What you need to know about Crowdfunding in Nigeria

Crowdfunding is a practice of raising money from a large number of people especially over the internet to finance a project or business venture.

Small and Medium Enterprises (SMEs) and entrepreneurs use this medium as an alternative source for funds although this is done in this context to the benefit of all involved.

Medical expenses, social welfare projects are also financed through crowdfunding.

There are various forms of the fundraising processes based on their purpose and they include reward-based, donation-based, equity-based and debt-based crowdfunding.

Reward-based offers a product or service to individuals who contributed.

These products and services have to be enticing to be able to garner the attention of the crowd.

Reward-based crowdfunding has a lot of benefits, it creates awareness for whatever project the crowdfund was carried out for and naturally people involved will actively inform others about it.

Donation-based crowdfunding is another popular type of crowdfunding, mostly done to solve a societal need.

Inequity-based, the individuals involved are given shares in the company while in Debt-based crowdfunding the money is eventually returned with interest to involved individuals.

SMEs or entrepreneurs that utilize these platforms do so by introducing their products to the market in form of listing, the crowd then forms their opinion about the product and then invests based on the investment options available.

Individuals who participate in the processes are mostly innovative oriented and risk-takers participate due to several reasons.

The three main strata of crowdfunding are the fund seekers, the crowd investors and internet platform operators and there has to be a level of trust and patience for the success of a crowdfunding project.

Crowdfunding bypasses intermediate financial institutions such as banks that serve as channels between investors and borrowers.

In the world there are over six hundred crowdfunding platforms, while widely used in developed economy countries it is scarcely used in developing countries, Nigeria not an exception.

It has a low-level usage in Nigeria as most times people are skeptical due to fear of losing their money or scammed.

In Nigeria, crowdfunding dealings involving security sales in the form of equity or loan are subject to Nigeria’s securities regulations.

In 2016, the Securities and Exchange Commission (SEC) suspended crowdfunding activities in Nigeria due to legal challenges.

There have been suggested regulations to running the process in Nigeria seeing as other countries have stipulated rules which help regulate both the amount an individual can invest per annum to how much can be raised on a platform per annum.

However, first any crowdfunding platform set to run its activities in Nigeria must be registered with the Security and Exchange Commission.

Also read, 6 Reasons you should consider Crowdfunding for your Venture

It is important to note that while ensuring the protection of the Nigerian public from fraud, these regulations should be flexible and not be overregulated so as not to discourage investors and issuers.

The Security and Exchange Commission, Nigeria has an eligibility standard for Micro, Small and Medium Enterprises ( MSMEs), which states that only MSMEs that are incorporated as companies in Nigeria with a minimum of two years operation record are eligible to raise funds through crowdfunding platforms.

There are general obligations for crowdfunding platforms some of which include, disclosure and prominent display of relevant information regarding the platform and its use, keeping investors abreast of any form of change to an issuer’s proposal, carrying out investors’ education programs amongst others.

Also in the regulation, no operator should discontinue the platforms without prior approval from the Security and Exchange Commission, Nigeria.

The platforms are also expected to monitor the conduct of issuers on their platform and take action against any misconduct, ensure that fundraising limits are not breached and also make both monthly and quarterly reports on the activities carried out on their platforms.

About the Author

Chibuzor Elizabeth Chijioke a graduate of Abia State University is a Nigerian-based entrepreneur and content writer. She trained as a digital marketer at Innovation Growth Hub. She is committed to teaching people how to apply technology to better their lives and businesses. She spends her leisure reading sci-fi and fantasy novels.

Don’t miss important articles during the week. Subscribe to techbuild.africa weekly digest for updates.