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Nigeria's leading finance and market intelligence news report.

Curious case of agric crowdfunding going comatose, after regulation

For almost five years, crowdfunding platforms offering investments in agriculture offered some of the best returns on investment in Nigeria. For many Nigerians with disposable income to invest, these platforms were particularly attractive with fixed income assets becoming less attractive in returns. An October 2020 Treasury Bill auction by the Central Bank of Nigeria had a 0.34 percent return, the lowest in its history at the time, whereas it had delivered as much as 18 percent in 2017.

As people sought more attractive investment windows, the new destination of crowd-funding platforms which until recently had no regulation, was a risky bet offering high returns.

Crowdfunding, a concept typically used in other climes for soliciting interest free or not necessarily repayable funds, became synonymous with agriculture in Nigeria, where it appeared to be the sole destination. This was not so surprising, as government rhetoric to ‘develop agriculture’ has made almost anything associated with it a potential buzzword; in this case, agricultural finance.

The average farmer would always complain of lacking funds to produce, anchoring their economic challenges on it. From one generation to the next, farmers passed the baton of poverty to those taking over from them. When companies suddenly ‘innovated’ a way of financing farming operations so as to finally break the cycle of poverty, it was appealing on two fronts; the sentimental fact that lives will be improved and perhaps more importantly, financial rewards of more than 100 percent per annum in some cases, many times more than any known legal financial instrument would return. At least, so far.

This was to be the moment investors waited to see for years, when they could finally invest with ease and importantly, peace of mind

In the last five years, bank lending to agriculture has increased every year since 2016 as previously reported by BusinessDay, while the CBN itself continues to pump funds into the sector. The private sector, now seemingly represented by technology-enabled platforms, apparently could not miss the party. However, they were not taking deposits from the public, then lending to farmers under a system where their operations and administrations of funds could have been regulated by the CBN.

The more companies surfaced, claiming to be crowdfunding providers, the more concerns increased among the investing public on the regulation of crowd-funding platforms in Nigeria. Within the last two years, complaints of defaults when investments are due were almost a daily news item.

Read Also: Farmcrowdy, others exit crowdfunding before regulation begins

In many cases, operations had appeared to become ponzi schemes, where claims of investment in agriculture became doubtful, as funds from new investors appeared to be used in paying old investors without actual agricultural production as claimed. At least perhaps, not at the scale the public was being made to think.

“I just stay completely away from any investment (especially business) that promises 30 percent and above returns a year,” was the view expressed by Michael Olafusi, a financial modelling and valuation expert. “Even small street sense dictates that if nothing is 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 risked becoming the Trojan horse potential fraudsters and Ponzi scheme operators would use in finding ways to the pockets of unsuspecting members of the public.

“I’m not comfortable with non-regulation,” said Amechi Ebeledike, a retiree who once told BusinessDay he had invested over N60 million with Farmcrowdy, Thrive Agric and Agropartnerships at the time.

In 2020, it was Mary Uduk, who as acting director-general of the Securities and Exchange Commission (SEC) first disclosed that the commission was planning to introduce some forms of regulation for crowdfunding.

“The returns are indeed mouth-watering. This is where regulators, especially the SEC, need to step in as the ‘big brother’,” said Dare Akinnuoye, a fellow of the Institute of Chartered Accountants of Nigeria (ICAN) in a chat with this reporter before regulations were later published.

In a widely publicised instance, HO Corn in early 2020 embarked on nationwide publicity to cultivate maize on about 30,000 hectares, which was to yield 120,000 metric tons. If the plan had actually succeeded, there may have been some succour for both industrial and other users following Nigeria’s restriction of foreign exchange for maize importation.

As BusinessDay reported, the scheme was to accommodate 30,000 investors with a minimum investment of N100,000 per lot and assurance of 50 percent return on investment after six months. A few days to the due date in July, the company sent a mail to its investors requesting for three more months, until October 2020. It would later default, and yet again, less than 24 hours to another December 30 deadline, sent another message that it could not execute repayment.

The company was one of many other mostly less-known platforms that had similar repayment issues. Thrive Agric, another major player, would also announce after months of a running battle with unpaid investors, that it was finally able to pay completely, with COVID-19 blamed for the challenges experienced.

Another company, Farmsponsor, claimed after regulations were to finally take off that it was unable to continue its crowdfunding operation as the SEC notice supposedly came abruptly. In a statement, it said paying everyone at once “will eat too deep into our operational cash flow. Let us continue to work to pay you.” The pay-outs would be staggered and may take between 18 – 24 months to complete, including loans to be taken for that purpose. However, the farming operations that investors’ funds were to be supposedly committed, should have been sufficient to repay them.

