New regulations for crowdfunding in Nigeria, long anticipated, have been introduced by the Securities and Exchange Commission (SEC). Among the key highlights is a requirement for crowdfunding intermediaries to maintain a minimum paid-up capital of ₦100 million.
Crowdfunding, a mechanism that pools small amounts of money from many individuals, has emerged as a significant alternative for funding startups and small businesses. While effective, it has also been exploited by fraudulent operators, raising calls for stricter oversight to protect investors.
New SEC Guidelines for Crowdfunding
In April 2020, the SEC released a draft of proposed guidelines for crowdfunding in Nigeria. These rules have now been finalized, aiming to ensure investor protection while fostering genuine fundraising activities.
Under the new rules, only Micro, Small, and Medium Enterprises (MSMEs) incorporated in Nigeria with at least two years of operational history can raise funds through registered crowdfunding platforms. Limits have also been set for how much can be raised:
- Medium enterprises: up to ₦100 million
- Small enterprises: up to ₦70 million
- Micro-enterprises: up to ₦50 million
Commodities Investment Platforms (CIPs), which fund specific agricultural or commodity-based projects, are excluded from these limits.
Operating Crowdfunding Portals
Crowdfunding portals must now register as intermediaries with the SEC to continue operations. This requirement affects platforms like PiggyVest, Pettysave, FarmCrowdy, and ThriveAgric. Additionally, these platforms must meet the ₦100 million capital requirement—a challenge for smaller operators, who may need to consolidate to comply.
SEC’s Head of Registration and Market Infrastructure, Timi Agama, emphasized that these measures are focused on ensuring sustainability and investor protection. The commission has left decisions like mergers to the companies themselves, focusing solely on setting operational benchmarks.
PiggyVest, for instance, has assured users that its operations will remain unaffected. Co-founder Odun Eweniyi stated that the platform would obtain any necessary licenses to ensure compliance.
Responsibilities of Intermediaries
Under the new rules, intermediaries bear significant responsibilities, including:
- Verifying the legitimacy of businesses listed on their portals.
- Educating investors about associated risks.
- Providing disclosures about potential investment dangers.
Intermediaries must also conduct due diligence on fundraisers, ensuring that listed projects meet certain credibility thresholds. This is aimed at curbing fraudulent schemes that exploit public trust.
Keeping Fraudulent Actors Out
Fraudulent crowdfunding schemes have long plagued Nigeria’s financial ecosystem. Ponzi schemes like MMM or ambiguous entities lacking clear business objectives have scammed many investors.
The SEC now prohibits entities with opaque ownership structures or undefined business plans from raising funds via crowdfunding portals. This ensures transparency and accountability, making it harder for bad actors to infiltrate the market.
Investor Safeguards
The new regulations also offer protection to investors. Before investing, individuals must sign a risk acknowledgment form, confirming their understanding of potential losses. Investors also have the right to cancel investments:
- Up to 48 hours before an offer closes, with refunds processed within two days.
- If there’s a significant adverse change in the project or fundraiser’s circumstances before the offer closes.
These safeguards aim to balance investor freedom with risk awareness, promoting a safer crowdfunding environment in Nigeria.
The SEC’s new rules are a significant step toward fostering a trustworthy crowdfunding sector while protecting investors. Although compliance may be challenging for smaller platforms, the regulations aim to build a more secure and sustainable financial ecosystem.
