years as Start-ups continue to discover innovative ways of raising funds as conventional methods like venture capital and loans from commercial banks are perceived as unattractive due to prohibitive conditions like loss of control and high interest rates.

One of such innovations is seeking investment through crowdfunding where investors fund a venture through an online platform and enjoy a certain percentage of interest over a specified period. The Crowdfunding sector in Nigeria which has been unregulated since commencement, has witnessed exponential growth. According to a report, in 2015 alone, the sum of $7-8 million dollars was raised through crowdfunding in Nigeria.

Uncertainty about whether the rules of the Securities and Exchange Commission (“SEC”), which apply to companies seeking investment from the general public has however deterred many from participating in this venture.

Potentially putting an end to this conundrum, the SEC has released the proposed Crowdfunding Rules (“the Rules”) to regulate crowdfunding activities in Nigeria.

While the Rules are currently in draft form, below is a summary of what the Rules are about.

Who can raise funds?
To raise funds, issuers must register and operate in Nigeria for a period of two years.

What is fundraising Limit?
The aggregate amount of securities or investment instruments that can be offered within a period of 12 months are:

  • N 100 million for medium enterprises
  • N 70 million for small enterprises
  • N 50 million for micro enterprises

These limits do not apply to Digital Commodities Investment Platforms (“DCIPs”) like Farmcrowdy or Thrive Agric which the Rules describe as platforms which connect investors to specific agricultural or commodities project in exchange for returns.

What is maximum investment limit?
Retail investors who are neither High Net worth nor Sophisticated Investors shall not invest more than 10% of their annual income.

How can funds be raised?
Funds may only be raised through Crowdfunding Portals, which can only be operated by platforms registered by the SEC and having a minimum paid-up share capital of N100 Million.

CONCLUSION

The draft in its current form raises a number of concerns which include; a) the minimum share capital of N100million which is considered too high for start-ups. ii) the limitation of sums which  can be raised  over a period of 12 months may not be realistic and finally, iii) the unclear distinction between Crowdfunding Platforms and DCIPs who may be allowed to obtain a No-Objection from SEC to continue to operate their existing Crowdfunding Platforms,  provided they do not have any interest in projects listed on their own platforms.

Whilst the Rules will protect investors’ interests, the Rules must not be seen as unsupportive of MSMEs who may either be forced to invent ways of circumventing the Rules  or  be dissuaded from investing in the market altogether.

Aderonke Alex-Adedipe

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