Crowdfunding In Nigeria: Evaluation Of The Legal Framework – Finance and Banking –

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Crowdfunding in Nigeria is a means through which businesses can
raise capital by pooling together small amounts of money from a
large number of people instead of raising funds from few investors.
It is also used to raise funds for personal financial emergencies,
medical emergencies or for charitable purposes. This is usually
done via internet platforms and through social media platforms as
it has proven to be the quickest and fastest way to reach a larger
number of people in the country. There are also several platforms
set up specifically for crowdfunding. These platforms include
Kickstarter, Indiegogo, Patreon, LendingClub, Porkmoney,
Farmcrowdy, ThriveAgric, with GoFundMe being one of the most
popular, among others.

With one of the major challenges of startups in Nigeria today
being funding, many have turned to crowdfunding as a means of
raising funds to finance their startups.

TYPES OF CROWDFUNDING

There are four main types of crowdfunding. They include
Donation-Based Crowdfunding, Reward-Based Crowdfunding, Equity
Crowdfunding and Debt-Based Crowdfunding,

Donation-Based Crowdfunding is a form of crowdfunding where
individuals help raise funds without expecting to be paid back.
This is mostly found in crowdfunding for charitable purposes,
medical emergencies, to finance community-based projects, among
others.

Reward-Based Crowdfunding is usually used to raise funds for new
startups or companies where the individual donors or investors earn
rewards based on the amount of money donated. Here, donors or
investors get something back in return for their investment usually
a product or service which the company offers.

Equity-Crowdfunding is a type of crowdfunding that requires the
company or startup to provide investors with shares in the company.
Here, the investors become part owners of the company.

Debt-Based Crowdfunding is a type of crowdfunding similar to
taking out a loan. It is preferable to a loan because the interest
rate is much lower. Here, the donee might not be required to pay
back until the company or startup begins to generate returns.

LEGAL FRAMEWORK FOR CROWDFUNDING IN NIGERIA

The Companies and Allied Matters Act (2020) as well as the
Investment and Securities Act (2007) expressly exclude private
companies from engaging in crowdfunding. The type of crowdfunding
envisaged in this circumstance being equity crowdfunding.

Section 67(1) of the ISA 2007 and Section 22(5) of CAMA 2020
specifically prohibit equity-based crowdfunding by private entities
and allows only public companies and statutory bodies or banks
established by or pursuant to an Act of the National Assembly to
accept deposits and savings from the public. Hence, to make an
invitation to the public to acquire or dispose of any of its
securities might be a contravention.

Also, by Section 67(1) ISA, an invitation will be deemed made to
the public, where the offer or invitation to make an offer is
advertised, published or disseminated by broadcasting,
cinematography or any other means whatsoever. As such, the
publication by a private company, of an offer on a Crowdfunding
Portal, may be considered an invitation to the public, and a breach
of the ISA.

However, on January 21, 2021, the Securities and Exchange
Commission, established a new set of rules on crowdfunding which by
its provisions allows for private companies to engage in
crowdfunding with the required structure in place.

The key provisions of the Rules are as follows:

  • Eligibility: The Rules allow Micro Small and
    Medium Enterprises (MSMEs) incorporated as a company with a minimum
    of two-years or less operating track records to raise funds through
    registered crowdfunding portals in exchange for investment
    instruments.1

  • Exemptions: Under the Rules, certain issuers
    may be exempted from prior registration provided that the issuer is
    an entity incorporated in Nigeria and is accredited by a
    crowdfunding portal to utilize its platform. Also, the aggregate
    amount of securities or investment instruments that can be offered
    and sold by the issuer within a 12-month period shall comply with
    the following limits:

  1. The maximum amount which may be raised by a Medium enterprise
    shall not exceed N100Million.

  2. The maximum amount which may be raised by a Small enterprise
    shall not exceed N70Million.

  3. The maximum amount which may be raised by a Microenterprise
    shall not exceed N50Million2.

  • Key Participants: The Rules provide that every
    entity involved in crowdfunding in Nigeria must be registered with
    the Commission. The key participants are the fundraisers, the
    investors and the intermediaries. The fundraiser is the originator,
    maker or obligor of the investment instrument to be issued. The
    investor is defined in the Act as any person or entity that seeks
    to make, are making, or have made an investment in an investment
    vehicle with the expectation of achieving returns.

Rule 4(a) of the Rules of Crowdfunding 2021 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”. The Crowdfunding Intermediary is
the entity that operates the Crowdfunding Portal. They are required
to be registered with SEC. The Rules place further responsibility
on the intermediaries, which are information disclosure, due
diligence, reporting obligations, data protection and privacy,
operation of a trust account, compliance and restriction on
cross-ownership.

The registration of such an entity is stated for a fee3.

  • Due Diligence: The Rules go further to provide
    that crowdfunding portals shall carry out due diligence on
    prospective issuers intending to use the platform.4 It requires these
    portals to conduct background checks on issuers to ensure fit and
    properness, verify the business proposition of the issuer and
    comply with all relevant KYC and AML/CFT regulations as stipulated
    by the Commission.

The Commission shall monitor the conduct of issuers and take
action against the misconduct of issuers5.

  • Data Protection and Privacy: The Rules provide
    that crowdfunding portals shall establish appropriate safeguards to
    ensure information privacy, ensure confidentiality, maintain
    reliable and secure operating systems, develop systems to avoid
    operational disruptions, have backup facilities and insurance, keep
    copies of all relevant documents for a period of at least seven
    years as well as provide investors with copies of documents
    relevant to the investor within a ten-day period from the date of
    the request.6

The Rules seek to ensure that information provided by investors
are kept secure and ensures that crowdfunding portals provide
adequate facilities and put in place adequate safeguards to ensure
data privacy.

  • Operation of Trust Account: The Rules provide
    that every crowdfunding portal shall appoint a custodian, who shall
    establish and maintain a separate trust account for each funding
    round on its platform with a financial institution registered by
    the Commission as a Custodian.7

CONCLUSION

The provisions of the Companies and Allied Matters Act and the
Investment and Securities Act need to be amended to make provision
to allow crowdfunding of private companies. Nonetheless, the Rules
on Crowdfunding 2021 is a welcome development that seeks to
regulate crowdfunding in Nigeria. This would encourage more
startups to spring up as well as support small and medium scale
businesses. It is, however important to note that effective
implementation of these Rules would ensure proper compliance with
its provisions and the Commission is charged with this
responsibility.

Footnotes

1. RULE
2, Rules on Crowdfunding 2021. Available online at https://www.sec.gov.ng

2. Rule
3, Rules on Crowdfunding 2021.

3. Rules
6 and 7, Rules on Crowdfunding 2021.

4. Rule
10, Rules on Crowdfunding 2021

5. Rule
11, Rules of Crowdfunding 2021

6. Rule
12, Rules on Crowdfunding 2021

7. Rule
13, Rules on Crowdfunding 2021

Originally Published 11 August 2021

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
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