Most startups are limited in the ways they can raise funds. Without having to wait for friends and family, angel investors or venture capitalists, a number of startups have turned to crowdfunding as a viable means of raising capital.
Crowdfunding is the use of small amounts of capital from a large number of individuals to finance a new business venture or startup. Crowdfunding makes use of the easy access to vast networks of people through social media and crowdfunding websites to bring investors and entrepreneurs together. Besides raising funds, crowdfunding ventures have also proved to be a valuable way to gather public opinion and create publicity for a startup or its product.
Legal Framework in Nigeria
Despite such regulatory questions about the legality of crowdfunding vis-à-vis the provisions of the Investment and Securities Act (ISA) and the Companies and Allied Matters Act (CAMA), raising capital through crowdfunding has become increasingly popular for startups in recent years.
The Securities and Exchange Commission (SEC) has proposed a new set of rules that will regulate crowdfunding businesses and deepen the capital market in Nigeria. The commission had some weeks back, announced its plans to regulate the crowdfunding business in Nigeria in order to reduce the risks associated with it for investors and financiers.
Who can raise funds under the new rules?
According to the SEC’s proposed rules, Micro, Small and Medium Scale Enterprises (MSMEs) incorporated in Nigeria with a minimum of two years operating track record, shall be eligible to raise funds through a crowdfunding portal registered by the commission. This could be done in exchange for the issuance of shares, debentures, or such other investment or instruments as the Commission may determine from time to time.
Eligibility of registration of crowdfunding portals
Funds may only be raised through Crowdfunding Portals, which can only be operated by platforms registered by the SEC and having a minimum paid-up share capital of N100 Million. The guidelines also provided clarity on companies incorporated outside Nigeria but still able to trade on crowdfunding platforms. According to the commission, a person is considered to be operating, providing, or maintaining a Crowdfunding Portal in Nigeria if:
(i) The platform is operated, provided or maintained in Nigeria;
(ii) The platform is located outside Nigeria but actively targets Nigerian investors; or
(iii) The component parts of the platform, when taken together, are physically located in Nigeria even if any of its component parts, in isolation, is located outside Nigeria.”
In line with the proposed regulation, crowdfunding portals can only be registered and operated by crowdfunding intermediaries – entities registered with the Commission as an Exchange, Dealer, Broker, Broker/Dealer or Alternative Trading Facility as prescribed under the SEC’s Rules.
What is the fundraising limit?
The commission states that the maximum amount which may be raised shall not exceed ₦100million by a medium enterprise, ₦70million for small enterprises and ₦50million for micro-enterprises. The limits set forth above shall not apply to MSMEs operating as digital commodities investment platforms, or such other MSMEs as may be designated by the Commission from time to time.
What is maximum investment limit?
The aggregate amount of securities sold to any investor in investment-based crowdfunding during the 12-month period shall not exceed 10% of their annual income in a calendar year for retail investors. Only “Sophisticated, High Net worth and Qualified Institutional Investors” are exempted from this limit set by the commission. Retail investors who are neither High Net worth nor Sophisticated Investors shall not invest more than 10% of their annual income.