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Nigerian crowdfunding startups are finally coming under heavy regulation

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After months of speculations and years of lip service, Nigeria’s Securities and Exchange Commission (SEC) is making concrete plans to regulate crowdfunding platforms. Over the weekend, the SEC released an exposure draft containing guidelines for investors and crowdfunding operators.

But before we dive into the esoteric guidelines, what is crowdfunding?

What is crowdfunding?

According to the SEC, crowdfunding is the process of raising funds to finance a project or business from the public through an online platform.

Crowdfunding is “all about allowing anybody to raise money for any idea,” said Slava Rubin, co-founder of US crowdfunding platform Indiegogo, in 2010.

Crowdfunding exists in three forms: donation-based, reward-based and equity-based crowdfunding. In 2016, crowdfunding helped to raise over $730 million for businesses globally.

In Nigeria, a number of such platforms exist. According to Banwo & Ighodalo (B&I), a Nigerian law firm, these platforms have become attractive options for raising business finance due to the difficult nature of getting bank loans.

Most crowdfunding platforms in the country are in the agricultural sector such as Farmcrowdy, Pork Money and Thrive Agric. To a reasonable extent, these startups have made it easier for people to invest in the agricultural sector and make some money.

But they carried a regulatory risk. For the last four years, the SEC made periodic statements threatening to regulate crowdfunding. 

At a fintech roundtable organised by B&I, Agama a director at the SEC shared that companies that collect money from people to fund their operations are engaging in capital market activities. “You must be regulated to protect the investors,” he said.

In 2016, the SEC banned these platforms from engaging in equity crowdfunding. Existing Nigerian business laws also prohibit private companies from raising equity from the public without regulatory authorization.

As a result, interest or debt crowdfunding remains the prevalent model in Nigeria according to B&I.

However, the new SEC draft regulation is the first holistic approach to govern the industry. The new rules are designed to protect investors and fix different guidelines for platforms to follow.

The new SEC crowdfunding regulation

For starters, all crowdfunding platforms must be regulated by the SEC.

The regulator created a new registration category just for them. “A dealer registered by the Commission for the purpose of crowdfunding will be considered a ‘Restricted Dealer’ and can only carry out activities covered under this rule.”

But registration is not cheap. Operators have to provide a capital requirement of ₦100 million ($255,461). Plus, they also have to observe tight rules regarding storing transaction data.

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Like other types of investment businesses, crowdfunding operators must send a report of all financial transactions on their platforms to the SEC at the end of the year.

The new guidelines also stipulate that small and medium enterprises can raise funds via crowdfunding. And they can only raise a maximum of ₦50 million ($127,730) to ₦100 million ($255,461) depending on their scale.

According to the rules, all funding requests must close within 60 days. If it extends, the issuer must close or withdraw the offering and allow investors to withdraw their interest within 48 hours.

Is there a problem

The new guidelines could cause confusion for agric tech startups. The new regulation created another new category for them: Digital Commodities Investment Platforms.

“A digital platform that connects investors to specific agricultural or commodities projects for the purpose of sponsoring such projects in exchange for a return.’

In a very ambiguous way, it said that these platforms can continue to operate if they apply for a “no objection” certificate before the new guidelines become active. Also, they will not be able to host their projects on their own platforms.

We’ve requested for comments from a number of agric techs but none has responded at press time.

What does this mean?

No doubt, the new regulations are designed to protect investors. But the ₦100 million capital required to operate a crowdfunding platform puts a significant strain on many startups.

Crowdfunding startups in Nigeria have not secured significant investor interest over the years. Farmcrowdy’s $2.4 million total funding is the largest for any startup in this business. Most have raised under $1 million, for instance, Thrive Agric raised $150,000 seed funding from YCombinator in March 2019.

The new regulation means many of these startups will have to shut down, raise new capital fast or partner with another company. Partnerships could be the easiest route if they serve only as technology providers.

According to the guidelines, SEC-registered bodies like Exchange, Dealer, Broker or Alternative Trading Facility can operate crowdfunding platforms. Startups could partner with any of these bodies to remain in business.

It is a difficult call.

The new regulation is only a draft at the moment, but if it goes into effect, it could cause a lot of disruption for crowdfunding companies

The post Nigerian crowdfunding startups are finally coming under heavy regulation appeared first on TechCabal.

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