For businesses that have crafted a value proposition out of getting people to pool their money together to finance some profitable project, it’s no longer business as usual, apparently.
On Monday, January 25, word got out that Nigeria’s capital markets regulator, the Securities and Exchange Commission (SEC), had put out some new rules and sundry amendments on certain financial instruments and products.
Rules are necessary to keep things running properly. But sometimes, rules also feel like torture. And it’s not unfair to say the SEC’s newly-published rules did take the biggest baton to the back of crowdfunding platforms in Nigeria.
How things got here
Crowdfunding platforms, mostly in the agricultural space, have proliferated in Nigeria over the past few years.
Indeed, a variation of crowdfunding known as crowdfarming is the de-facto favourite model adopted by most of the new-age so-called “agritech” startups in Nigeria. It might even be said that crowdfarming is the most common example of crowdfunding schemes in Nigeria.
This model typically involves pooling funds from both institutional and retail investors with a view to financing specific agricultural projects over a period of time. After a specific period (typically after a farming season), the investors earn specific returns (anywhere between 5 to 30 percent) ontop of their initial capital and the platforms do the payout.
Ideally, such payouts should happen as scheduled, with no stories. But with more than 60 of such crowdfarming platforms now operating in Nigeria, talks of “bad actors” creeping into the space is a given.
For every good guy in Farmcrowdy, for example, there’s a bad guy in HOcorn.
It was always just a matter of time before the space was infiltrated by obscure platforms luring in the unsuspecting public with returns that are too good to be true, and expansive farm operations that simply do not exist, or are terribly exaggerated.
In recent times, there’s been an increasing number of painful tales of “agro-investments gone bad” in Nigeria. Stories of platforms ghosting, two-timing, reneging, and absconding with investors’ funds come payday have been rife lately. And for the longest time, the SEC has talked about regulating the crowdfunding space even though it amounted to mere talk, up until now.
In comes the strong hand of regulation
As spelled out in the newly released document from the SEC, which follows an exposure draft issued in April 2020, companies that “run” on the crowdfunding model will now have to jump through several hoops without falling if they are to stay in business.
The new rules see the SEC introduce Crowdfunding Intermediaries (CFIs) who will facilitate crowdfunding transactions such as offers for sale of securities or instruments through its portal.
This means anyone seeking to raise money through a crowdfunding service will have to go through a Crowdfunding Intermediary (CFI). Thus, a fundraiser (the initiator of the fund) will need to go through a CFI web portal to raise capital.
The SEC also placed a cap on the amount retail investors can invest in a crowdfunding transaction, limiting it to just 10 percent of their net annual income in a year, though High Net-Worth Individuals (HNIs) are exempt.
Additionally, the SEC specifies the following four (4) participants in a crowdfunding issuance: Fundraiser, Crowd-Funding Intermediary (CFI), Investors, and Custodians. However, there is also a provision for applications for a self-regulatory trade association to facilitate crowdfunding supervision.
To clarify the terms, the fundraiser, as in the above, is the platform itself that wants to finance an operation via a crowdfunding arrangement, like an agritech startup, for instance.
The CFI is an organised entity registered and licensed as a corporation to facilitate crowdfunding transactions.
Obviously, the investors are the group (or crowd) that brings in the funds that are pooled, while the custodians are the banks that hold the funds contributed on behalf of the parties. Custodians enable the aggregation of funds deposited and only release to the Fundraiser subject to the criteria of each issuance being met.
What this means
The raft of new rules from the SEC looks set to govern crowdfunding in Nigeria with an iron fist as it places a great deal of red-tape around each of the four participants along the crowdfunding chain.
The new workflow is designed such that fundraisers (which until now was the crowdfunding platform itself) would now need to engage CFIs to facilitate the pooling of funds from investors via the approved Crowdfunding Portals (CFPs).
Also, these CFIs will ensure that there are sufficient disclosures by fundraisers to Investors about the purpose and use of funds.
It was enumerated in the new regulation that 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 criteria.
Apart from that, CFIs and CFPs are required to provide a plethora of information to both SEC and Investors. The portals are to also help ensure compliance with approved guidelines (such as ensuring set amounts are not exceeded in a crowd fundraising).
Essentially, the SEC has opted to decentralise the crowdfunding process by introducing middle-men and a whole lot of bureaucratic wedges and regulatory friction in-between too. This takes power away from the crowdfunding platforms themselves which until now have completely controlled the process in-house with end-to-end visibility.
Some might say they held all the cards before now, mostly because crowdfunding has for long existed within a grey area of the laws governing businesses in Nigerian.
The SEC says the new rules are in line with its goal of creating a fool-proof framework around who can participate in crowdfunding issuances, as well as drive increased transparency around crowdfunding issues and create more accountability to investors. But it’s unlikely that crowdfunding platforms in the country will be as enchanted.
It will be interesting to see how some of the companies affected by the rulebook update find a way to survive this maneuvre by the SEC, which seemingly has Nigerian crowdfunding in an arm lock.
Featured Image Courtesy: Invoice.ng