Crowdfunding: ‘Retail investors can come to the platform to seek investments of their choice’
As the cost of funds continues to be a major barrier to investments and growth of businesses, including real estate, many innovative ideas have evolved, offering alternatives to lending from traditional financial institutions. One of such alternatives is crowdfunding. In this interview, ROLAND IGBINOBA, Founder/CEO, Propcrowdy Limited, explains how Securities and Exchange Commission (SEC) approved this intermediary initiative. He also highlights its benefits to real estate investors, low and mid-income home buyers, and small scale businesses. He speaks with CHUKA UROKO. Excerpts:
Your company has just secured SEC’s approval for a crowdfunding initiative which, for us, is no mean achievement. What next in terms of what to expect from you?
The license is not the end. It is only a means to it. This is because we have been able to demonstrate that it is possible to obtain the license. Many more people will be granted the license. Now, the real hard work begins.
The next thing for us is how to get people to understand that crowdfunding is safe and secure now in Nigeria. We are embarking a lot on advocacy and consumer education to bring MSMEs, low and medium income retail investors to crowdfunding as an alternative funding/investment channel.
We expect lots of MSMEs who are looking at raising money to come to the platform. On the other hand, the platform is ready to welcome retail and institutional investors who want vetted, safe and secure investment outlets for their hard-earned money. We have created a funding/ investment waitlist on our website for those who want to enjoy the benefits of crowdfunding
Crowdfunding means a group of people coming together to raise funds; what measures have you put in place to deal with trust issues associated with crowdfunding in Nigeria?
As you know, the case for crowdfunding worsened with the emergence of unregulated agrictech platforms, which are no more now, thanks to Securities and Exchange Commission (SEC). The first and most critical mechanism put in place is that SEC created regulations around crowdfunding. What we did at Propcrowdy was to pursue a license as our first order of business and submitted ourselves 100 percent voluntarily to regulation.
To obtain this license, especially being the first to so do, we have been subjected to thorough scrutiny and the SEC has made sure that we are fundamentally in compliance with the strict provisions of the Rules on Crowdfunding.
Our risk management infrastructure is exhaustive. A few that come to mind are insurance of investors’ principal capital; deposit of investors’ funds with a custodian bank which shall only be disbursed on a milestone basis; approval of all listings by SEC; thorough due diligence on all fundraisers, including the promoters; collateralization of title deeds and other documents of interest; etc.
These and many other mechanisms have been put in place to inspire investor-confidence and minimize risk to the barest minimum. This is not to say that these are 100 percent fail-proof, but measures have been put in place to ensure that confidence in the market only appreciates with the passage of time.
The target of the initiative, on the B2B side, is small and medium scale developers whose primary objective is to build affordable housing for the average Nigerian but are too cash-strapped to achieve this objective.
Since this initiative is also for Nigerians in Diaspora, how are you going to deal with FX challenges in the financial system?
Solving the FX problems in the financial system will not be done by crowdfunding alone. But crowdfunding will be a significant and critical lever. We do know that one of the challenges we are having with FX, in a broad sense, is that demand is significantly lower than supply.
With a regulated crowdfunding space, more structured remittances will flow into the country. When this happens, the MSMEs who hitherto lacked capital, will have more capacity to produce and grow their products and services and this, in turn. will lead to export of their produce that will, in turn, generate more FX inflows into the country. So, at Propcrowdy, we see ourselves as an exchange and/or marketplace that engenders the productive capacity of MSMEs. And, of course, MSMEs are the engine for economic development of any country.
Why do you consider Propcrowdy as an exchange or a marketplace?
We are licensed as a Crowdfunding Intermediary (CFI). Basically, this means two things. First, anybody can come to the platform to raise capital provided you meet the minimum requirements as stipulated by the Securities and Exchange Commission (SEC).
Second, retail investors can come to the platform to seek investments of their choice and will be able to make those investments on the platform right away. The reason that they will be able to do this is because Propcrowdy as a CFI would have taken the pain to vet the fundraisers and ensure that the meet SEC guidelines.
