The Nigerian Securities And Exchange Commission Crowdfunding Rules – Its Impact On

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INTRODUCTION

On 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.

SEC 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.

The 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 offerings.

In May 2020, we considered the provisions of the Exposure Draft
of the Rules released by the SEC (read here1). 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

The Rules only apply to investment-based
crowdfunding2. 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 time
    ‘,

  • 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
    platform
    ‘,

  • 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
    ‘.

To 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

Before 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
    investor.

MSMEs 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 buildings).

In 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.

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

Investment-based 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.

Paragraph 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.

In 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.

We 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.

Fundraisers 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

The 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 Intermediaries3.
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 article4.

It can be deduced from the Rules that the SEC has placed
emphasis on the regulation of websites, apps, etc (portals) that
offer investment-based crowdfunding to Nigeria and…

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