The Legality of the SEC Proposed Rules on Crowdfunding in Nigeria

The Legality of the SEC Proposed Rules on Crowdfunding in Nigeria

1. Overview

In a move to regulate crowdfunding in Nigeria, the Nigerian Securities and Exchange Commission (SEC) in March 2020, exposed its Proposed Rules on Crowdfunding in a bid to regulate crowdfunding activities in the country (the Draft Rules) and invited comments from the general public. The Draft Rules seek to provide a framework for the regulation of debt and equity crowdfunding activities in Nigeria. This commentary provides an overview of the Draft Rules and examines the power of the SEC to regulate crowdfunding in light of the provisions of the Investment and Securities Act, 2007 (ISA).

2. The Draft Rules

The Draft Rules define crowdfunding as the process of raising funds to finance a project or business from the public through an online platform. It provides the key participants in crowdfunding as the issuers (which are medium, small and medium enterprises (MSMEs)), crowdfunding portals, crowdfunding intermediaries and investors investing in crowdfunding investment instruments.

The Draft Rules appear to apply only to debt and equity crowdfunding, therefore leaving other forms of crowdfunding outside its ambit.[1] We have discussed the distinctive types of crowdfunding here.

Issuers and Investors[2]

The Draft Rules specifically provides that all MSMEs duly incorporated as companies in Nigeria and with a minimum of 2-years operating track record, are eligible to raise funds through a crowdfunding portal registered by the SEC, in exchange for the issuance of shares, debentures, or other investment instruments determined by SEC.

The Draft Rules exempt eligible issuers[3] from certain requirements under the ISA. Under the Draft Rules, issuers are authorised to offer or sell securities or other investment instruments without the need for prior registration of the securities or investments pursuant to the ISA. The Rules may be referring to the requirements of section 67 of the ISA that only a public company, and  a statutory body or bank established by an Act of the National Assembly and empowered to accept deposits and savings from the public or issue its own securities, are authorised to offer or sell securities to the public.[4] The SEC is however empowered under section 313(1)(f) of the ISA to prescribe that the provisions of the ISA ‘shall not apply or shall apply with such modifications (if any) as may be specified in the regulations to any person or class of persons or any securities or class of securities or to any transaction.’  In light of section 313(1)(f), the SEC has issued the Draft Rules functionally exempting MSMEs from the requirements of incorporating as public companies before they are eligible to offer securities to the public.

The Draft Rules however prescribe certain limitations on MSMEs in issuing securities to the public:

1. such MSMEs must be incorporated in Nigeria and accredited and/ or accepted by a crowdfunding portal to use its platform; and
2. a maximum amount of securities or investment instruments that can be offered/ sold by an issuer within a 12 – month period. Micro enterprises are not permitted raise above NGN50 million; small enterprises above NGN70 million and medium enterprises above NGN100 million.

These limits do not apply to MSMEs operating as digital commodities investment platforms or any other MSME exempted from those limitations by the SEC. Retail investors are also limited to investing no more than 10% of their annual income on all crowdfunding platforms in a year. High net worth and qualified institutional investors have no investment limits. The issuance of securities or investment instruments under the Draft Rules is only compliant when conducted through a registered crowdfunding portal.

Crowdfunding Portals and Crowdfunding Intermediaries.[5]

The Draft Rules define a crowdfunding portal as a website, portal, intermediary portal, application or other similar module that facilitates the interaction between fundraisers and the investing public.[6]  All crowdfunding portals facilitating investment-based crowdfunding[7] in Nigeria are required to be registered with the SEC. This requirement applies to platforms that are operated, provided or maintained in Nigeria, platforms that though located outside Nigeria, actively target Nigerian investors through promotion of their services in Nigeria, and platforms whose component parts when taken together, are physically located in Nigeria.

The Rules define a crowdfunding intermediary as an intermediary organized and registered as a corporation to facilitate transactions involving the offer or sale of securities or investments through an online electronic platform. Only entities registered with SEC as an exchange, dealer, broker, broker/ dealer or alternative trading facility as prescribed under ISA and SEC Rules may be registered as a crowdfunding intermediary.

The rules applicable to a crowdfunding portal or intermediary do not apply to a technology service provider who merely provides the infrastructure, software or the system to an operator, an operator of a communication infrastructure that merely enables orders to be routed to an approved stock market, and an operator of a financial portal that aggregates content and provides links to financial sites of service and information providers.

Crowdfunding portals are required to register with the SEC, and successful registration is subject to the intermediary meeting the registration requirements contained in the Draft Rules.[8] Crowdfunding portals are subject to disclosure, due diligence, monitoring and reporting obligations concerning issuers on their platform. They are mandated to comply with data protection and privacy rules.

Penalty for Non-Compliance

Crowdfunding portal or intermediary will be liable to fines for non-compliance with the Rules, of not less than NGN1million and an additional sum of NGN10,000 for every day any such violation continues.

Exceptions

Certain entities and business ventures are exempted from the provisions of the Rules. Businesses not utilising the internet to raise funds to finance a project or a business will not qualify as being engaged in the business of crowdfunding. MSMEs which are only registered as business names also do not fall within the eligibility provision of the Draft Rules. Therefore, individuals (or sole proprietors) registered as business names will not have access to raise funds from the public through these platforms. Complex structures, public listed companies and their subsidiaries, companies with no specific business plan or a blind pool cannot raise money through a crowdfunding portal. The Draft Rules also appear to exclude private companies who are bigger than MSMEs from the opportunity to access funding through regulated crowdfunding.

3. Analysis of The Power of the SEC to Regulate Crowdfunding

By virtue of the provisions of the ISA, the SEC has amongst its other functions, the duty to regulate investments and securities business in Nigeria, register and regulate securities exchanges, capital trade points, futures, options and derivative exchanges, commodity exchanges, and any other recognised investment exchange and to regulate all offers of securities of public companies  and register securities of public companies.[9]  The SEC is also expressly permitted to make rules and regulations generally for carrying out the principles and objectives of the ISA.[10]

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