Given the complexities in the means of doing business in Nigeria, the availability of funding continues to pose a major Achilles hill for many start-up enterprises in the country. Arguably, one of the easiest means of raising funds is by offering a form of stake in the business to the investors in exchange for capital.Be that as it may, the level of investors’ participation in contributing to new business start-up is not significant when compared to their participation in the process of investing in established businesses.
Furthermore, the bottleneck procedure encountered by start-ups when accessing loan facilities from financial institutions is hinged with high ending interest rate and other regulatory/compliance difficulties.
In view of the foregoing, business owners have devised means such as crowdfunding to raise capital for their businesses.The question of whether this means of raising capital is recognized and/or regulated under the Nigeria law is amongst other things this article seeks to clarify. In addition, the article will give an exposition to the various opportunities available to Micro, Small and Medium Enterprise (MSMEs) under the proposed Securities and Exchange Commission rules for crowdfunding Nigeria (2020).
WHAT IS CROWDFUNDING?
Crowdfunding can be defined as a method in which companies and individuals raise funds from the general public through an online platform to finance a particular project or company. This process involves connecting start-up owners with potential investors.
In line with the above, for an investment scheme to qualify as crowdfunding, certain fundamental elements must be present and these are;
- It must be hosted via a website/online platform;
- It must be an offer open to the general public to finance or sponsor a particular project or business venture;
- The funding rounding must be approved by the Securities and Exchange Commission (“the Commission”);
- Crowdfunding must be conducted by a corporation registered with the Commission as an operator.
FORMS OF CROWDFUNDING
Crowdfunding is usually categorized based on the purpose of the funding. There are three (3) categorization and these are:
- Donation-based crowdfunding: This type of crowdfunding involves people pulling funds or other resources together to sponsor a charitable project with no expectation of reward.
- Reward-based crowdfunding: This mode is usually non-monetary or funds are contributed in return for a product or service.
- Equity crowdfunding: This essentially is a form of funding where the contributing persons are invited to participate in the funding of a project or business to secure a stake in project or business.
Countries in various jurisdictions have embraced crowdfunding as an acceptable mode of raising funds and they have enacted various rules to govern crowdfunding in their territory. In Nigeria, the Securities and Exchange Commission is saddled with the responsibility of regulating the country’s capital market space. The commission on the 28th of March, 2020 released its proposed rules on crowdfunding in the country. This rule is considered long overdue within the Nigerian capital market space as it will open up more opportunities for emerging businesses particularly Micro, Small, Medium and Enterprise (MSMEs). Existing legal framework on crowdfunding would be considered before proceeding to give an overview of business opportunities available under the proposed Crowdfunding rules.
EXISTING LEGAL FRAMEWORK ON CROWDFUNDING IN NIGERIA.
The Securities and Exchange Commission in its official statement released on the 15th of August 2016, suspended all activities relating to the crowdfunding of businesses in Nigeria due to legal complications. The commission stated that the mode of raising capital was not anticipated under the Companies and Allied Matters Act (CAMA) and the Investment and Securities Act 2007 (ISA) and has since then been working on how to incorporate this model into the Nigeria financing structures giving its nature as a viable means of raising capitals for companies or start-ups enterprise.
Notably under Nigeria law, particularly section 22(5) of CAMA forbids a private company 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 or not bearing interest.
The effect of this provision possess legal difficulties for many start-up companies since crowdfunding is usually directed to the general public and a private company is precluded from having not more than 50 members it, therefore, means that many startups cannot engage in equity crowdfunding as this will require the general public invitation.
Accordingly, 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; or
(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:
Provided that nothing in this subsection shall render unlawful the sale of any shares by or under the supervision of any court or tribunal as may be authorized by law.
(2) If an invitation to the public is made in breach of subsection (1) of this section, all persons making the invitation and every officer who is in default or anybody corporate making the invitation shall each be separately liable to a penalty of N500, 000 in the case of a body corporate and N100, 000 in the case of an individual.
