The Securities and Exchange Commission (SEC) has announced plans to regulate the activities of crowdfunding investors in Nigeria. This is an attempt to reduce the risks associated with crowdfunding for investors and financiers that want to invest in small and medium scale startups and businesses.
According to the acting Director-General of the SEC, Mary Uduk, the details of the regulation will be released later in the year.
“Investors’ confidence is central to our job as the regulator of the capital market. People must have the confidence to invest.Mary Uduk, Acting Director-General of the Securities and Exchange Commission
With crowdfunding, private companies can raise long-term funds using regulated platforms. The platform of the crowdfunding will be regulated by the SEC.”
Crowdfunding is the practice of funding a project or venture by raising small amounts of money from a large number of people. Sometimes, the funding is in exchange for a certain percent of equity in the company. This is the division that is referred to as equity crowdfunding.
With past track record of investors and financiers showing interest in the Nigerian economy, the SEC’s move to put regulations in place for the crowdfunding sector comes at a good time.
Based on the modalities of the regulations however, the crowdfunding sector can either be crippled or helped to grow. A study of the regulation system in place for the same sector in other countries show some patterns that can advise subsequent regulations in other countries.
For starters, the regulations can be either liberal or restrictive based on a number of factors which include but is not limited to:
- Cap on the amount that investors and financiers are allowed to invest in a year.
- Administrative requirements for startups and businesses that need crowdfunding.
- Tax incentives.
- Extent to which investors can set their own market practices and meet startups and businesses they want to invest in.
Practices governing crowdfunding
Research shows that the UK has the most developed equity crowdfunding industry and it has achieved this by having relaxed regulations in place, allowing investors to screen startups and businesses themselves.
The investors act for their own interests and carry out proper vetting of the standards in order to protect both their investment and their credibility to their own investors. This has resulted in the highly standardized equity crowdfunding industry the UK boasts of today.
Administrative requirements for startups and businesses
Generally, startups are known to prefer lean and straightforward administration. However, based on the SEC, startups may be required to upgrade to certain CAC (Corporate Affairs Commission) provisions in the areas of how the business or startup is registered.
The amount investors are allowed to invest will be a part of the regulations that the SEC will put in place. For example, in the US, companies using equity crowdfunding portals to raise money may raise up to $1.07 million.
In Nigeria, the SEC may choose to not put a cap on how much investors can invest, or it can put an amount it considers suitable as a cap to guide and protect investors.
As the SEC begins its plans to regulate aspects of crowdfunding investments, the policies will affect the sector, and to some extent it may determine who receives investment, how they receive it and how much they receive.
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