LEGAL ASPECTS OF CROWDFUNDING IN NIGERIA – ELIJAH OLAWALE AGBOOLA
While crowdfunding is not as popular as it is in developed economies, it is gradually catching up to other methods of capital raising in Nigeria. It is the practice of soliciting small contributions from a large number of individuals via online platforms (crowdfunding platforms) in order to finance a project, cause, or business. This article examines the various forms of crowdfunding, the risks it poses to investors, the legal regime regulating the nascent crowdsourcing sector in Nigeria, analyses the risks that the start-ups face and along with the investors too.
Crowdfunding is the process of soliciting modest contributions from a large number of individuals via online platforms (crowdfunding platforms) in order to finance a project, cause, or business. There are several types of crowdfunding: donation crowdfunding; reward crowdfunding; peer-to-peer lending; and equity participation in a business (equity crowdfunding).
In its simplest form, crowdfunding is a method of supporting a project or endeavour by soliciting financial contributions (often modest sums) from a large number of individuals (investors), primarily over the internet. Crowdfunding typically involves three parties:
I. the operators of the crowdfunding platform, who establish the platform’s terms of operation and the criteria for accepting a project;
II. investors, who contribute funds to individual projects offered through the platform; and
III. applicants, who seek funds to implement their projects.
Financing initiatives can take many forms: research and development, works of art and cultural events, and also private real estate purchases or loans for the purchase of a car or other consumer items.
The word “crowdfunding” first originated in the 1990s to refer to an online platform used to raise money for various creative or social endeavours. There are already thousands of crowdfunding platforms operating on a global scale. Globally, the most successful crowdfunding platforms are GoFundMe, Kickstarter, and Indiegogo. NaijaFund, Piggyvest, Donate-ng, and others have all enjoyed varying degrees of success in Nigeria.
Variation of Crowdfunding
The traditional paradigm of crowdfunding is donation-based, with funds raised mostly for philanthropic or other public causes. Because the investor’s legal connection with the applicant is typically based on a gift contract, investors do not demand an instant economic benefit or service from the applicant.
However, the most popular crowdfunding model today is reward-based crowdfunding, which is a compensation-based strategy. This recompense may be material or monetary in nature. Reward-based crowdfunding with tangible consideration is frequently used to fund arts projects (films or music albums, books, or theatrical performances) that benefit specific communities or organizations, but it is also used to fund various technical and technology advancements. The investor’s legal relationship with the application is typically in the form of a donation agreement, a purchase agreement, or a contract for the provision of services, and is frequently a combination of these.
On the other hand, there are numerous reward-based crowdfunding methods that take financial considerations into account. One of these is debt/lending-based crowdfunding, in which each investor determines the amount to lend to a particular applicant or project (referred to as peer-to-peer lending, or “P2P”), and maybe lending firms to other lending companies (business-to-business lending, “B2B”). Credit or loan agreements typically govern the legal relationship between the contributor and the applicant.
The final financial crowdfunding type is equity-based crowdfunding, which is a platform that mediates investment interests in business companies or specific assets when a contributor becomes the owner of that asset or stake in a company. This model is most frequently employed by start-up businesses and entrepreneurs in the information technology sector.
Regulation of crowdfunding in Nigeria
The advancement of technology and economic progress have transformed the world into a global market. In Nigeria, one of the primary issues faced by start-ups is a lack of funding to enable such businesses to run. They frequently encounter funding constraints and rely heavily on family, friends, bank loans, and venture investors. The high-interest rates on bank loans and the difficulty in attracting venture capitalists have prompted enterprises to look for alternative sources of funding.
Equity crowdfunding has become a vital aspect of the financial industry since it enables start-ups to raise cash in a cost-effective manner. However, bad actors have taken advantage of the simplicity of crowdfunding to defraud Nigerians through increasingly sophisticated methods. As a result, attention must be paid to the financing, growth, and development of start-ups in the country.
