Nigeria ‘s Securities and Exchange Commission has revealed plans to introduce regulations on the use of crowdfunding by small businesses to raise capital.
The acting Director-General, SEC, Ms. Mary Uduk, while speaking during an interview with journalists on the sidelines of the ongoing annual meetings of the World Bank and International Monetary Fund in Washington DC, said the move was aimed at protecting investors in the capital market.
She said, “Investors’ confidence is central to our job as the regulator of the capital market. People must have the confidence to invest.
“With crowdfunding, private companies in Nigeria can raise long-term funds using regulated platforms. The platform of the crowdfunding will be regulated by the SEC.”
Uduk, while speaking on the performance of the capital market in 2019, said the market had received a significant boost with the listing of MTN Nigeria and Airtel on the Nigerian Stock Exchange.
She noted that the primary market witnessed a new trend in the last one year with the listing of the telecom companies, Initial Public Offerings and dual listings.
Uduk said, “The dual listing of Airtel signifies the interest of the foreign issuers into the Nigerian capital market.
“Consequent to the Airtel IPO, some offshore companies are in discussion with the commission for an IPO that will be dually listed in Nigeria and the United Kingdom.
“If you look at the equities market, especially on the NSE, the market has lost about 16 per cent so far this year on the back of relatively weak economic fundamentals and investors sentiments.”
She stated that into the last quarter of the year, she hoped to see some improvement in the equities segment, especially as investors saw opportunities to pick low-priced stocks.
She added that there were still opportunities and higher probabilities for the market to rise before the end of the year.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world
Indeed, this could be ground-breaking. No more waiting for years and centuries for startup IPOs to happen. With this new deal, once startups raise funds through equity crowdfunding in South Africa, the startups’ shares automatically become tradable on the floors of South Africa’s Stock Exchange. Money more here!
Here Is How Everything Is Going To Happen
Today, Africa’s first equity crowdfunding, Uprise.Africa, and South African alternative exchange ZAR X have come to an agreement that will see the mini stock exchange list any up-and-coming entities, which have already successfully raised capital via crowdfunding, and freely trade their shares on the open market.
Not only could the arrangement be the funding gap filler that fledgling South African entrepreneurs desperately seek, but it could bring the local capital market to the people.
The partnership also solves the fundamental flaw of all other pre-IPO models, Nel says, namely that once a company has issued the shares they remain fairly illiquid, with investors having their funds tied up until that company looks at going public.
Tabassum Qadir, co-founder, and CEO of Uprise.Africa says they plan to conclude at least three deals a month.
“We are simplifying venture capital through this mutually beneficial partnership for both entrepreneurs and investors,” says Qadir
“It means, when you have a business idea, you can leverage the Uprise.Africa platform to potentially raise capital quickly and ultimately list on a licensed stock exchange, making the shares tradable,” she says.
Etienne Nel, CEO of ZAR X, agrees that equity crowdfunding democratizes start-up financing by enabling entrepreneurs to raise additional capital, but also allows more people to invest in local businesses and in listed equity.
“Furthermore, it gives crowdfunding investors liquidity in their investments, which ultimately drives financial inclusion and job creation,’ he adds.
He says it gives this new generation of investors the same opportunities as high-net individuals and institutional investors, who can afford the investment costs of larger stock exchanges.
Not only are lower minimum investment amounts possible, but certain transaction fees and regulatory costs also don’t apply.
For example, the alternative exchange community is not subject to the Financial Services Conduct Authority (FSCA) protection levy and doesn’t charge for the custody of funds.
“It is also no secret that the ‘incumbent’ is more focused on institutional money that the interests of retail investors,” Nel says.
Equity crowdfunding is gaining much popularity across the globe, and it doesn’t look like it will slow down soon.
The World Bank, for instance, estimates that the global equity crowdfunding sector will be worth more than $93-billion by 2020.
Upraise.Africa is also putting the funding model on the map. It made headlines recently by facilitating a R34-million capital raising exercise for Intergreatme — a business that describes itself as a “platform that provides users with a secure, simple and effective way to share personal information with anyone”.
Qadir says the platform enables the trust to be built between investors and entrepreneurs and in doing so creates a supportive business ecosystem.
