Crowdfunding is on its way to extinction in Nigeria. The Securities and Exchange Commission (SEC) recently disclosed that the practice will be inhibited by certain provisions of the Companies and Allied Matters Act (CAMA) and the Investment and Securities Act (ISA).
This new development may not be a good news to SMEs, which are estimated to make up 96% of Nigerian businesses. Rather than asking for funds from Venture Capitalists, angel investors and banks, — who largely consider investment in startups and SMEs highly risky — small and medium scale entrepreneurs can seek contributions from thousands of people through crowdfunding. SMEs hold a compelling growth potential, which if exploited, could contribute immensely towards building a sustainable Nigerian economy.
The case for regulating crowdfunding
In most western countries, crowdfunding often takes the form of selfless pledges. It may be in support of a social cause like bringing food to the less fortunate, grants for poor countries or funding a technology company that adds value to others.
However, crowdfunding in Nigeria is still two-faced. Its advantages are also risk-laden. Take the story of Dolapo Jasmine Igboin, whose successful campaign on GoFundMe helped her to complete her medical programme. While her story lends credence to the validity of crowdfunding, there are also many cases of highly suspicious campaigns; like the alleged fundraising scam in the case of Mayowa. After successfully raising funds for health purposes, one Aramide Kasumu alleged that the family had no intentions of using the money for her treatment. Sadly, she passed on barely a week ago and there has been no update on the funds generated from the public.
These risks make regulatory laws for crowdfunding imperative. However, it doesn’t warrant outright prohibition.
Cues from international regulatory laws
The government needs to realize that times have changed and the laws have to reflect the current trends.
In the USA, the Jumpstart Our Business Startups (JOBS) Act was passed in 2012 to permit equity crowdfunding. This has potentially opened up a huge new pool of investment capital in the country.
Similarly, in the UK, the Financial Conduct Authority (FCA), stipulates that investments can be made — directly or indirectly — into new or established businesses through buying shares or debt securities on crowdfunding platforms (otherwise known as investment/equity crowdfunding).
Donation and reward-based crowdfunding are exempted from FCA’s regulatory remit, which explains why crowdfunding platforms like Kickstarter and Indiegogo continue to flourish. And neither of the platforms are looking to go into equity crowdfunding anytime soon.
While the Nigerian regulation appears to prohibit all kinds of crowdfunding, the clarity and flexibility in the US and UK regulations have provided renewed hope for potential crowdfunding recipients.
Without question, a law is needed to prevent exploitation. However, a blanket prohibition of crowdfunding may not be the way forward. A proper and less restrictive legislation will make crowdfunding an expedient way to raise capital for struggling SMEs in Nigeria.
Nigerian startups raised $377m in 2019, more than twice what they did in 2018. Find out more when you download the full report.