The Securities and Exchange Commission (SEC), the apex regulatory agency for the Nigerian capital market, has released new rules to govern crowd-funding activities in Nigeria.
Crowd-funding is the practice of raising funds from a segment of the public to fund a project. The funds are raised from the public are often negligible amounts of money raised through an internet platform, in return for equity in the business venture or an ascertainable profit.
Under the new regulation, crowdfunding can only be raised through an online portal that must be operated by crowd-funding intermediaries who must be registered by SEC and have a minimum paid-up capital of N100 million and a current Fidelity Insurance Bond valued at 20 percent of the paid-up capital, among other requirements.
This means that capital requirement will prove difficult for existing and intending crowd-funding portals to achieve but can be surmounted through raising additional equity capital or consolidation, a report by Advocaat Law Practice notes.
Read also Farmcrowdy, others exit crowdfunding before regulation begins
The proposed regulations further state that a person is considered to be facilitating, operating, providing, or maintaining a crowd-funding portal in Nigeria if the platform is operated, provided or maintained in the country or the platform is located outside Nigeria but actively targets Nigerian investors and components of the platform, when taken together, are physically located in Nigeria even if any of its components, in isolation is located outside the country.
A crowd-funding portal that is located outside Nigeria will be considered as actively targeting Nigerian investors if the operator or representative promotes the platform directly or indirectly in Nigeria.
This seeks to put an end to crowd-funding portals incorporating their companies outside Nigeria to avoid registering with the SEC but actively operating and raising funds in Nigeria.
In addition to the foregoing, the regulation places several obligations on crowd-funding portals that must be fulfilled for registration with the SEC, and these include: disclosure of fundraisers that includes details of ownership, management, and overall controls structure in place at the time of the offering; the portal must display conspicuously information on the fundraisers – a general risk warning on participating and information about complaints and a grievance redress mechanism.
Others are: the portal will also have to show business continuity plans, risk management, data integrity and confidentiality, proper record keeping, and audit trails as part of its application for registration with SEC.
Similarly, crowd-funding portals will further be mandated to take adequate measures to reduce the risk of fraud such as obtaining background and securities enforcement regulatory history checks on the issuer and must carry out due diligence, conduct background checks, and verify the accuracy and viability of the business proposition of the fundraisers intending to use its platform, among others.
For the fundraisers, the regulation states that only MSMEs incorporated in Nigeria and operating for a minimum of two years or less than two with a technical partner who possesses a two-year operating record will be eligible to raise funds through a crowdfunding portal.
According to the SEC document, an eligible fundraiser shall maintain an accurate list and details of all investors post-issuance, which shall include the full names, address, email, and the number of units and monetary value of investment instruments and which shall specify investors from countries other than Nigeria.
Also, a threshold has been set for the amount that can be raised by MSMEs through crowd-funding to not be more than N50 million for a micro-enterprise, N70 million for a small enterprise, and N100 million for a medium enterprise in 12 months.
The Commission notes that the limit of the threshold set above does not apply to commodities investment platforms or such other MSMEs as may be designated by the Commission from time to time.
For commodities investment platforms, SEC says the cash assets ratio requirement for a crowd-funding intermediary shall, without prejudice to the other registration requirements specified, be a minimum of 60 percent liquid assets and 40 percent fixed and other assets.
The SEC document puts the maximum amount of funding that can be raised on a commodity platform for 12 months at N1 billion.
For investors, the Commission says investors are allowed to invest in companies hosted on crowd-funding portals subject to the investment limit specified by SEC from time to time.
Investors will be given a cooling-off period from the time of investment until 48 hours to the close of the offer within which they may withdraw their investment, and if there is a material adverse change before the closing date of the offer, affecting the project or the fundraiser, investors may rescind the investment within seven days from the date the material adverse change became public.
It adds that where the proceeds have not been transferred to the fundraiser or where an investor cancels the offer or agreement to purchase securities or investment instruments, all funds that may have been debited from or blocked in the account of the investor shall be refunded or released within 48 hours of the request to cancel.
Currently, lots of agri-tech platforms that crowd-funded finances to fund various farming projects are failing in paying their return-on-investment (ROI) to investors and this is because the sector has been unregulated in the country.
Experts say the new regulation on crowd-funding activities will help regulate the sector and reduce investment risks that are susceptible to investors.
The Commission warns that any crowd-funding intermediary that fails to comply with the new rules shall be liable to a fine of not less than N100,000 and the sum of N5,000 for every day the violation continues and shall, besides, be liable for any loss of investors’ funds.
