WHAT NEW SEC REGULATION MEANS FOR CROWDFUNDING
The Securities and Exchange Commission (SEC) has a statutory duty to promote investor education and train persons in the capital market. The Securities and Exchange Commission (SEC), the apex regulatory agency for the Nigerian capital market, has released new rules to govern crowd-funding activities in Nigeria.
Crowd-funding is the practice of raising funds from a segment of the public to fund a project. The funds are raised from the public are often negligible amounts of money raised through an internet platform, in return for equity in the business venture or an ascertainable profit.
Under the new regulation, crowdfunding can only be raised through an online portal that must be operated by crowd-funding intermediaries who must be registered by SEC and have a minimum paid-up capital of N100 million and a current Fidelity Insurance Bond valued at 20 percent of the paid-up capital, among other requirements.
This means that capital requirement will prove difficult for existing and intending crowd-funding portals to achieve but can be surmounted through raising additional equity capital or consolidation, a report by Advocaat Law Practice notes.
The proposed regulations further state that a person is considered to be facilitating, operating, providing, or maintaining a crowd-funding portal in Nigeria if the platform is operated, provided or maintained in the country or the platform is located outside Nigeria but actively targets Nigerian investors and components of the platform, when taken together, are physically located in Nigeria even if any of its components, in isolation is located outside the country.
A crowd-funding portal that is located outside Nigeria will be considered as actively targeting Nigerian investors if the operator or representative promotes the platform directly or indirectly in Nigeria. This seeks to put an end to crowd-funding portals incorporating their companies outside Nigeria to avoid registering with the SEC but actively operating and raising funds in Nigeria.
In addition to the foregoing, the regulation places several obligations on crowd-funding portals that must be fulfilled for registration with the SEC, and these include: disclosure of fundraisers that includes details of ownership, management, and overall controls structure in place at the time of the offering; the portal must display conspicuously information on the fundraisers – a general risk warning on participating and information about complaints and a grievance redress mechanism.
Similarly, crowd-funding portals will further be mandated to take adequate measures to reduce the risk of fraud such as obtaining background and securities enforcement regulatory history checks on the issuer and must carry out due diligence, conduct background checks, and verify the accuracy and viability of the business proposition of the fundraisers intending to use its platform, among others.
For the fundraisers, the regulation states that only MSMEs incorporated in Nigeria and operating for a minimum of two years or less than two with a technical partner who possesses a two-year operating record will be eligible to raise funds through a crowdfunding portal.
According to the SEC document, an eligible fundraiser shall maintain an accurate list and details of all investors post-issuance, which shall include the full names, address, email, and the number of units and monetary value of investment instruments and which shall specify investors from countries other than Nigeria.