• Friday, March 29, 2024
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Crowdfunding, alternative sourcing methods and leveraging FinTech solutions in Nigeria (1)

Fintech

Businesses require capital to fund their operations and entrepreneurs have, in recent times, looked to financial technology (FinTech) solutions to achieve some of these capital-seeking objectives. Globally, FinTech, the internet and social media have collectively made access to capital somewhat easier.

One of the ways through which companies raise capital is through crowdfunding. Crowdfunding can be generally defined as the process of funding a project or venture by raising (small amounts of) money from a large number of people using the internet. There are different types of crowdfunding including, equity and debt crowdfunding, donation crowdfunding and reward crowdfunding.

Currently, there is no specific law regulating crowdfunding in Nigeria. Due to restrictions contained in the Companies and Allied Matters Act Chapter C20 Laws of the Federation of Nigerian, 2004 (CAMA) and the Investments and Securities Act No. 29 of 2007 (ISA), the scope of Nigerian companies which may participate in raising capital through the internet is limited. As such, crowdfunding activities in Nigeria may not be carried out in a manner similar to what obtains in other jurisdictions.

CAMA regulates the incorporation, administration, and operation of registered companies (private or public), incorporated trustees and business names in Nigeria. By Section 22(3) of CAMA, a private company cannot have more than 50 shareholders. Also, private companies are restricted from inviting the public to (a) subscribe for any shares or debentures of the company; or (b) deposit money for fixed periods or payable at call, whether or not bearing interest (Section 22(5), CAMA).

The ISA governs activities in the Nigerian capital market as it establishes the Securities and Exchange Commission (“SEC”) and regulates investments and securities business in Nigeria. Section 67(1) of the ISA provides that no person shall make an invitation to the public to acquire or dispose of any securities of a body corporate unless such body corporate is a public company, or a statutory body or bank established by or pursuant to an act of the National Assembly of Nigeria. “Securities” are defined in the ISA to include debentures, stocks or bonds issued or proposed to be issued by a body corporate. Further, an invitation shall be deemed to be an “invitation to the public” under the ISA if it is an offer or invitation to make an offer which is published, advertised or disseminated by newspaper, broadcasting, cinematograph or any other means whatsoever (Section 69(1), ISA).

However, such an invitation shall not be treated as an “invitation to the public” if it can be regarded as not being calculated to result in the securities becoming available for purchase by persons other than those receiving the invitation. Furthermore, Section 75(1) provides that no person shall, without the prior approval of the SEC issue, circulate, publish, disseminate or distribute any notice, circular or advertisement to the public which offers for subscription or purchase of securities in a company.

Thus, equity and debt crowdfunding through the issuance of securities (an “Offer”) can be carried out only by public companies in Nigeria. Also, where such an Offer is undertaken, the approval of the SEC is required. Ultimately, the ISA and CAMA do not permit equity and debt security crowdfunding offers made to the public by private companies. As such, several start-ups and small and medium enterprises set up as private companies cannot undertake crowdfunding activities within the existing legal framework.

In the US, the Jumpstart Our Business Start-ups Act (“JOBS Act”), which was signed by Barack Obama and enacted in 2012, established a framework for start-ups and small businesses to raise capital through securities offerings via crowdfunding. Also, Title III of the JOBS Act provides an exemption for crowdfunding activities exempting domestic U.S. issuers from the registration requirements under the US Securities Act, 1933 (as amended). In the United Kingdom, equity crowdfunding legislation exists which permits investments by high net-worth/sophisticated investors.

Good news on the horizon?

The SEC on October 14, 2019 issued rules governing electronic offerings in Nigeria (the “Rules”). The timing of the publication of the rules gives an indication of the willingness of the regulator to further deepen the Nigerian capital market and provide additional flexibility to issuers. Fortuitously, in mid-October 2019, the acting Director-General of the SEC, Mark Uduk, highlighted that regulations to govern crowdfunding by small businesses are currently being considered by the SEC. She also expressed that investor confidence is central to the SEC’s mandate as the regulator of the Nigerian capital market and that such Nigerian crowdfunding platforms will be regulated by the SEC. It appears that the regulator’s vigour in this regard, has been revivified by the boost in market activity witnessed after the listings of major telecoms companies such as MTN and Airtel on the Nigerian Stock Exchange.

The Rules seek to govern electronic offerings, defined therein as the use of the internet (or other electronic means including but not limited to, mobile or Unstructured Supplementary Service Date (USSD) platforms), to display and/or provide access to prospectuses, offering memoranda or other disclosure and offer documents, forms, etc., during an offer. An electronic offering platform will also accommodate subscription and payments for such electronic offerings. As such, Nigerian public companies can now issue their securities to the public through the internet and other electronic platforms.

The rules require that an Eligible Service Provider (ESP) registered with the SEC to operate as a securities exchange or capital trade point shall be responsible for coordinating and operating e-offerings as well as implementing security measures and systems for such e-offering platforms, amongst others. These ESPs are responsible for implementing platform disaster recovery procedures, ensuring online payment options are integrated into the platforms, and safely processing personal data received users on e-offering platforms.

Interestingly, in October 2019, the NASD OTC Securities Exchange Plc (NASD), a SEC registered platform for trading equities, bonds and other securities not listed on a general securities exchange (such as the NSE), announced its intention to commence a platform for private and unlisted public companies to obtain funding from the capital market. The said platform is targeted at providing capital to micro, small and medium enterprises (typically start-ups) through from equity firms and asset managers, amongst others. The initiative is expected to result in an increase in the number of companies seeking listing on the NASD thereby becoming part of other leading entities such as Fan Milk Plc, Air Liquide Nigeria Plc and ARM Life Plc.

From the above, there is a clear indication that the SEC and other key stakeholders in the Nigerian capital market are mindful of the crowdfunding law gap and seek to fill same.

TONI NUMA

Toni is an Associate in the firm of Banwo & Ighodalo, a top tier law firm in Nigeria. He has other published works on capital markets, consumer protection, crowdfunding, financial technology and governance which are available online at www.academia.edu/ToniNuma