Given the nature of the above provision, the question of whether a start-up business qualifies as a public company is based on facts. Whether the start-up can meet up with the strict compliance level required before a company can invite the general public to subscribe to its shares is another question. It is our view that many times business start-ups are usually private and they hardly meet up with the compliance level required of a public company by the Commission.
In the same vein, one will consider whether crowdfunding will qualify as a collective investment scheme under the ISA 2007 since it involves inviting members of the public to invest money in a portfolio scheme. Giving the nature in which crowdfunding is set up section 159 of the ISA is clear as to how a collective investment scheme set-up and crowdfunding will not qualify under same.
CAPITALIZATION UNDER THE PROPOSED RULE
The Commission recently released its proposed rules and guidelines for crowdfunding in Nigeria to accommodate this model of funding within our corporate finance structure. A rule Stakeholders and investors consider as long overdue yet timely given the increasing number of MSMEs in the country.
The below provides a summary of certain key guidelines on crowdfunding in Nigeria;
All Micro, Small and Medium Enterprise (MSEMs) incorporated as a company 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
- All issuance of securities or other investment instruments shall be conducted through a registered crowdfunding portal;
- Only plain vanilla bonds/debentures, ordinary shares, and other accepted investment instruments shall be issued.
- Platforms facilitating interaction between fundraisers and investors for purposes of investment base crowdfunding shall be registered with the Commission as a crowdfunding portal;
- 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 are located in Nigeria;
- 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.
In addition, the Commission must amongst other things ensure 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. Additionally, 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. The rule also ensures that such an operator must not have been convicted for any capital market-related offense,etc.
To ensure investors’ confidence, the guideline set out the grounds upon which a crowdfunding portal can be revoked. 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 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. Accordingly,the crowdfunding portal is obligated to carry out a due diligence check on all prospective issuers intending to use its platform. Crowdfunding platforms shall at all times 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. Further, 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.
OPPORTUNITIES AVAILABLE TO MSMEs UNDER THE PROPOSED RULE.
Considering the increasing number of MSMEs in the country, one sees that the proposed guideline seeks majorly to connect business start-ups with potential investors. The rule accordingly envisages a situation where an existing issuer (Startup) intends to offer or sell its securities or other investments instrument. What is generally required under the rules is that the issuer (Start-up) must be an entity incorporated in Nigeria and accredited and or accepted by a crowdfunding portal to utilize its platform. The rule, however, places a threshold on the maximum amount of money a business enterprise may raise form the aggregate amount of securities or investment instruments sold by the issuer. This entire sale must be within 12 months.
In line with the above, the foregoing is the maximum threshold a business enterprise can raise within the stipulated time of 12 months:
- The sum of 100 million naira may be raised by a Medium enterprise.
- The sum of 70 million naira may be raised by a Small enterprise.
- 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. Also, 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. The implication of this is that where an investor makes a total of 90 million in a particular year such investors will only be allowed to invest 10 percent of their total earning that year. This provision does not, however, apply to sophisticated, high net worth and qualified Institutional investors.
Crowdfunding Nigeria remains unregulated pending the implementation of the rule in Nigeria. However the new guidelines will advance the cause of major MSMEs in the country.Business owners will have access to potential investors whenever they intend to raise capital through this model of fundraising.
Although, we have noticed certain restrictions in the rules such as the amount of investment a retail investor can contribute to a particular business entity, whether section 22(5) of the companies and allied matters act will not be infringed upon etc. while we understand the purport of all this provision and all the new possibilities the rule will provide. We strongly believe that the level of investment should not be determined by the annual income of an investor provided that all compliance requirement and due diligence is carried out on the targeted Issuer. Further, we believe the Commission needs to clarify what it’s intents under the rule“that a company shall be regarded by default as a public company where the number of investors exceeds 50(fifty)” there seem to a lot of ambiguity regarding that provision.
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