Agric crowdfunding at risk of Ponzi schemes as regulation lags

Agriculture crowdfunding platforms that sell products promising higher returns than the rates the companies can earn on risk-free investments may be pushing risky bets that are increasingly skirting the lines of Ponzi schemes amid a hunt for yield by investors and weak regulations.

Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture.

For many Nigerians with disposable income to invest, crowd funding platforms, many of which claim to operate in the agriculture space, have been the destination of choice in recent years.

The practice has become increasingly attractive as yields on fixed income assets plummet. For instance, one-year treasury bills had a yield of 5.7 percent as at February 25 this year, down from 12.94 percent in October 2019, according to FMDQ data.

Logically, people are looking for more attractive investment windows, but a pitfall could be near if crowdfunding platforms continue to operate without quick, comprehensive regulation.

“I just stay completely away from any investment (especially business) that promises 30 percent and above returns a year,” said Michael Olafusi, a financial modelling and valuation expert. “Even small street sense dictates that if there is nothing fishy, those businesses would rather borrow the money themselves from legal or shadowy sources and keep all those crazy high returns to themselves.”

Under the guise of operating crowdfunding platforms for agriculture, the sector may soon become the Trojan horse potential fraudsters and Ponzi scheme operators will use in finding ways to the pockets of unsuspecting members of the public.

A Ponzi scheme is a form of fraud that lures investors and pays profits to earlier investors with funds from more recent investors. The scheme leads victims to believe that profits are coming from product sales or the advertised business, and they remain unaware that other investors are the source of funds.

Mary Uduk, acting director-general, Securities and Exchange Commission (SEC), said last week that the commission was planning to introduce some form of regulation for crowdfunding later this year, but introducing these guidelines appear more urgent before any permanent damage is done.

As lack of regulation continues to pervade the crowdfunding practice, which has become a multi-billion naira venture, investors fear it is becoming increasingly attractive for unscrupulous elements, making the risks equally higher for the investing public.

Recently, a new agric crowdfunding platform offered 50 percent returns in six months for a supposed maize farm. This was particularly worrisome for some people. Even if the company would deliver 100 percent returns in one year, which is more than 15 times the current annual returns from investing in risk-free government treasury-bills, there is no regulatory oversight to ensure investors do not lose their funds.
While maize could deliver double the returns on investment, this is only possible under specific conditions that are not easily achievable, said Oluwafemi Abioye, CEO, Agric Media, which has investments covering several hundred hectares of agricultural land in Nigeria’s South-West.

On paper, he said “corporate farmers promoting an agric investment” may say double or more returns can be possible, but in reality, not always.

“These mouth-watering offers are really very risky,” said Amechi Ebeledike, a retiree who has invested with Farmcrowdy, Thrive Agric and recently, AgroPartnerships.

“In fact, the last one I invested with AgroPartnership farmfortes has continued to give me sleepless nights at 35 percent for seven months! I’m waiting for the crystallisation early next month before I can have rest of mind,” said Ebeledike, who has so far invested over N60 million through the different platforms.

Dare Akinnuoye, a fellow of the Institute of Chartered Accountants of Nigeria (ICAN), said, “The returns are indeed mouth-watering. This is where regulators especially the SEC need to step in.”

He explained that when viewed from two perspectives, certain questions determine where regulation should come from. Can the crowdfunded amount be seen from a sense of classical public offers? That is, raising money to do business.

“If this is the case, SEC should step in and regulate,” said Akinnuoye, who added that he knows people who invested in some of these platform even though he has personally not.

Secondly, he explained that the proprietors of these businesses could argue that this is not an offer to the public. In this case, he told BusinessDay that the Central Bank of Nigeria (CBN) should step in because no unlicensed body can take deposits from the public.

“At 30 percent in six months, I am still holding my breath till I am paid,” said Babajide Olowu, an engineer who said he has invested with AgroPartnerships.

“I can confirm today that we are in constant conversations with the necessary authorities who will be responsible for regulating the crowdfunding space,” Onyeka Akumah, founder/CEO, Farmcrowdy, said in an emailed response to BusinessDay request for comments. “As an innovator in crowdfunding within Nigeria, Farmcrowdy has been carried along concerning a possible roadmap and eventually a sandbox that will regulate the entire fintech space in Nigeria including crowdfunding.”

Uka Eje, CEO, Thrive Agric, said his company “started having conversations with SEC last year and that has driven us to exploring a trustee relationship for subscribers’ funds”.

Eje, in an emailed response to BusinessDay inquiries, explained that currently, the business structure involves reporting to its equity investors and board (which includes Ycombinator investors in Airbnb, Stripe and Dropbox) alongside this, offering regular farm updates and farm visits to subscribers.

In the end, regulation, and a comprehensive one at that, is what investors see putting their minds at ease.
“I’m not comfortable with non-regulation,” said Ebeledike, noting he is not comfortable that the incomes are not being subjected to withholding taxes except it is a deliberate waiver policy by government.

CALEB OJEWALE