“And now crowdfunding investors can trade their holdings on the ZAR X platform,” she says.
“We have cracked the code. We have now derisked the proposal. We give investors the option to exit by allowing them to sell their shares at will. Usually, and in the current format, investors are tied up in an equity crowdfunding investment for between 6–8 years.
“We also aim to disrupt the country’s traditional funding landscape,” she adds, “which is rather limited and restrictive at that.”
As the IPO model certainly remains very viable for certain businesses of size wishing to launch into the public markets, it is not for everyone.
After these stock exchanges, the next biggest stock market in Africa is Mauritius, followed by Tunisia and Namibia.
Business Maverick had reported recently that it is a capital-raising method on the decline, and Nel says that they “are simply seeing more opportunities for investors and founders looking for methods that better fit their needs than what the traditional incumbents are offering”.
“The compliance costs of being listed on the bigger boards are devastating, and private money and smaller enterprises just find some of the disclosure requirements too cumbersome and restrictive,” he adds.
The Financial Sector Conduct Authority,(FSCA), (the South African market conduct regulator of financial institutions that provide financial products and financial services, financial institutions that are licensed in terms of a financial sector law, including banks, insurers, retirement funds and administrators, and market infrastructures) is still in the process of finalising regulations pertaining to crowdfunding, after releasing its draft proposals in mid-2017. The lack of regulation has been cited by some in the sector as the reason why equity crowdfunding has not taken off in South Africa as it has in more advanced economies.
But ZAR X and Uprise.Africa thinks their deal could be the catalyst needed to kick-start it all.
The World Bank believes the potential market for crowdfunding is significant.
It estimates in its report: Crowdfunding’s Potential for the Developing World that there are up to 344 million households in the developing world able to make small crowdfund investments in community businesses.
“These households have an income of at least $10,000 a year, and at least three months of savings or three months savings in equity holdings. Together, they have the ability to deploy up to $96-billion a year by 2025 in crowdfunding investments,’’ the report noted.
South Africa’s ZAR X Is Not As Small As You Think
ZAR X, one of South Africa’s newest stock exchanges, was granted an operational license in 2016 to operate by the Financial Services Board (FSB). ZAR X commenced operations on Monday, 5 September 2016.
Etienne Nel, ZAR X CEO, says the approval signifies a new era in tech-friendly and user-focused share trading. He said:
“ZAR X creates choice and offers corporate South Africa and the public at large a new opportunity to reduce unnecessary red tape, speed up transaction times and open up equity-based wealth creation to sectors of the South African population that for far too long have been largely excluded from full participation in the financial markets.”
ZAR X listings requirements are largely principles-based, enabling the process of a more flexible and efficient listing. ZAR X will initially offer a primary board for conventional company listings, an investment entities board that will cater for structured products and exchange-traded funds, and a ‘restricted market’ for BBBEE shares, Agri shares and other restricted securities which can only be traded within a clearly defined investor base.
Senwes and Senwesbel were the first companies to list on the Exchange commencing trading on Monday, 3 October 2016.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.
Good day for South African businesses, bad day for their Nigerian counterparts. This is because there are still so many issues surrounding equity crowdfunding in Nigeria. Below, we discuss the legal implications of crowdfunding in Nigeria more intensely.
Crowdfunding sometimes appears the only alternative for start-ups, in the face of stifling interest rates on loans from banks and financial institutions, and lack of funds from family and friends as well as the absence of venture capitalists and angel investors. Crowdfunding is a way of funding a project or venture by raising small amounts of money from a large number of people, typically via the Internet. Here is a quick grasp of reality.
The United States
The United States’ Securities and Exchange Commission has made a lot of rules on Crowdfunding which will enable eligible companies to offer and sell securities through crowdfunding. Thus in the US, all transactions under Regulation Crowdfunding take place online through an SEC-registered intermediary, either a broker-dealer or a funding portal. A company is to raise up to a maximum aggregate amount of $1,070,000 through crowdfunding offerings in a 12-month period. However, there is a limit on the amount individual investors can invest across all crowdfunding offerings in a 12-month period. Securities purchased in a crowdfunding transaction generally cannot be resold for one year.
South Africa.
