Recently, the Nigerian Securities and Exchange Commission (SEC) announced that it had approved a new set of rules to guide crowdfunding activities in Nigeria. This is coming after the exposure draft that was published by the SEC in 2020.
Crowdfunding has proven to be a useful fundraising option for startups in Nigeria, although a lot of fraudulent and highly-risky investment platforms with unreasonably high ROIs have also utilized crowdfunding to generate capital. Most of the Nigerian startups that engage in crowdfunding to raise capital are Agritech startups, like Farmcrowdy, Thrive Agric, Farmcart and ChubiAgro, who receive funds from the public to finance agricultural activities, offering a promise of paying back the capital plus a typical 15-30% ROI to investors after a few months.
Before the introduction of the new rule, crowdfunding activities in Nigeria have been largely unregulated, which has left investors in a pool of financial risk. This new rule will redefine the rules of operations in crowdfunding engagements and protect investors from extreme risks.
According to the new rule, startups(fundraisers) who intend to raise capital through crowdfunding will only be able to do so through a Crowdfunding Intermediary (CFI) that will facilitate the crowdfunding process. The funds will now have to be pulled from the public through an approved Crowdfunding Portal.
The CFIs must also ensure that the fundraisers disclose sufficient information to investors on what the funds are meant for and how they will be used. This will ensure that investors fully understand everything that is involved with the investment they are making.
The SEC rule also provides clear details on who can raise funds through a Crowdfunding Portal that is operated by an approved Crowdfunding Intermediary. Crowdfunding is now restricted to;
- Micro, Small and Medium Enterprises (MSMEs) incorporated as a company in Nigeria and have been operating for a minimum of two years
- MSMEs incorporated in Nigeria which have been operating for less than 2 years but have a “strong technical partner that possesses a minimum of 2 years operating track record or has a core investor.
The rule also declares the maximum amount that can be raised by startups within a 12-month period, restricting the maximum amount to ₦100 million (260k) for Medium enterprises, ₦70 million ($182k) for Small enterprises, and ₦50 million ($130k) for Micro enterprises. However, exceptions are made for Commodities Investment Platforms, which the SEC defines as electronic platforms that connects investors
to specific agricultural or commodities projects for the purpose of sponsoring such
projects in exchange for a return. For CIPs, like Farmcrowdy, the maximum amount that may be raised through an approved Crowdfunding Portal within a 12-month period is N1 billion ($2.6m).
Overall, one of the advantages of the new set of rules is that it puts a lot of requirements in place to protect investors from incurring avoidable financial losses or falling victim of a fraudulent fundraising activity. In line with the new rules, retail investors may be restricted from investing more than 10% of their net annual income, preventing them from putting in all or nearly all of their money and losing it. The official recognition and regulation of crowdfunding will also increase the trust of the public in crowdfunding activities since they are now well regulated, which, in turn, makes it easier for these startups to raise capital from the public.
However, the maximum amount that can be raised by startups that are not Commodity Investment Platforms is small relative to those of other countries. In the US, startups can raise as much as $5 million through crowdfunding, while South African startups can raise up to $2.5 million through crowdfunding. This is far above the maximum ₦100 million ($260k) that can be raised through crowdfunding by Nigerian startups.
The requirements for startups that are eligible for crowdfunding also restricts very-early-stage startups from raising funds from the public to accelerate growth and expansion.