The Securities and Exchange Commission(SEC) on March 28th, 2020 announced that it intends to regulate the activities of crowdfunding investors in Nigeria in a bid to further deepen the nation’s capital market and enable it to provide development capital for medium and small-scale enterprises of the economy and this have had investors and companies speculating. The reason is not farfetched because hitherto crowdfunding was not regulated and in 2016 SEC announced that based on the provisions of the Companies and Allied Matters Act and Investment and Securities Act, private companies are not allowed to invite the public to subscribe for any shares or debentures of the company or deposit money to it. See section 22(5) of CAMA and 67 of ISA. This meant that only public companies were legally allowed to engage in crowdfunding although in practice some private companies had somehow found a way around it and were crowdfunding.
However with this new development, there are a lot of issues to be considered and most especially it is important to be abreast of these provisions as little changes might be done to the draft copy. However before we go into all that let’s first define crowdfunding.
WHAT IS CROWDFUNDING?
Crowd-funding, an alternative finance source is a practice of funding a project or business venture by raising small amounts of money from a large number of people through an online platform, which could be a website, portal, intermediary portal, application, or other similar modules that facilitate interaction between fundraisers and the investing public. Most times the funding is done in exchange for a particular percent of the equity in the company and that is what is referred to as equity crowdfunding.
According to the SEC, crowdfunding is the process of raising funds to finance a project or business from the public through an online platform.
Crowdfunding has over the years has been a very popular means for startups and companies to raise capital in Nigeria and with track records of financiers and investors showing interest in our economy the move of SEC to have regulations in place for crowdfunding is a welcomed idea.
THE NEW SEC CROWDFUNDING REGULATION
On Saturday, March 28, 2020, Nigeria’s SEC released a proposed regulatory framework that will allow private companies with the required structure and mechanism in place to raise capital from the public through crowdfunding. This regulation though a draft provides some salient provisions that one should take note of.
The regulation provides that all MSMEs incorporated as a company in Nigeria with a minimum of two-years operating track record shall be eligible to raise funds through a Crowdfunding Portal registered by the Commission, in exchange for the issuance of shares, debentures, or such other investment instrument as the Commission may determine from time to time.
This means that all MSMEs that are incorporated as a company in Nigeria with at least 2 years operating track record will be eligible to raise funds through a crowdfunding portal registered by the commission.
The commission states that the maximum amount which may be raised shall not exceed ₦100 million by a medium enterprise, ₦70 million for small enterprises, and ₦50 million for micro-enterprises.
MSMEs engaged in digital commodities — cryptocurrencies — investments were, however, exempted from the set limits.
According to the commission, the total fees payable to parties to crowdfunding issue shall not exceed two percent of the total funds raised. The commission went further to stipulate that retail investors may not invest more than 10% of their annual income in a calendar year.
Under the regulation the issuance of securities or other investment instruments shall be conducted through a registered crowdfunding portal and the crowdfunding portal may be registered and operated only by an operator registered with the commission as a crowdfunding intermediary.
A Crowdfunding Portal that is located outside Nigeria will be considered as actively targeting Nigerian investors if the operator, or the operator’s representative, promotes directly or indirectly the platform in Nigeria.
REGISTRATION OF CROWDFUNDING INTERMEDIARY
A Crowdfunding Portal may be registered and operated only by an operator registered with the Commission as a Crowdfunding Intermediary and only entities registered with the Commission as an Exchange, Dealer, Broker, Broker/Dealer or Alternative Trading Facility as prescribed under the Act and the SEC Rules and Regulations may be registered as a Crowdfunding Intermediary.
Crowdfunding portal or crowdfunding intermediary that failed to comply with the rules shall be liable to a fine of not less than N1 million and the sum of N10,000 for every day the violation continues.
The crowdfunding intermediary is restricted from providing any financial assistance to investors for them to invest in an offer hosted on its platform or for which it has provided a service, compensate people for providing information about potential investors, prohibited from soliciting investments or making recommendations and shall not act as a facilitator of secondary trades between buyers and sellers for securities or investment instruments issued under these rules.
An issuer is not allowed to pay a commission, finder’s fee, referral fees, or similar payment to any person in connection with an offering other than to the Crowdfunding Portal except payments for accounting or legal fees. Also they are not allowed to lend or finance or arrange lending or finance for an investor to purchase investment instruments under a crowdfunding offer or host an offer concurrently on multiple Crowdfunding Portals.
The following entities are prohibited from raising funds through a Crowdfunding Portal: (a) complex structures; (b) public listed companies and their subsidiaries; (c) companies with no specific business plan or a blind pool; (d) companies that propose to use the funds raised to provide loans or invest in other entities; (e) such other entity as may be specified by the Commission.
In as much as the move by SEC to regulate crowdfunding is a welcomed one, the commission should however ensure that the terms and conditions are not strenuous. For instance the N100 million capital requirements might be a little bit difficult for many startups and businesses which might cause a lot of hardship to them. The regulation is still in the draft form and we hope that a lot of considerations will be put in place before drafting the final copy.
 Companies And Allied Matters Act Cap c20 LFN 2004
 Investments and Securities Act Cap 124 LFN 2007