Equity Crowdfunding in Nigeria
THE ISSUERS
In simple terms, the issuer is the enterprise that seeks to raise capital through the Crowdfunding portal. A Crowdfund offering by an issuer can only be made on one portal and such offering shall not be open for more than 60 days. The Crowdfunding portal is tasked with the responsibility of setting a minimum threshold for all offers on its platform which shall not be less than 50% of the target amount. Where the minimum threshold for the target amount is not reached, the offer may be withdrawn, and the issuer cannot commence a new offering earlier than 90 days from the date of withdrawal.
There is also a restriction on Cross ownership as an issuer “shall” not have access to the portal if the portal or any of its officers, directors or significant shareholder owns and controls more than 5% of the securities of the issuer. This invariably serves as a restriction to curtail insider trading in any form and uphold the rules of transparency in corporate governance.
In instances where the target amount is not raised but the funds raised fall within the minimum threshold, the issuer shall provide a revised plan for the proposed use of the funds to the portal and investors. To further safeguard investors, there is a cooling period of 48hours for investors to withdraw an offer or an agreement to purchase securities after close of offer. Investors can also rescind such investment where there is a material adverse change affecting the project or issuer. Such rescission must not be later than seven (7) days from the date the material adverse change became public. Where the investors rescind the investment for any of the reasons stated above, he is entitled to a refund within 48 hours.
Whenever the portal is in receipt of an application from an issuer, it is expected to provide information on the promoters, directors, controlling shareholders, area of business and other relevant information. Any adverse change to the aforementioned must be communicated to the investors within 24 hours. Upon reaching the funding target, the funds shall be made available to the Issuer within 24 hours. Where the issuer is a public company or a public company by default, evidence of registration of the securities with SEC is required. Retail investors are also provided with tag along rights which gives them the right to withdraw from the company or sell their stake if controlling shareholders transfer control of the company to a third party within 3 years of the offer. Every eligible issuer is obligated to provide a offering document (similar to a prospectus) which shall disclose warnings to investors, principal risks faced by the business of the issuer, target amount, use of proceeds, risks associated with the investment, etc.
PROHIBITIONS UNDER THE RULES
The rules prohibit intermediaries from offering investment advice or recommendations; soliciting purchases, sales or offers to buy securities offered or displayed on its website or portal etc. An issuer is also prohibited from directly or indirectly paying a commission to anybody connected with an offering than the portal. This does not apply to fees such as legal or accounting fees paid by the issuer for the preparation of materials relevant to the offering. Entities prohibited from raising funds through a crowdfunding portal include, complex structures, public listed companies and their subsidiaries, companies with no specific business plan or blind pool, companies that propose to use the funds raised to provide loans or invest in other entities and such other entity as may be specified by the commission.
Finally, a Crowdfunding portal or an intermediary that fails to comply with the rules shall be liable to a fine of not less than N1,000,000 and the sum of N10,000 for every day the violation continues. The operator of a crowdfunding portal must send a report of all financial transactions on the portal to the SEC at the end of the year.
DEFICIENCIES AND RECOMMENDATIONS
A major shortcoming of the rules is the N100 million-naira capital requirement as well as strict registration requirements for Crowdfunding portals. In as much as the rules seek to protect investors against fraudulent Crowdfunding portals, the minimum share capital is quite high. Most of the existing Crowdfunding platforms are startups that may need to be dissolved if they fail to meet the share capital requirements. As a way out, these portals can partner or merge with other existing portals to meet the share capital requirement. Alternatively, since the rule provides that only intermediaries registered with the SEC can run a crowd funding portal, the portals can form a partnership with any of the already registered intermediaries.
It is recommended that this share capital requirement and some other registration requirements be relaxed because the crowd funding market is at its infancy. The growth of the sector should not be hampered by stiff regulations and requirements that are hard to meet. SEC can subsequently make further regulations once the market finds its footing and portals are more stable. For instance, in USA, there are proposed amendments removing the need for issuers to register until after two years of using a crowdfunding platform to raise funds for their new businesses. There is also no requirement (In USA) for issuers to have an operating track record before they are eligible for crowdfunding. The essence of this is to help new businesses to successfully market their initial products to the investing public.
Further, the provision permitting Digital Commodities investment platforms to host commodity investment projects on any platform other than its platform or a platform it controls directly or indirectly is quite unclear. This presupposes that if a platform like Pork money has a project, Pork money must approach Farm crowdy to put up such project on its platform because Pork money is not allowed to do so based on the provisions of the rules. It is hoped that SEC will provide clarity on this particular provision.
In a bid to give maximum protection to investors, the rules fail to offer the issuer some form of protection as well. For example, the rules allow investors to withdraw their investments within 48 hours of the close of the offer. The effect of this is that it poses a financial threat to the issuer as an issuer who originally meets the threshold and entitled to the funds raised may lose such entitlements where several investors rescind their investment. This can tell on the business of the Issuer especially where it has made calculated moves based on the projected level of investments.
It is apparent from the entirety of the rules that the issuance of shares to many crowdfunding investors creates potentially time-consuming problems for a company’s management team due to the large number of new shareholders they must now satisfy. Startups that use equity crowdfunding may struggle with managing a multitude of shareholders with voting rights. In the United States of America, Crowdfunding Portals have tried solving this problem by providing an alternative model using what they call a “nominee” structure, where they manage corporate governance for the funded company and crowdfunding shareholders. It is however in doubt whether SEC will align with this Nominee structure if adopted by a crowdfunding portal.
CONCLUSION
It is commendable that SEC, the regulator of the securities market in Nigeria has taken the initiative of proposing these rules in order to assist the growth of startups as well as protect investors. It is always important that investors’ confidence must be maintained for the continued growth of the securities market. Thus, the proposed rules can be said to be a step in the right direction.
Ayokunle Olowogboyega and Idris Edalere are associates at Tayo Oyetibo LP, a foremost multi service Law firm in Nigeria. Ayokunle is a member of the firm’s Regulatory compliance and Business Advisory group as well as the Commercial law practice group and Idris is one of the Founding Members of Commercially Aware NG. They can be reached at ayokunlegboyega@gmail.com and idrisedalere@gmail.com.