So, there is a whole dimension of risk management protocol that has been set in motion. Although it is important to mention that investors must fully take responsibility for understanding the risk that they are getting into.
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FinTech has aggressively spread globally using technology in finance while property technology (Proptech) is now emerging. What is the future of real estate crowdfunding in Nigeria, especially for the low and medium income class?
First and foremost, let’s contextualize this. There is currently, arguably, a housing deficit of 20 million units. If the average cost of production of these units is N5million, that will be a N100 trillion market. What is the market capitalization of the Nigerian Exchange (NGX)? About N28 trillion. So, potentially you are looking at a market potential that is 4 times the capital market.
Having said that, the SEC rules allow retail investors to invest not more than 10 percent of their income while institutional investors and high net worth individuals have no cap. With real estate crowdfunding, retail investors who ordinarily would not have been able to partake in real estate investments are now given the opportunity to do so.
Furthermore, developers on the other hand can solicit for investments by leveraging the huge investor categories available on social networks. A major game changer in crowdfunding for real estate is that investors can now put far lower amounts of capital towards owning properties on the crowdfunding platform and they can earn returns on them.
For example, on the Propcrowdy platform, you can invest as low as N10,000. Summarily, crowdfunding has a massive future, and it is here to stay. This is already evident in emerging climes and more developed markets.
However, overall, the future of real estate crowdfunding in Nigeria, especially for the low and medium income class, is likely to be influenced by a number of factors including government policies and regulations, economic conditions, and technological advancements. There may also be challenges to the growth of this platform such as a lack of awareness of the concept among the general public .
Looking at the estimated N100 trillion funding gap in the real estate sector, do you think crowdfunding will tackle the challenge?
Crowdfunding will not raise a N100 trillion gap overnight and it is not certainly the only channel for closing this funding gap. But it is a new and innovative route outside the traditional banking system. Crowdfunding initiative opens an alternative window to funding real estate and other allied projects and allows developers have more access to cash at a lower cost and at higher speed.
The target of the initiative on the B2B side, is small and medium scale developers whose primary objective is to build affordable housing for the average Nigerian but are too cash-strapped to achieve this objective.
Propcrowdy creates a viable and sustainable solution for this class of developers by connecting them to funding from low and middle income earners who, in turn, become stakeholders in the projects (in the most direct sense) and potentially grow and expand their portfolio by investing in this asset class. In essence, it tears open the veil and allows the everyday Nigerian to enter the “holies of holies” of the real estate market in Nigeria.
You have mentioned the benefits of this initiative to SMEs, developers and low-income earners. What benefits are there for the housing sector in general?
The benefits are enormous. Apart from democratizing real estate investments, it also puts power back in the hands of the people as to what the focus of developers should be: luxury properties that allow the housing deficit in the country to keep soaring, or affordable housing which gives the average working Nigerian a chance to have decent housing at a more affordable rate, thereby reducing the housing deficit.
Our Crowdfunding Intermediary license gives a wider range of Nigerians the opportunity to look at the projects on offer on the Propcrowdy platform, make assessments on them and fund the projects that specifically meet their investment needs. This improves access to affordable housing. This alone may not eradicate the challenges in the housing sector, but it lends a hand to curtailing the issues.
SEC Rules state that you can only fund N100 million per transaction on a Crowdfunding platform. Looking at the enormous funding gap in the market, isn’t this a tiny drop?
Yes, but these are tiny drops that can make an ocean. We agree with the SEC on this cap based on the several conversations we have had and the spirit behind the rules, especially if you look historically at how ponzi schemes and some of the agritech platforms have operated in the country. So, working with SEC, we are starting from known to the unknown.
As regulators, they want to watch the markets, and understand it. Interestingly, the rule also makes provisions for some level of flexibilities on a case by case basis. So, beyond just regulating the market, the SEC is very open to innovations that develop the crowdfunding space. We believe that once we have proven ourselves as operators, the cap will increase.