A few weeks ago, the Securities and Exchange Commission, Nigeria, released a proposed regulation to guide the country's crowdfunding activities. Though a good initiative, the high bar set by the regulator raised some questions about the future of crowdfunding in Nigeria.
Prior to this regulatory framework, raising funds from the public by private companies incorporated in Nigeria was illegal. Thanks to a few legal loopholes, these platforms have flourished across sectors such as agriculture, consumer lending, and charity.
As per the proposed regulations, operators of crowdfunding platforms need to have a paid-up capital -- equity funding -- of ₦100 million ($256,000) and must have been registered as a dealer or exchange platform by the SEC.
By virtue of those requirements, most crowdfunding platforms can only raise funds through an intermediary that has all the capital requirements -- a condition that can prove tough for regular startups to meet.
On good intentions and better options
The agricultural sector is one that has been heavily disrupted by crowdfunding. Given the reluctance of banks to grant high-risk funding, adopting the crowdfunding model for investments has helped startups thrive in the agricultural space.
However, crowdfunding in this space and other sectors has largely operated without any form of regulation. A scenario that could lead to the rise of fraudulent platforms offering unrealistic monetary returns.
According to Grace (not real name), an associate partner at an investment advisory firm, the SEC's regulations are meant to provide more due diligence information on issuers, market standardisation, and market data on crowdfunding, while also protecting retail investors, among other things.
While this seems laudable, as Francis, a CEO of a crowdfunding platform we spoke with insists, a number of stakeholders were not involved in the discussion process for the proposed regulations, and current provisions could end up hurting the sector.
One of the talking points of the proposed regulation is the fact that the aggregate amount that can be issued in a 12-month period by medium, small, and micro-enterprises, cannot exceed, ₦100 million ($256,000), ₦70 million ($180,000), and ₦50 million (~128,000), respectively.
These limits were set based on the definitions of MSMEs by the Small and Medium Enterprises Development Agency of Nigeria (SMEDAN).
As per SMEDAN, micro-enterprises have less than 10 employees and assets (excluding lands and buildings) less than ₦5 million ($12,971), small enterprises 10 to 49 employees and ₦5 million ($12,971) - less than ₦50 million ($259,421), and medium enterprise, 50-199 employees and ₦50 million ($129,710) - less than ₦500 million(~$1.3 million).
According to SMEDAN's specification the number of employees takes precedence if a company's turnover is higher than the stated threshold.
Grace believes that these amounts are not realistic, especially for agritech platforms that have fewer employees and fewer assets but generate high turnovers because of the opportunity to scale.
For her, this could be better set as an initial limit that would subsequently be increased once the issuer or project has satisfied due diligence and know your customer (KYC) requirements from the first funding round.
The new regulations require three sponsored individuals, among whom must be a compliance officer and the company's managing director, but Grace believes that this could be restrictive, and it could be limited to just one sponsored individual.
Coming to terms with the reality
For Bridget (not real name), a board advisory member for a crowdfunding platform, startups would need to be proactive and creative in light of the SEC's regulations.
While the proposed guideline demands evidence of a ₦100 million ($256,000) paid-up capital, Bridget reveals that the SEC does not specifically state that the said amount should be seated in an escrow account.
She refers to the SEC's requirement for exchanges to show evidence of minimum paid-up capital in bank balances, fixed assets, or investment in quoted securities, explaining that the same could apply to crowdfunding platforms upon confirmation.
Though only entities registered with the SEC as brokers or dealers can register a crowdfunding platform, startups can register as restricted dealers only able to carry out crowdfunding activities; such startups will still have to meet the same lofty requirements.
However, as Francis believes, this clause might lower the entry barrier for just a few more participants.
"Most startups, by their digital nature, are asset-light, and if anyone of them had access to a ₦100 million in equity funding, they would not bother raising money through crowdfunding," he argues.
"The crowdfunding route is taken in the absence of regular investors, and in the absence of such money, startups will have no choice but to go through the intermediaries which could be a stifling process."
Francis also points out that the presence of such intermediaries could hinder immediate access to money, especially when there is an urgent need for it.
Grace, however, insists that since the SEC's primary focus is on intermediaries and protecting the investment of the public, startups need to innovate, think around the regulations, and stay steps ahead as has always been the case.
Depending on its possible effects, both Grace and Bridget agree now will be a perfect time for startups to consider all available options. A restricted dealership? A partnership or an acquisition strategy with a registered broker? or a pivot?
Nevertheless, key players agree that more engagement is needed between these platforms and the regulators.
"Most times regulators are not fully aware of what is going on in the market. They require insight from active players in that market. The solution is not to bypass, but to proactively engage them," she says.
Fortunately, it appears the SEC is giving room for affected stakeholders to share their thoughts on the proposed crowdfunding rules as it is presently accepting comments (email) on the current exposure draft.