Regulating CrowdFunding: the new SEC Guidelines

Adebayo Obajemu

The Security and Exchange Commission, SEC, has come up with a new set of guidelines to regulate crowdfunding in the country in line with best practices.

Under new regime, Micro, Small and Medium Scale Enterprises (MSMEs)which are incorporated in Nigeria, and which have a minimum of two years operating track record, shall be eligible to raise funds through a crowdfunding portal registered by SEC.

Recall that most startups are traditionally limited in the ways they can raise funds.

The traditional way of raising capital to start a business venture, normally through friends and family, have proved difficult mainly because of changing cultural pattern which has put much strain on family ties, as a result a number of startups have turned to crowdfunding as a viable means of raising capital.

In a nutshell, crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business idea or a startup. This is done through access to vast networks of people through social media and crowdfunding websites to connect investors and entrepreneurs together.

The idea of raising funds through crowdfunding has provided added publicity advantage to startups or their products.

According to Ambrose Omokordion, chief research officer at Investa, the ” new set of rules has the capacity to deepen the capital market and sanity to crowdfunding.”

Recall that the Commission had some weeks back, announced its plans to regulate the crowdfunding business in Nigeria in order to reduce the risks associated with it for investors and financiers.

In a new regulation released SEC, Micro, Small and Medium Scale Enterprises (MSMEs) incorporated 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.

According to the guideline, this new regime says this can be done in exchange for the issuance of shares, debentures, or such other investment or instruments as the Commission may determine from time to time.

Eligibility of registration of crowdfunding portals
Funds may only be raised through Crowdfunding Portals, which can only be operated by platforms registered by the SEC and having a minimum paid-up share capital of N100 Million.

The guidelines have also shed light on companies incorporated outside Nigeria but which can still trade on crowdfunding platforms.

In the new rule, a person is considered to be operating, providing, or maintaining a Crowdfunding Portal in Nigeria if:

(i) The platform is operated, provided or maintained in Nigeria;
(ii) The platform is located outside Nigeria but actively targets Nigerian investors; or
(iii) The component parts of the platform, when taken together, are physically located in Nigeria even if any of its component parts, in isolation, is located outside Nigeria.”

In accordance with the new rule, crowdfunding portals can only be registered and operated by crowdfunding intermediaries – entities registered with the Commission as an Exchange, Dealer, Broker, Broker/Dealer or Alternative Trading Facility as prescribed under the SEC’s Rules.

The Commission has indicated that the maximum amount which may be raised will not go beyond ₦100million by a medium enterprise, ₦70million for small enterprises and ₦50million for micro-enterprises. The above limits shall not apply to MSMEs operating as digital commodities investment platforms, or such other MSMEs as may be designated by the Commission from time to time.

The new rule also states that the aggregate amount of securities sold to any investor in investment-based crowdfunding during the 12-month period shall not exceed 10% of their annual income in a calendar year for retail investors.

Only “Sophisticated, High Net worth and Qualified Institutional Investors” are given waivers from this limit set by the Commission.