The Securities and Exchange Commission, SEC, has issued updated guidelines and rules governing the operation of Crowd Funding activities in Nigeria.
This follows an exposure draft issued in May 2020 as reported by Nairametrics.
Key highlights of the new SEC regulations
- SEC introduced Crowd Funding Intermediaries who will facilitate crowdfunding transactions such as offer for sale of securities or instruments through its portal.
- This means anyone seeking to raise money through a crowdfunding service will have to go through a Crowd Funding Intermediary (CFI).
- Thus, a fundraiser (the initiator of the fund) will need to go through a CFI web portal to raise capital.
- The new rules also limit the amount retail investors can invest in a crowdfunding transaction to just 10% of their net annual income in a year.
- This means individuals cannot invest more than 10% of their net salaries in crowdfunding activities. But this excludes High Networth Individuals who do not have limits.
Information contained in the regulation highlights
In summary, this is SEC Nigeria’s attempt to provide a framework around who can participate in crowdfunding issuances, drive increased transparency around Crowdfunding issues AND create more accountability to investors.
Specifically, the new rules specify the following four (4) participants in a crowdfunding issuance.
- Fundraiser, Crowd-Funding Intermediary, Investors, and Custodians.
- There is also a provision for applications for a self-regulatory trade association to facilitate Crowdfunding supervision.
Definitions of the participants per the new rule
- Fundraiser: refers to the originator, maker, or obligor of the investment instrument to be issued pursuant to these Rules.
- Crowdfunding Intermediary (CFI): An entity organized and registered as a corporation to facilitate transactions involving the offer or sale of securities or investment instruments through a Crowdfunding Portal (CFP);
- Investors: As defined by the act; relates to end takers of the instruments and products from the crowdfunding issue. The SEC attempts to differentiate between High-net-worth individuals, Retail Investors, and Qualified Institutional Investors.
- Custodians are the banks who will hold the funds contributed on behalf of the parties.
Requirements
The four categories of participants specified in the rule are required to register with the SEC for purposes of taking part in Crowd Funding activities. Whereby the SEC will approve or reject registration requests depending on the eligibility criteria as outlined in the new rules on Crowdfunding.
The eligibility criteria vary by participant type. As an example,
- Fundraisers must be entities incorporated in Nigeria and have been in operation for at least two years. Or have technical partners who meet the 2-year operating track record requirement.
- Crowdfunding Intermediaries have a lot more onerous set of requirements for registration. This is because these intermediaries are the core participants saddled with creating and operating crowdfunding portals (i.e., Platforms/marketplace for the crowdfunding issue).
- Notably, both the Crowdfunding intermediaries and the actual Crowdfunding platforms need to be registered.
- Custodians: As the name implies will facilitate the aggregation of funds deposited and only release to the Fundraiser subject to the criteria of each issuance being met.
Workflow highlights for each Crowd Funding issuance
The workflow highlights for each crowdfunding issue include;
- Fundraisers need to engage a Crowdfunding Intermediary (CFIs) to facilitate the pooling of funds from investors via the approved Crowdfunding Portals (CFPs).
- These CFIs will ensure that there are sufficient disclosures by Fundraisers to Investors about the purpose and use of funds.
Notably the new rules prohibit misleading information to investors.
- The amounts being raised will be safe kept at a Custodian for the duration of the fund-raising window and released to the Fundraiser subject to meeting criteria.
- Crowdfunding Intermediaries and the Portals are required to provide a plethora of information to both SEC and Investors. The portals also help ensure compliance with approved guidelines (e.g. not exceeding target amounts approved for each issuance)
In conclusion
- The new rule on Crowdfunding is a welcome development. Specifically, the introduction of technology portals to enhance disclosures about funds should bring more transparency into the sector and facilitate investor due diligence.
- Furthermore, the introduction of eligibility criteria for the various participants should serve to increase accountability whereby Fundraisers will need to provide increased levels of assurance with regards to the use of funds whilst Crowdfunding intermediaries will be keen to facilitate investor due diligence as they seek to protect their reputation and prevent censure from the SEC.
- One observation however is that the new SEC rule is not explicit about the issue of recovering investor funds in the event of registered entities failing. This may explain why the SEC is keen to differentiate between classes of investors (i.e. High-net-worth, Institutional investor, and Retail investor) and then further require that retail investors, who are arguably the most vulnerable to financial shocks, do not invest more than 10% of their annual income in these schemes.
