In defining Crowdfunding, it is important to first note its etymological history. Crowdfunding was first used as a term in 2006 by Micheal Sullivan, who is credited with its coinage. It means the practice of funding a project or venture by raising monetary contributions from a large number of people, usually through an online platform[1]. Even though the term was coined in 2006, the underlying concept is not new. From as early as the biblical era[2] to African traditional societies[3], the concept has been thriving in our world. By the simple definition that Crowdfunding is the sourcing of funds from a large number of people for the financing of a project or venture, it is clear that this practice has been with us for a long time.

Over the years, four different types of Crowdfunding have been identified. They are:

  • Equity-based Crowdfunding

This is when individuals contribute to ventures or projects in exchange for shares or securities.

  • Reward-based Crowdfunding

This is when a large number of individuals contribute to ventures or projects in returns for products or services

  • Lending-based/Debt-based Crowdfunding

This is when a large number of individuals contribute to a venture or project with the promise of repayment.

  • Donation-based Crowdfunding

This is when a large number of individuals contribute to a venture or project out of their good-will, with no expectation or reward. This is usually the case in charitable or religious causes. There are two types of Donation-based Crowdfunding:

  • Keep-it-all:

This where the project owner or campaign manager sets a fundraising goal and keeps all the funds donated towards the project, regardless of whether or not the fundraising goal is met.

  • All-or-nothing:

This where the project owner or campaign manager sets a fundraising goal and agrees to return the funds donated towards the project if the fundraising goal is not met.

There are examples[4] all around us of projects and ventures funded by Crowdfunding. Everyday new platforms and avenues are created to source for funds for new ventures. Social media and its commonality in our daily life made this more apparent. With the growth and constant usage of this method of finance, one begins to wonder if regulation is needed especially seeing that involves money and a large of people – two major proponents of conflict. In Nigeria, particularly, given our impunity with regards to regulations and how we tend to misuse platforms, the question of regulation for crowdfunding is a growing and legitimate concern.

WHY REGULATE?

First, we must answer this question before we look into how we can regulate crowdfunding. The major issue with crowdfunding is the protection of the ‘crowd.’ How can we ensure that individuals contributing to ventures are not being taken advantage of or cheated? How can we verify the information offered by the campaigner? In relevant instances, how can contributors protect their interests and rewards? These are some of the questions that need reveal the need for the regulation of crowdfunding.

REGULATION IN OTHER COUNTRIES

To be able to provide analysis for the regulation of crowdfunding in Nigeria, an understanding of regulations of crowdfunding in other countries is important. This is especially so because this is by and large a green field for legislation and legal framework. This article will focus on two countries, namely: Canada and the United States of America.

UNITED STATES OF AMERICA

In the United States, the financial regulatory body is the Securities and Exchange Commission. The body has adopted a number of rules that regulation activities on crowdfunding. The relevant rules are the Jumpstart Our Business Startups (JOBS) Act, 2012, the US SEC Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings (Regulation D), 2013, and the US SEC Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A) 2015.

The major provisions of a combination of these rules are:

  • Fundraising Limitations:

A company can raise a maximum aggregate of one million dollars within a period of 12 months.

  • Investment Allowances/Limitations:

Individual investors are permitted to invest a maximum aggregate of between $2,000 and $100,000 (One Hundred Thousand dollars) in a 12 month period, depending on their net worth.

  • Eligibility/Disqualification:

Certain companies are ineligible for the exemption under Title III of the JOBS Act, such as non-U.S. companies, companies that have failed to comply with the annual reporting requirements under Regulation Crowdfunding.

  • Disclosure:

Companies raising funds through crowdfunding are required to file and disclose some information such as the price of the securities to the public and the method for determining the price, names of directors, officers, and individuals holding more than 20% of the company’s shares, the company’s tax returns and so on. The requirements of this disclosure are relative and depend on the amount being offered.

  • Registration:

The rules also require that Broker, Intermediaries, Online Platforms and Funding Portals register with the Commission. Registered funding portals are also required to be members of a registered national securities association. A company offering its shares through crowdfunding must also do so using one exclusive intermediary or funding portal at a time.

CANADA

The rules regulating crowdfunding in Canada is the Multilateral Instrument Crowd-funding (MI 45-108) which was published in 2016 by the Ontario Securities Commission. The major provisions of the Instrument include:

  • A crowdfunding prospectus exemption for issuers
  • Investment Limitation:

Individual non-accredited investors are permitted to invest between an aggregate of between $2,000 and $10,000 (One Hundred Thousand dollars) in a 12 month period, while accredited investors are permitted to invest between an aggregate of between $25,000 and $50,000 per calendar year. ‘Permitted Clients’, with net ‘Financial Assets’ of over $5,000,000, are exempted from this annual limit.

