Start-ups are generally more financially constrained than larger existing firms and are also less likely to have access to formal finance. Across the globe, they face difficulties in securing capital from the traditional financing models and these constraints are even more pronounced in less developed countries. This has led to the creation of alternative financing sources outside the conventional bank lending options. Crowdfunding is one of the promising alternative financing sources capable of bypassing the traditional funding methods. This article seeks to provide more insight into the opportunities available to Micro, Small and Medium Enterprise (MSMEs) under the proposed Securities and Exchange Commission the rules for crowdfunding Nigeria. 


Crowdfunding refers to a market-based financing technique where funds are raised from a large pool of individuals or entities in small amounts by using online web-based platforms to fund businesses, projects, and other needs. It also bypasses traditional financial intermediaries. The following elements must be present for an investment scheme to be classified as crowdfunding: a. It must take place on a website platform/ online platform. b. It must include an offer to the general public to finance the company on a project, business venture. c. It should not involve the traditional financial intermediaries. Forms of Crowdfunding a. Equity Crowdfunding: Equity Crowdfunding allows large number of individuals to invest in the business by acquiring a small stake of the business without complying with the stringent requirements often attached to the transfer or purchase of securities. Contributors therefore become shareholders of the company and are assured of returns in the form of dividends. Should the company do well, a contributor (now a shareholder) stands to make profit. Presently, the combined provisions of Companies and Allied Matters Act, 2020 and Investment and Securities Act, 2007 make this form of crowdfunding illegal. Debt Crowdfunding: Debt Crowdfunding, also known as peer to peer lending connects business owners to potential lenders at a reduced interest rate. This type of crowdfunding is popular in the agribusiness sector. Entrepreneurs who do not want to give up any equity in their business typically adopt this approach. Some notable debt crowdfunding companies include: Thrive Agric; Eatrichfarms; Naturfunds; Farmcrowdy; Imeela and Pork Money. b. Donation Crowdfunding: This type crowdfunding typically seeks token sums from a large group of contributors for the completion of a project or goal. It is a way to source money for a project by asking many contributors to individually donate a small amount to the cause with no expectation of a reward. In Nigeria, Donation-based crowdfunding is typically employed as an effort to raise funds for charitable causes. Notable sites include:;; cal); and c. Rewards based crowdfunding – Under this type of crowdfunding, participants contribute to the project with the expectation of obtaining a non-financial reward which many either be tangible or intangible. A tangible benefit could be in form of clothing, equipment, machinery or the company’s products while an intangible reward may be in form of publicity from the expression of gratitude, showcasing the donor’s name on the project or recognizing the donor as a supporter. Challenges to Crowdfunding
In Nigeria, the use of crowdfunding through web based platforms faces various challenges. Some these threats are as follows: MSME’s inability to fully compensate or pay the investor’s interest. There is a growing lack of investor confidence because in some instances, they may fail to refund the investors capital where the platform operator do not guarantee the success of the project. Lack of proper evaluation of the risks and value of projects. Due to the absence of proper due diligence typically used in conventional lending, crowdfunding investors are unable to properly assess the risk and value of projects. Challenges of equal access to information between fund contributors and creative ideas initiators. Given their reliance on payment systems, they run the risk of cyber-attacks or online fraud. The possibility of a sudden closure of the crowdfunding platform may leave the investors and borrowers at a loss. Unlike publicly quoted companies, there is a lack of specific disclosure by MSMEs.

Opportunities Under the Crowdfunding Scheme Some of these opportunities are: Reduction in cost and time required to raise funds. It provides individuals and businesses with a simplified fund-raising or investment alternative. It provides an accurate measurement of the bankability of projects at an early stage by reaching the accredited investors who intend to invest. Business owners under crowdfunding are able to access the funds they require and still retain control. The risk associated with the investment is usually spread amongst multiple investors Since this platform allows for many innovative ideas to be funded, it leads to job creation and value addition to the country’s economy. LEGAL FRAMEWORK IN NIGERIA. The Investment and Securities Act, 2007 and the Companies and Allied Matters Act 2020(“CAMA”) are currently the only laws that address crowdfunding in Nigeria and the Securities and Exchange Commission (the “SEC” or the “Commission”) is saddled with the responsibility of regulating the country’s capital market. In response to the dearth of crowdfunding regulations in Nigeria, the Commission, on the 28th of March 2020 released its proposed rules on crowdfunding in the country (the “Proposed Rules”). The Proposed Rules seek to create more opportunities for emerging businesses, particularly, MSMEs. Prior to the release of the Proposed Rules, the Commission had released an official statement suspending all activities relating to the crowdfunding of businesses in Nigeria. Under the existing laws on crowdfunding in Nigeria, a private company is expressly barred from inviting the public to subscribe for any shares or debentures of the company or deposit money for fixed periods or payable at call, whether bearing interest. This provision poses a challenge to many start-ups which are usually private companies since crowdfunding generate funds from members of the public. Also, start-ups are unable to utilize the potential equity crowdfunding offers due to restrictions on public subscription and the number of members. Section 67 of the ISA states as follows:

