On January 12, 2021, which was exactly a year ago, the Nigerian Security and Exchange Commission (SEC), the regulatory body in charge of investment in Nigeria, released landmark rules which changed the face of crowdfunding by small businesses to raise capital in Nigeria forever.
The landmark rules legalized and accepted crowdfunding as a means of raising capital by small businesses operating in the tough Nigerian terrain that want to scale.
Raising capital to start a new business or expand an existing one is hard. I speak from the experience of an entrepreneur that has run multiple businesses.
According to the SEC, with the published new rules, it is legal for a small business to raise capital through the means of crowd funding on Facebook, but the rules prohibit and frown at any dick, tom, or Harry coming on Facebook to solicit for funds.
So, what does the SEC want, and who is permitted to crowdfund on Facebook?
Who can raise funds under the new rules?
According to the rules of the SEC, only businesses that have been in business for at least two years are allowed to raise money through a crowdfunding portal that has been approved by the commission.
This could be done in exchange for the issuance of shares, debentures, or such other investment or instruments as the Commission may determine from time to time.
Note the word “crowdfunding portal.” And issuance of shares in lieu of your money.
Eligibility for registration of crowdfunding portals
To get money, you can only do it through crowdfunding portals that are registered with the SEC and have a paid-up share capital of at least N100 million.
The guidelines also provided clarity on companies incorporated outside Nigeria but still able to trade on crowdfunding platforms. A person in Nigeria is operating, providing, or maintaining a crowdfund portal if they do one of the following things:
(i) In Nigeria, the platform is managed, provided, or operated.
(iii) The platform doesn’t have a physical location in Nigeria, but it actively looks for investors from Nigeria.
(iii) The component parts of the platform, when taken together, are physically located in Nigeria, even if any of its component parts, in isolation, are located outside Nigeria. “
People who want to set up and run crowdfunding portals need to be crowdfunding intermediaries, which are businesses that have been registered with the SEC as an exchange, dealer, broker-dealer, or alternative trading facility as required by the SEC’s rules.
Another question is: how much can small businesses raise through crowdfunding to help them grow or scale?
Let’s go back to the SEC rules published last year.
What is the fundraising limit?
The commission states that the maximum amount which may be raised shall not exceed ₦100million by a medium enterprise, ₦70million for small enterprises and ₦50million for micro-enterprises. The limits set forth above shall not apply to MSMEs operating as digital commodities investment platforms, or such other MSMEs as may be designated by the Commission from time to time.
The final question is this:
What is the amount allowed by the SEC for Facebook investors who want to invest their hard-earned money in small businesses in order to create wealth and beat inflation with their investment?
Again, let’s go back to SEC rules.
What is the maximum investment limit?
Retail investors can’t buy more than 10% of their annual income in a calendar year from investment-based crowdfunding, but they can buy more than that.
Only “sophisticated, high-net-worth and qualified institutional investors” are exempted from this limit set by the commission.
Retail investors who are neither wealthy nor sophisticated are not permitted to invest more than 10% of their annual income.
Let me break this down:
Retail investors mean Obinna, who wants to invest his life savings of 500k with an unreglated food storage ponzi scammer on Facebook.
Before you dash her, your life savings are for her to invest in garri and other fabled food items.
Hear today that what you are doing is illegal as you are only permitted by the SEC to give her 50k of the 500k you have in the bank as your life savings.
This last sentence is only permissible by the SEC if and when they have recognised the food vendor you want to give the 500k.
The only individuals exempt from this 10 percent rule are high-net-worth individuals like Tony Elumelu, Seahorse boss, Ebuka Onunkwo, Peace Mass Transit boss, Dr. Sam Onyishi, and Dangote. These are billionaires who are permitted by the SEC to invest in any crowdfunding effort by a small business seeking to raise capital without any threshold on the amount they could invest.
At the moment, I’m not sure if there is any food storage vendor raising money that is recognized by the SEC.
I had to do this intervention because I followed the uproar that trailed the update by my brother and senior colleague, Barrister Azubuike
Section 67(1) of the INVESTMENT AND SECURITY ACT 2007 and Section 22 (5) of COMPANIES ALLIED MATTERS 2020, SPECIFICALLY prohibit equity based crowd funding by private entities, and allows only public companies, and statutory bodies, or banks established by or pursuant of an act of the nation, to accept deposit and savings from the public.
You may not like his approach to how he dragged your favourite Garri seller, who is raising money from guillable investors on Facebook, but he is actually right. The important question to ask before you drag him again is simple:
Does the Garri seller you are defending have her business recognized by the SEC?
Does her business, or any food storage vendor business raising money from Facebook, meet the SEC’s rules for small businesses who want to raise money through crowdfunding?
Your answer will determine whether or not a food storage business as it were now can legally raise money through crowdfunding on Facebook.
Be honest in answering this question.
When I was writing this, some one mentioned to me that what the food storage vendors do on Facebook is partnership and not crowdfunding which is fine.
Let’s go back to SEC rules again, According to SEC and also, let’s look at Company and Allied Matters ( CAMA),a partnership business in Nigeria is not meant to exceed 50 partners but our food storage vendors have more than 50 partners on the surface.
Anything more than 50 partners, the company is mandated by Law to transform into a PLC company, known as a public company.
Anything more than this is an illegal investment company, more or less a Ponzi.
Nigeria is a country of law. We are not Barbarians at the gate or a lawless country.
Therefore, any business operating outside the frame work meant to regulate it is an illegal business and can be called a Ponzi business as well.
Investing your money in an illegal food storage business is risky because the business you are investing in is a packaged Ponzi scheme, but since it is not my money, I wish you guys that you do not hear word. All the best from my heart.
I’ll be here when the Ponzi collapses to remind you that we warned you, but you get coconut head and no dey hear word, Ntor!, Dino Melaye style.
Till then, continue making all the food storage Ponzi scammers richer.
It’s just a matter of time
By Barrister Chukwudi Iwuchukwu