A January 21, 2021 document by the Security and Exchange Commission (SEC) had detailed regulations and guidelines for the conduct of crowdfunding business generally in Nigeria, not just agriculture.

“This is to inform all stakeholders that as part of efforts to ensure investor protection while encouraging innovation in the conduct of securities business, the rules governing Crowdfunding business in Nigeria came into effect on the 21st day of January 2021,” read a notice on SEC’s website.

The transitional period elapsed on April 21, 2021, and 2 months later, precisely, by June 30, all existing investment crowdfunding portals/digital commodities investment platforms were to comply with the registration requirements or cease operations.

This was to be the moment investors waited to see for years, when they could finally invest with ease and importantly, peace of mind. For the crowdfunding platforms, especially the prominent ones that had clamoured for regulation and pledging to support it whenever introduced so as to “separate themselves from Ponzi-like operators”, this was to be their moment too.

A shocker, however, on March 3, 2021, Farmcrowdy, which often claimed to be the first among digital platforms offering crowdfunding in Nigeria, among other announcements by its holding company, said it was exiting the crowdfunding space.

The company, which on its website claimed to have raised $15 million for farmers, had only one year earlier, explicitly claimed to be working with regulatory bodies towards a framework to guide the fast-growing sector.

“I can confirm today that we are in constant conversations with the necessary authorities who will be responsible for regulating the crowd-funding space,” said Onyeka Akumah, CEO of Farmcrowdy in a February 2020 emailed response when BusinessDay sought comments on threat of ponzis if there was no regulation.

“As an innovator in crowdfunding within Nigeria, Farmcrowdy has been carried along concerning a possible road map and eventually a sandbox that will regulate the entire fintech space in Nigeria including crowdfunding,” he said at the time. “Platforms like ours will conform to the regulations set within to continue to do our business.”

In his 2021 email, Akumah said, “Our engagement with SEC was no longer necessary as it concerns crowdfunding as soon as they found out that we had changed our model. Crowdyvest however continued engagement with SEC on the regulations.” However, with Crowdyvest also sold, the new investors, according to him, would like to take a different direction when it comes to crowdfunding.

The trend of exiting the crowd-funding space was however not limited to Farmcrowdy. Toyosi Ayodele, CEO, Agrorite Limited, told BusinessDay the company had exited the crowd-funding space since October 2020, and not a recent decision that could be inferred in response to regulations finally taking off.

“After careful analysis of our project portfolios and the cost implications for execution, we quit crowdfunding in October 2020 and focused on sustainable partnerships for growth and development,” said Ayodele.

According to Ayodele, Agrorite started as a crowd-funding platform to finance different agricultural projects and while this strategy was helpful to gain traction and improve the livelihood of thousands of smallholder farmers, it became imperative to remodel the company’s strategy with a long-term value based objective.

BusinessDay also reached out to Groupfarma, another player, whose CEO confirmed the company was putting its crowd-funding operations on hold (but not permanently), while focusing on Business-to-Business strategies to mobilise funds.

“We will be complying with the rules. We will work towards meeting the requirements but before then we will maintain B2B,” said Niyi Ogungbade, CEO, Groupfarma, in an emailed response to BusinessDay enquiry.

Uka Eje, a founder of Thrive Agric, another major player in the crowd-funding space, told BusinessDay in a March 2021 email that the company had paused its crowdfunding activities since April 2020.

“Thrive Agric welcomes the new regulation and will fully comply if the organization reactivates crowdfunding,” he said. However, Eje had told BusinessDay a year earlier that his company was having conversations with SEC which had “driven us to explore a trustee relationship for subscribers funds.” The company was also now exiting crowdfunding when regulations were to finally take off.

Ebeledike, the retiree who had invested over N60 million with Farmcrowdy, Thrive Agric and Agropartnerships, when asked if he was aware of the recent development, reached out to those he had invested with for clarifications.

“I’ve spoken with the key operators now. It is confirmed that the restructuring was as a result of SEC requirements, directives and deadlines given to them,” he replied.

Within three months of the SEC regulations finally taking off, crowd-funding platforms started to ditch what was once their pathway to growth. Endeared to the public on the two-pronged approach of helping farmers increase productivity and generating decent returns for investors, the model was being abandoned, although none would admit it is to avoid the commencement of regulations.

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.

The guidelines by SEC, were among other things, to ensure the investing public was protected from operators whose activities may be suspect. With big players exiting the stage, and smaller players not likely to approach the stage, it remains unclear, why the introduction of what could have conferred legitimacy on these businesses, was instead seemingly scaring them away.

 

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