There is no substantial legislation on crowdfunding in South Africa, except that equity crowdfunding is a form of securities. However, South’s Africa’s first equity crowdfunding platform Uprise.Africa was launched after being told by the Financial Services Board (FSB) that the platform does not fall foul of the Collective Investment Schemes Act, the platform’s founder and COO Patrick Schofield said. Inge Prins, the Chief Marketing Officer Uprise.Africa, had hinted the platform, in one of its numerous success instances, paid out investment funds to a local brewery, Drifter Brewery following a successful campaign that raised R3,889,000 (US$293,000), far exceeding its stated goal by almost R1,000,000.
Understanding How Crowdfunding Works
Crowdfunding refers to raising money from the public (who collectively form the “crowd”) primarily through online forums and social media.
Crowdfunding models include: Donation-based crowdfunding (in which donors are not typically granted anything in return for their donation)
Rewards-based crowdfunding (in which backers contribute funds in exchange for some reward–in many cases the item produced by the campaign)
Equity crowdfunding (Equity crowdfunding refers to raising money from small public investors (who collectively form the “crowd”) primarily through online forums and social media. In exchange for relatively small amounts of cash, investors get a proportionate slice of equity in a business venture).
Debt/lending crowdfunding (in which lenders provide money and expect their loan to be paid back with interest).
Crowdfunding For Private Companies Cannot Work Unless Nigeria’s Companies And Allied Matters Act (Nigeria’s Chief Company Legislation) Is Amended.
The idea of having crowdfunding for companies is that the general public would be allowed to contribute towards the formation of the companies. Now while the public can contribute to an idea, the same is not possible for a company. By section 22(5) of Nigeria’s CAMA, it is impossible for a private company to invite the members of the public to subscribe to its shares. It is also impossible for equity crowdfunding to work because the idea of equity crowdfunding is that the public funds the formation of the company expecting to be repaid their contributions by way of shares in the company.
Again, under Section 22 of CAMA, the maximum number of persons a private company shall have shall not exceed fifty, not including persons who are bona fide in the employment of the company.
Nigeria’s Securities and Exchange Commission and Crowdfunding
The Commission determines governs all company securities in Nigeria. Section 13 of the Investment and Securities Act (the chief Act that regulates securities of companies in Nigeria) empowers the Commission to:
regulate all offers of securities by public companies and entities;
register securities of public companies;
prepare adequate guidelines …necessary for the establishment of securities exchanges and capital trade points.
register and regulate the workings of venture capital funds and collective investments schemes in whatever form;
Consequently, by Section 67(1) of the Act, 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 relevant provisions of Act are duly complied with.
To this effect, the SEC, which was empowered to do so, has gone ahead to give the listing requirements for any company in Nigeria to include that the company must be registered as a public limited company with no restrictions on the transfer of fully paid shares; have a minimum of three (3) years operating track record; have a pre-tax profit from continuing operation of not less than N300million cumulatively for the last three (3) fiscal years and a minimum of N100 million in two (2) of these years. Hence, since equity crowdfunding is ideally a thing for new, mostly private companies limited by shares, there is no way any of them would be able to fulfill the listing requirements, to be able to offer their securities to the public.
The continued ban on equity crowdfunding in Nigeria by SEC, therefore, is not a surprise, even though the Commission said it is looking at the crowdfunding rules in the US and Canada.
The SEC believes that crowdfunding cannot be effective in Nigeria in the meantime because of a lack of rules.
Bottom Line
While equity crowdfunding remains banned in Nigeria, donation and reward-based crowdfunding are however excluded from the SEC’s regulatory remit. This explains why there are a number of donation crowdfunding platforms, and not one for equity crowdfunding. Nigeria’s first equity-based crowdfunding platform, Malaik, launched in 2015 is now down and is up for sale at $3795 on HugeDomains.com, while other donation-based platforms such as Donate-ng.com, and Imeela have since carried on.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based Lawyer with special focus on Business Law, Intellectual Property Rights, Entertainment and Technology Law. He is also an award-winning writer. Working for notable organizations so far has exposed him to some of industry best practices in business, finance strategies, law, dispute resolution, and data analytics both in Nigeria and across the world.
