Can Business Owners Legally Crowdfund in Nigeria?
Of course, we’re HUGE proponents of the power of crowdfunding. However, if you own a for-profit business you’ll want to ensure you don’t crowdfund yourself into hot waters. Staying on the right side of the law begins with knowing what the law says. Let's see what the law says about crowdfunding in Nigeria.
Is crowdfunding legal in Nigeria?
Yes, and no. It depends on the particular model of crowdfunding you intend to use. We have donation, reward, debt and equity-based crowdfunding models. (You can learn more about crowdfunding models here.)
Donation and reward-based crowdfunding are perfectly legal in Nigeria. These are freely given donations in which funders expect nothing in return. If the campaigner wishes, they may send product samples or gifts to thank their donors.
However, debt and equity-based crowdfunding, jointly categorized as investment-based, are prohibited by law. This is because crowdfunding in Nigeria is currently unregulated, so prohibitions are established to protect investors from fraudulent investments.
Does this mean you can't crowdfund your business?
No, the current prohibitions don't stop you from getting help from willing donors who want to support your for-profit business.
What you can't do is offer monetary returns or equity. You can give them gifts, product samples, thank-you cards, or nothing at all.
To put it simply, you can crowdsource funds for anything as long as you are not promising funders any monetary rewards. For instance, you cannot crowdfund a loan to be paid back with interest or offer shares in your company.
SEC rules on investment-based crowdfunding
Crowdfunding is a powerful tool for small businesses and startups to raise capital that Nigeria can no longer ignore.
In 2021, the Nigerian Securities and Exchange Commission (SEC) proposed a crowdfunding regulation framework. If the proposed rules are passed into law, it will make investment-based crowdfunding legal in Nigeria. Then investors can securely crowdfund micro, small, and medium enterprises (MSMEs).
While we wait, here are some things you should know.
Who will be eligible?
All MSMEs incorporated as a company in Nigeria with at least two years of trackable operation will be eligible.
In the case where the business has less than two years of operation, it needs a reputable technical partner that has been operating for a minimum of two years or has a core investor.
Who won't be eligible?
Any complex business entity without transparent ownership will not be eligible for investment-based crowdfunding. Also, publicly listed companies and their subsidiaries are not allowed to participate.
How much can be raised?
The SEC places a cap on the amount of money that eligible MSMEs may crowdsource within 12 months. The maximum amount for a medium-scale enterprise cannot exceed 100 million Naira.
A small-scale enterprise can only crowdsource 70 million Naira a year, while micro-enterprises must not exceed 50 million Naira.
Where can you crowdfund?
Legally, you cannot host your investment-based crowdfunding independently. All such crowdfunding must be done through a crowdfunding platform registered by the SEC. The crowdfunding platform may be located in or outside Nigeria.
The platform is expected to conduct due diligence and assure investors of your trustworthiness.
You can find more about the SEC’s rules on investment here.
Successful, compliant crowdfunding
Although reward and donation-based crowdfunding is completely legal in Nigeria, disgruntled donors could still sue you if you give them a reason to.
Use the tips below to keep your crowdfunding campaign compliant and build trust with donors.
Be transparent
You need to provide evidence that you can be trusted to put the funds to good use. You can do that by showing your track record or answering questions sure to be on the minds of prospective donors.
Here are some questions to guide you.
- Why are you seeking funds?
- What is the state of your business or nonprofit?
- How are you going to spend the funds?
- Have you received funds before?
Provide feedback
After raising funds, remember to send a thank you message to your donors and provide a detailed report of how you used the funding and its impact. This helps maintain the trust you have gained.
Keep any promises you make
If you promise to reward donors with products or gifts, fulfill them. It would be fraudulent to renege on your promises. Reputation is a big deal in the crowdfunding landscape, and you shouldn't let anything ruin yours.