The Securities and Exchange Commission, as the capital market’s regulator, is saddled with this obligation. Other Nigerian regulations governing enterprises and corporations contain provisions relevant to crowdfunding. It is crucial to note that Section 67(1) of the Investment and Securities Act, 2007 states as follows:
“(1) No person shall make any invitation to the public to acquire or dispose of any securities of a
body corporate or to deposit money with anybody corporate for a fixed period or payable at call,
whether bearing or not bearing interest unless the body corporate concerned is-
- A public company, whether quoted or unquoted and the provisions of Sections 73 to 87 of
this act are duly complied with; or
- A statutory body or bank established by or pursuant to an act of the National Assembly
and is empowered to accept deposits and savings from the public or issue its own
securities (as defined under this Act), promissory notes, bills of exchange, and other
Additionally, Section 22(5) of the Companies and Allied Matters Act 2020 specifies that:
“A private company shall not, unless authorized by law, invite the public to
● Subscribe for any share or debenture of the company; or
● Deposit money for fixed periods payable at call, whether or not bearing interest”
Only public companies, whether quoted or unquoted, are permitted to ask the public to acquire or dispose of their securities. Private Companies are officially prohibited from engaging in crowdfunding in Nigeria, as it has been declared that they should refrain from equity crowdfunding, which is soliciting members of the public to give funds in exchange for a stake in the company.
On 15 August 2016, the Securities and Exchange Commission (SEC) issued a statement suspending all crowdfunding activities due to legal difficulties, as the Capital Market Regulations and Laws did not anticipate or create provisions to cover crowdfunding activities.
The Commission published new rules on the 21st of January 2021, one of which concerns Crowdfunding: the rules apply only to Investment-Based Crowdfunding. It described Investment-Based Crowdfunding as the practice of soliciting funds from the public via an internet portal in exchange for shares, debt securities, or other Commission-approved investment instruments. This rescinds the statement prohibiting the country’s citizens from engaging in Crowdfunding activities.
The following are the essential players in a Crowdfunding process, as stipulated by Rule 1 of the
SEC Rules on Crowdfunding 2021:
1. Crowdfunding Intermediary: A corporation created and registered for the purpose of facilitating transactions involving the offering of securities or investment instruments via a Crowdfunding Portal.
2. Fundraiser / Issuer: The term “fundraiser” or “issuer” refers to the person who created and manufactured the investment instrument to be issued.
3. Crowdfunding Portal: This is the website, platform, program, or other comparable module that facilitates interactions between Fundraisers and the investing public.
4. Investor: Any individual who wishes to make or has made an investment in an investment vehicle.
Rule 5(a) requires the SEC to regulate all Crowdfunding Platforms. It stipulates the following:
“Every portal that facilitates, operates, provides or maintains interactions between fundraisers and investing public (crowd) in Nigeria for the purpose of an investment-based Crowdfunding shall be operated only by an entity registered as a Crowdfunding intermediary.”
Furthermore, funds may be raised only through Crowdfunding Portals that are administered by SEC-registered entities with a minimum paid-up share capital of N100 million. In terms of investment limits, the regulations prohibit retail investors who are neither High Net Worth nor Sophisticated Investors from investing more than 10% of their yearly income.
Additionally, the rules let Micro, Small, and Medium-Sized Enterprises (MSMEs) organized as corporations with a minimum of two years of operating history to raise funds in exchange for investment instruments through a Crowdfunding Portal run by a registered Crowdfunding Intermediary. Additionally, it allows for incorporation of MSMEs with less than two years of operational experience but with a strong technical partner with a minimum of two years of operating experience or with a core investor.
The aggregate amount of securities or investment instruments that can be offered in a 12-month period is 100 million naira for medium-sized businesses, 70 million naira for small businesses, and 50 million naira for micro businesses. These restrictions do not apply to Digital Commodities Investment Platforms (“DCIPs”) such as Farmcrowdy, which are defined in the Rules as platforms that connect investors to specific agricultural or commodities projects in exchange for returns.
Notably, the following entities are prohibited from fundraising through a fundraising portal:
1. Complex structures
2. Companies that are publicly traded and their subsidiaries.
3. Businesses that lack a clear business strategy.
4. Businesses that intend to use the funds obtained to provide loans or invest in other businesses.
5. Other entities as the commission may specify.
Regulation of crowdfunding and comparable technological advances in the financial industry is still in its infancy in Nigeria. There are very few regulations, and regulatory agencies have been tasked with the responsibility of overseeing and writing regulations. Nonetheless, the SEC Rules on Crowdfunding is a positive development, particularly because they strive to prevent Nigerians from being used by unscrupulous elements and suffering investment loss.
 Dije Umaru Watse, Sources of Financing for Small and Medium Enterprises in Nigeria (Walden University Dissertation, 2017)
 Krati Rajoria, “Crowdfunding: A successful way of raising capital?” (2017) 2(2) Amity Law Journal 11 – 15