Nigeria's Securities and Exchange Commission, SEC, has issued updated guidelines and rules governing the operation of Crowd Funding activities in Nigeria.
In a similar vein, SEC also introduced Crowd Funding Intermediaries to facilitate crowdfunding transactions including offering securities or instruments for sale through its portal.
By implication, anyone seeking to raise money through a crowdfunding service will have to go through a Crowd Funding Intermediary (CFI).
The new rules also limit the amount retail investors can invest in a crowdfunding transaction to just 10% of their net annual income. i.e. individuals cannot invest more than 10% of their net salaries in crowdfunding activities. This however excludes High Net-worth Individuals, who are spared any limits to their donation.
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.
New rules and sundry amendments covering fund management products, nominee companies, CIS, admin fees and crowdfunding https://t.co/5BbflkW1z8 pic.twitter.com/hHROZUj7e7
— SEC Nigeria (@SECNigeria) January 25, 2021
Requirements
The four categories of participants specified in the rule are required to register with the SEC to take part in Crowd Funding activities. The SEC will approve or reject registration requests depending on the eligibility criteria as outlined in the new rules on Crowdfunding.
The eligibility criteria include:
- 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.
The new rules also prohibit misinformation of 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 pre-stated 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).
The new Crowdfunding regulations are a welcome development. The introduction of technology portals to enhance disclosures about funds, especially, would bring more transparency into the sector and facilitate investor due diligence.
Find The New SEC Nigeria Guidelines for Crowdfunding Here.