  • Issuers are liable for whatever statements and representations made in their offering documents.
  • Right of Withdrawal:

An equity crowd-funder has the option to withdrawn the funds invest in a company or venture within 48 hours after such funds were given.

  • Fundraising Limitation:

A company can raise a maximum aggregate of $1,500,000 within a period of 12 months through equity-based crowdfunding.

COMMON FEATURES

As noted earlier, the Canadian rules are similar to the rules in the United States of America. These common features are:

  • Regulation of only Equity-based and Loan-based crowdfunding
  • Platform registration requirements
  • Disclosure requirements
  • Investments caps (both for the fundraiser and the investor)
  • Consumer protection (especially of the small, potentially uninformed investor)
  • Statutory allowance of crowdfunding activities (as long as they fall within required/regulated standards of engagement)

These would serve as good guides for Nigeria in dealing with crowdfunding.

REGULATION IN NIGERIA:

In Nigeria, a statement was credited to the Director-General of the Securities and Exchange Commission, where it is alleged that he said It is yet to be seen in any regulation or law the outright abolishing or suspension of crowdfunding activities. In fact, just recently, Nigerian athletes used online funding portals like Kickstarter to solicit for funds to finance their trip to the 2016 Olympics[5]. Daily, in Nigeria, we witness the raising of funds both through online and offline, especially for charitable and religious causes.

There are some relevant provisions in Nigerian legislation which border on crowdfunding activities. They do not mention crowdfunding as a term, but in effect and operation they are affected by activities relating to crowfunding.

Companies and Allied Matters Act (CAMA), Cap C20, LFN 2004

Sections 22 (3) & (5) requires a private company to have no more than fifty members. Also prohibits public invitation for subscription for shares or debentures or to deposit money for fixed periods or payable at call.

Section 50 of the same Act outlines the procedures and requirements for a private company to convert to a public company.

Investment and Securities Act (ISA) 2007

Section 67(1) (a) provides that –

‘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 is: a public company, whether quoted or unquoted, and the provisions of sections 73 to 87 of this Act (relating to prospectus) are duly complied with.’

Section 69 defines an invitation to the public to include an offer which is published, advertised or disseminated by newspaper, broadcasting, cinematography or any other means whatsoever. Section 161(1) prohibits dealings in units or securities of schemes without due registration with the Securities and exchange Commission (SEC).

The above sections majorly relate to the public offering of securities especially the provisions of ISA. However, there is no legal framework that regulates the activities of crowdfunding specifically. As we progress into the information, and the borders of our relations increase across space and time, it might be appropriate for Nigerian law to keep up with the times. It might be appropriate that the SEC creates its own rules regulating the activities of crowdfunding, especially activities revolving around Equity-based crowdfunding and Debt-based crowdfunding.

In the light of the rules and regulations on crowdfunding in other countries, below are some recommendations of how crowdfunding can be regulated in Nigeria:

  • By placing a limit on the amount of funds that can be on a particular platform periodically as well as the amounts of funds a company or enterprise can raise through crowdfunding periodically.
  • Placing a limit on the amount of funds private investors can invest or contribute periodically based on their estimated net worth and level of erudition.
  • Requiring all funding portals and platforms operating within the Nigeria space to register with the commission or division of it.
  • Requiring that all companies or project managers seeking for finance through crowdfunding disclose their financial status, name and details of directors and members of company, use of funds and foreseeable risks involved in venture.
  • By requiring that all entities sourcing for funds through crowdfunding make a detailed report of how the funds were spent for accountability purposes.

This list is by no means complete; they are just mere indicators of potential areas regulation could serve in protecting the goodwill and securities of the public. Our laws, as it is, need to catch to the stem of the current times.

[1] B Walterus and S Williams

[2] The Holy Bible, Acts Chapter 4 Verse 34

[3] Isusu or Utu (Igbo, Nigeria); Ajoo (Yoruba, Nigeria); Adashi (Hausa, Nigeria) etc.

[4] In 1886, Joseph Pulitzer launched a campaign that raised $100,000 to fund the donation of The Statue of Liberty to the United States of America by France.

[5] Shame of a nation: More Nigerian athletes solicit for fund on social media, http://www.vanguardngr.com/2016/07/shame-nation-nigerian-athletes-solicit-fund-social-media/

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