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.

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