SEC to strictly regulate crowdfunding, issues new rules

The Securities and Exchange Commission (SEC) has proposed a new set of rules that will regulate crowdfunding businesses and deepen the capital market in Nigeria.

The commission had some weeks back, announced its plans to regulate the crowdfunding business in Nigeria in order to reduce the risks associated with it for investors and financiers.

Crowdfunding is the practice of raising a small amount of fund from a large number of people typically through the internet and has been an alternative source of finance for businesses. It is the use of small amounts of capital from a large number of people to finance a new business venture.

Some of these rules which were obtained from the commission’s website are as follow:

  • All Micro Small and Medium Enterprises (MSMEs} incorporated as companies in Nigeria with a minimum of two years operating track record shall be eligible to raise funds through a crowdfunding portal registered by the commission, in exchange for the issuance of shares, debentures or any other investment instrument.
  • Issuance of securities or other investment instruments shall be conducted through a registered crowdfunding portal.
  • The term issuer as used in the rule, shall include all entities controlled by or under common control with the issuer and any predecessors for the purpose of calculating the aggregate amount of securities and investment instruments offered and sold by an issuer under this rule and determining whether an issuer has previously sold securities or investment instruments within a 12-month period.
  • The aggregate amount of securities sold to any investor in investment-based crowdfunding during the 12-month period shall not exceed 10% of their annual income in a calendar year for retail investors. However, sophisticated, high net worth and qualified institutional investors are not subject to any limits.
  • Some exemptions to certain provisions in this rule include: the issuer may offer or sell securities or investment instruments without the need for prior registration of the securities or investments as long as the issuer is an entity incorporated in Nigeria and accredited and /or accepted by a crowdfunding portal to utilize its platform.
  • The aggregate amount of securities or investment instruments that can be offered and sold by the issuer within a 12-month period shall comply with the following limit: medium enterprises can only raise a maximum amount not exceeding N100 million, small enterprises can only raise a maximum amount not exceeding N70 million and micro-enterprises can only raise a maximum amount not exceeding N50 million.

The commission also set out some rules for the operation of crowdfunding portals.

Crowdfunding portal is a website, portal, intermediary portal, application, or other similar modules that facilitate interaction between fundraisers and the investing public.

Some of the requirements for crowdfunding portals are:

  • Every platform that facilitates interaction between fundraisers and the investing public (crowd) for the purpose of any investment-based crowdfunding shall be registered with SEC as a crowdfunding portal.
  • A crowdfunding portal that is located outside Nigeria will be considered as actively targeting Nigerian investors if the operator or its representative, promotes directly or indirectly the platform in Nigeria.
  • A crowdfunding portal may be registered and operated only by an operator registered with the commission as a crowdfunding intermediary
  • Only entities registered with the commission as an exchange, dealer, broker, broker/dealer or alternative trading facility as prescribed under the Act and the SEC rules and regulations may be registered as a crowdfunding intermediary.

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