Welcoming SEC’s new regulations for crowd-funding

In the last couple of years, crowd-funding has proved to be an easy and convenient way for raising funds from a segment of the public for projects funding. This cuts across various sectors of the economy.

In a way, the practice has been of benefit, especially for small investors. In real estate and agribusiness, for instance, small investors have leveraged crowd-funding to invest in big-ticket projects with low-hanging fruits which, ordinarily, they would not have been able to undertake and execute.

But there is a snag. Crowd-funding is unregulated, hence exposing investors to insider abuses, manipulations and risks. This, perhaps, explains the decision of Security and Exchange Commission (SEC), the apex regulatory agency for the Nigerian capital market, to intervene with new regulations.

That intervention, in our view, is not only timely, but also necessary as, we hope, it will make for checks and balances, minimize risks in the practice, and ensure investors’ interests are protected at all times.

Over time, there have been abuses in the manner funds are raised from investors and more in the way dividends are paid, sometimes not paid at all. But SEC, in the new regulations, says crowd-funding can only be raised through an online portal that must be operated by crowd-funding intermediaries.

We agree totally with this, more so as these intermediaries must be registered by SEC and have a minimum paid-up capital of N100 million and a current Fidelity insurance bond valued at 20percent of the paid-up capital among other requirements.

Though the implication of this is that capital requirement will prove difficult for existing and intending crowd-funding portals to achieve, we have no problems with that inherent difficulty, notwithstanding an Advocaat Law Practice report, which says the difficulty can be surmounted through raising additional equity capital or consolidation.

The proposed regulations state further 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.

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.

The drive here, which we welcome with open hands, is 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. This is totally unacceptable.

As a matter of course, benefits and obligations must go together. For that reason, the new regulations place several obligations on crowd-funding portals that must be fulfilled for registration with the SEC.

These include disclosure of fundraisers showing 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 having 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 stated 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 crowd-funding 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 be not more than N50million for a micro-enterprise, N70million for a small enterprise, and N100million for a medium enterprise in 12 months.

The commission noted 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 put the maximum amount of funding that can be raised on a commodity platform for 12 months at N1billion.

As stringent as these regulations may seem, it is worth the while, considering the high inclination to defraud, deceive or cheat unsuspecting investors by some fundraisers who thrive on unethical practices.

We are totally in support of SEC’s new stance as we see hope of continuity and sustainability of both existing and intending crowd-funding platforms on firm, bold and unbiased regulations that protect not just the interest of investors, but also the practice itself.