Crowdfunding In Nigeria: Evaluation Of The Legal Framework

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.

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