The Nigerian SEC Crowdfunding Rules-Its Impact on Startups and SMEs


Friday, July 09,
2021 / 09:50PM / By
Oyeyosola Diya
of AELEX / Header Image Credit: AELEX



12 January 2021, the Nigerian Securities and Exchange Commission (“SEC”)
released its Rules on Crowdfunding (“the Rules”), pursuant to section 13(a) of
the Investment and Securities Act 2007 to regulate investment-based
crowdfunding in Nigeria.


set a deadline of 30 June 2021 for the implementation of the Rules. It
is therefore important to consider the activities and entities required to be
registered with the SEC per the Rules.


SEC has mandated that all existing portals/platforms that facilitate
investment-based crowdfunding comply with the requirements of the Rules and
register with the SEC or cease their operations by the 30th of
June 2021
. Failure to comply with the foregoing would render any operation
by an unregistered entity illegal and they will be subject to regulatory
sanctions as provided by the Rules. It is important to note that entities do
not need to term their activities crowdfunding before they fall under the
purview of the Rules; this is determined by their structure and product

May 2020, we considered the provisions of the Exposure Draft of the Rules
released by the SEC (read here). In this
article, we discuss the changes introduced in the final issue of the Rules and
its impact on the operation of crowdfunding in Nigeria.


Scope of the Rules

Rules only apply to investment-based crowdfunding
To understand the Rules, there are a number of definitions that are important
to note:

  • investment-based
    crowdfunding – ‘
    the process of raising funds from the public through an
    online portal in exchange for shares, debt securities or other investment instruments
    approved by the Commission’
  • investment instruments – ‘ordinary
    shares, plain vanilla bonds or debentures, and simple investment contracts
    approved by the SEC for issuance through a crowdfunding portal from time to
  • simple investment contract – ‘a contract or scheme for the placing of capital in way intended to secure
    income or profit from its employment and includes participation in any
    profit-sharing agreement by virtue of which the investors provide the capital,
    the promoters manage, control and/or operate the enterprise, and the investors
    share in the earnings and profits’
  • crowdfunding intermediary – ‘an entity organized and registered as a corporation to facilitate
    transactions involving the offer or sale of securities or investment
    instruments through a Crowdfunding Portal’
  • crowdfunding – ‘the use
    of small amounts of money, obtained from a large number of individuals or
    organizations, to fund a project or, a business through an online web-based
  • fundraiser – ‘refers to
    the originator, maker or obligor of the investment instrument to be issued
    pursuant to the Rules’
    , and
  • crowdfunding portal – ‘a website, platform,
    portal, intermediary portal, application or other similar module that
    facilitates interaction between Fundraisers and the investing public’



simplify the above definitions, investment-based crowdfunding involves many
people (the public) investing various amounts of money to fund a project or an
entity in exchange for interest or return on their investment. Entities who
receive contributions/capital from its users, manage this capital and then
distribute profits to the users will also fall under the scope of the Rules as
they are seen to be entering into simple investment contracts as
defined under the Rules. Now, per the Rules, entities who facilitate
investment-based crowdfunding via online platforms (Crowdfunding Portals) are
required to be registered with the SEC as Crowdfunding Intermediaries.


Fundraisers and Investment-Based Crowdfunding

the Rules, there were no limits on the types of issuers that may participate in
investment-based crowdfunding; however, with the passage of the Rules, the SEC
has set a limit. Entities that are eligible to raise funds through a
Crowdfunding Portal operated by a Crowdfunding Intermediary by the issuance of
investment instruments are:

  • MSMEs incorporated as a
    company in Nigeria with a minimum of two-years operating tracking record; and
  • MSMEs incorporated as a company in Nigeria with
    less than 2 years operating track record but with a strong technical
    partner that has a minimum of 2 years operating track record or has a core


are defined by the Rules as micro, small and medium enterprises as prescribed
by the Small and Medium Enterprises Development Agency of Nigeria (“SMEDAN”) in
relation to total asset annual turnover or number of employees. This shows that
SEC clarified one of the conflicts highlighted in our earlier article in terms
of the definition of MSMEs in the National Policy for MSME published by SMEDAN
adopting the dual criteria of employment and asset (excluding land and


addition, it is interesting to note, the Rules differ from the Exposure Draft
in terms of the eligible MSMEs. The Exposure Draft had been much stricter by
providing that only MSMEs with a minimum of two-years operating track record
were eligible to raise funds through a Crowdfunding Portal, but the Rules are
more flexible as it permits MSMEs with a technical partner or a core investor
to crowdfund.

 Proshare Nigeria Pvt. Ltd.

Investment Instruments – Exemptions from the Investment and Securities
Act 2007 (“the ISA”)

crowdfunding which involves the offering of securities to the public would
typically be subject to restrictions under the Nigerian securities regulation.
Section 67 of the ISA provides that no person can make an invitation to the
public to acquire or dispose any securities of a body corporate unless the body
corporate is a public company.


4 of the Rules provides that a Fundraiser may offer or sell investment
instruments without prior registration of the investment instruments as
required under ISA provided that the fundraiser is incorporated in Nigeria and
accredited by a Crowdfunding Intermediary to utlilize its portal, the
instruments are offered through a Crowdfunding Portal,  and the aggregate
amount of investment instruments offered and sold by the Fundraiser within a
12-month period does not exceed N100Million for a medium enterprise, N70
Million for a small enterprise, and N50Million for a micro enterprise. Also,
the aggregate amount of investment instruments sold to retail investors during
the 12-month period shall not exceed 10% of their net annual income in a
calendar year.


addition, the Rules prescribe that in calculating the aggregate amount of
investment instruments offered and sold by a Fundraiser within a 12-month
period, all entities controlled by, under common control with the Fundraisers
or that are predecessors of the Fundraiser shall also be considered. This means
that the securities offered by sister companies, a parent company and its
subsidiaries shall be counted together when determining whether the aggregate
value limit of an issuing MSME has been reached.

note that the final issue of the Rules does not address one of the concerns
raised following the Exposure Draft, which is, what value limit shall apply to
the aggregate amount of investment instruments offered by a Fundraiser where
one of its related companies falls into different classifications? For example,
in a situation where the parent company is a medium enterprise and the
subsidiary company is a micro enterprise, would the N100 Million limit apply or
would the N50 Million apply? This appears to be a grey area that the SEC would
need to clarify.


and Crowdfunding Intermediaries must also note that any equity-based
crowdfunding remains subject to provisions of the Companies and Allied Matters
Act 2020, especially on restrictions on the shareholding of private companies.


Crowdfunding Portals

Rules mandate that every portal that facilitates, operates, provides or
maintains interactions between Fundraisers and the investing public in Nigeria
for any investment-based crowdfunding must be operated only by Crowdfunding
Intermediaries. The type of Crowdfunding
Portals that fall under the scope of the Rules remains the same as in the
Exposure Draft and highlighted in our previous article


can be deduced from the Rules…


Read More:
The Nigerian SEC Crowdfunding Rules-Its Impact on Startups and SMEs