No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with anybody corporate for a fixed period or payable at call, whether bearing or not bearing interest unless the body corporate concerned is- (a) A public company, whether quoted or unquoted and the provisions of sections 73 to 87 of this Act are duly complied with; (b) A statutory body or bank established by or pursuant to an Act of the National Assembly and is empowered to accept deposits and savings from the public or issue its own securities (as defined under this Act), promissory notes, bills of exchange and other instruments: Impliedly, the above provision of ISA reiterates the fact that a company can only invite members of the public to acquire its securities only if it is a public company. In addition, there are other stringent rules a company must satisfy before it can invite members of the public to subscribe to its shares. Proposed Rule: Key Highlights The Proposed Rules are clearly aimed at expanding the SEC’s regulatory oversight as the Commission seeks to accommodate crowdfunding as an alternative source of funding. Some of the key highlights of the Proposed Rules include: Eligibility All MSMEs incorporated in Nigeria within a minimum of 2 years’ operating track record will be eligible to raise funds through a crowdfunding portal registered with the Commission. Means of Issuance of Securities i. It provides that the issuance of securities or other investment instruments shall be conducted through a registered crowdfunding portal; ii. Only plain vanilla bonds/debentures, ordinary shares, and other accepted investment instruments shall be issued. Portal Requirements i. The Proposed Rules provides that platforms facilitating interaction between fundraisers and investors for purposes of investment base crowdfunding are to be registered with the Commission as a crowdfunding portals; ii. All platforms shall be considered operating in Nigeria where same is operated and/or maintained in Nigeria or where the platform is outside Nigeria but actively targets Nigeria Investors or the component part of the platform when taken together in Nigeria;

iii. Only a crowdfunding portal operated by a registered entity with the Commission can serve as a crowdfunding intermediary and only entities registered as broker/dealer or Alternative Trading Facilities (ATF) under the ISA and SEC rules can serve as a crowdfunding intermediary. Legal Requirements for Operators I. It provides that a registered operator must be able to operate orderly, fairly and transparently when it comes to securities and investments traded through its electronic platform. II. The operator’s board, chief executive and any person who is primarily responsible for operating a crowdfunding portal must not have been convicted whether within Nigeria for an offense involving fraud. III. The rule also ensures that such an operator must not have been convicted for any capital marketrelated offense, etc Rights of Investors An investor has some rights under the proposed Rules such as: • A 48 hours grace window to withdraw the investment after offer the closes • Right to withdraw his investment within 7 days of becoming aware of any material adverse change affecting the issuer. • An investor has the right to be refunded debited sums within 48 hours after cancellation or withdrawal. Grounds for Revoking License The Proposed Rules provide that the Commission will revoke the registration of a crowdfunding portal where such portal fails to meet up with the requirements under any relevant provisions of the rules or where the operator fails or ceases to operate or maintain the crowdfunding portal for a consecutive period of 6 months or where there is a failure to pay fees as prescribed by the Commission . Obligations on Crowdfunding Portal The Proposed rules imposes the following mandatory obligations on crowdfunding portals: • The crowdfunding portal is obligated to carry out a due diligence check on all prospective issuers intending to use its platform; • The rule places a duty of disclosure of all material information relating to issuers hosted on the platform and the level of general risk involved in the investment; • Crowdfunding platforms shall always monitor the conduct of issuers and take appropriate action whenever an issuer is in breach of the fundraising limit imposed on it by the Commission;

• Every crowdfunding portal is mandated to appoint a custodian, who shall establish a separate trust account for each funding round on its platform with a financial institution registered by the Commission as a custodian; • Ensuring data privacy and protection; • Filing monthly, quarterly and Annual reports with SEC. Maximum Threshold The commission states that the maximum amount which can be raised via instruments or securities sold by the issuer within the stipulated time of 12months is as follows: i. The sum of 100 million naira may be raised by a Medium enterprise. ii. The sum of 70 million naira may be raised by a Small enterprise. iii. The sum of 50 million naira may be raised by a Microenterprise. The above limit does not, however, affect MSMEs operating as digital commodities investment platforms and other such MSMEs as may be designated by the commission from time from time. Maximum Investment Limit The rule places a limit on the aggregate amount of securities to be sold to an investor. A retail investor may not be able to invest more than 10 percent of their annual income in a calendar year. Sophisticated, High Net Worth and Qualified Institutional Investors are exempted from this limit as set by SEC. Conclusion The three critical elements required for a crowdfunding ecosystem to thrive are (i) Economic Development; (ii) Technological Infrastructure and (iii) Regulatory Framework. Whilst available statistical data clearly shows the existence of a rapidly growing economy and a relatively developed technological infrastructure1 , the final critical element is clearly missing. Until the Proposed Rule is implemented, the crowdfunding ecosystem in Nigeria will remain largely unregulated and unattractive to investors. Despite its obvious flaws, the Proposed Rule, once implemented, is expected to accelerate the growth of MSMEs and grant more access to potential investors. Contributors: Olabode Adegoke Head, Legal Advisory +2348095812716 1 If measured using internet access and social media penetration as indices Oluwakemi Ajibola Associate +2349084417005