Crowdfunding regulation in Nigeria: the revised platform framework

January 2021 marked the start of Nigeria's revised platform regime under the Rules on Crowdfunding. In crowdfunding, outside contributors provide the funds needed to carry out a project. Its creator outlines the idea on a platform; individuals and companies then choose whether to invest. Responsibility for crowdfunding regulation in Nigeria lies with the Securities and Exchange Commission (SEC). Its revised regime concerns contributions for which investors expect a financial return.

Crowdfunding platforms in Nigeria: why businesses use them

For a young business, the difficulty is immediate: it needs money before it has built a strong credit history. Staff, premises, equipment and advertising all need to be paid for, and the expenditure keeps mounting. A start-up cannot always secure funding through conventional channels.

Banks generally want strong assurances that a loan will be repaid. Venture capital funds and business angels also choose projects carefully, as they expect their investments to generate earnings later. These sources are unavailable to a small business or one just starting out. The entrepreneur has another route: assemble the required amount gradually through modest contributions from many people.

This is where entrepreneurs turn to specialist platforms. Crowdfunding platforms in Nigeria let a project draw funds from numerous contributors instead of one major investor. Each person can commit a relatively small amount, with those individual contributions together making up the capital required.

The entrepreneur publishes project details online, setting out the amount needed and how the money will be used. People who find the idea appealing support it with their own funds.

A contributor can simply give money to an idea or project, expecting neither repayment nor a profit. Another model offers a reward in return for support. For example, the contributor might receive the finished product once it is released, or another benefit agreed in advance. Securing support for an idea is one thing. Raising money on the promise of a financial return is a different proposition.

Participants' roles under Nigerian crowdfunding rules

Several participants come within Nigerian crowdfunding rules:

• The project organiser (called the issuer or fundraiser) is the company or other person needing funds. It uses the platform to publish an investment offer.
• Investors, whether individuals or companies, study the offer and decide to invest their own money in it. Unlike someone making a donation, an investor expects a definite financial result.
• The crowdfunding platform is where the offer is published, where investors obtain information about the project and where the parties deal with one another.
• The intermediary is a registered organisation that takes part in dealings in securities or other investment instruments.

Investment-based crowdfunding in Nigeria falls under the Investments and Securities Act (ISA). Any offer of securities or other instruments for investment through the platform is subject to financial legislation, although a qualifying offer within the fundraising ceilings is exempt from prior registration of those instruments.

No platform may launch without SEC registration for the intermediary operating it, and the SEC requirements include a minimum capital threshold. Investors have their own restrictions, discussed later. After committing money, a retail investor may cancel the investment until the offer has only 48 hours left to run.

What a crowdfunding intermediary in Nigeria must do

An organisation operating the platform and facilitating investment offerings, whether of securities or other instruments, must obtain SEC registration. Much of the operational work falls to a crowdfunding intermediary in Nigeria, which organises the platform's activity, monitors how participants interact and is responsible for the documents that lay down the working procedures for project organisers and investors.

Investors should not find themselves dealing with a black box. They need to know which platform they have joined, under what rules projects are presented there and who is responsible for arranging an offer. The intermediary must nevertheless act only as an intermediary: it cannot both arrange an offering and profit from steering investors into the transaction.

An intermediary cannot accept an application from any company seeking money and simply publish it online. It must check the issuer against the prescribed requirements. The platform must not become a shop window in which any project can be displayed in the hope that investors will provide money. The first task is to establish who is seeking the funds.

Arranging a transaction must not make the intermediary a party to it. The prohibitions are:

• funding an investor's subscription to an offer on the intermediary's own platform;
• buying information about prospective investors from other intermediaries.

The intermediary running the platform must not promote investment in its own project. Nor may it arrange secondary trading in instruments originally issued via that platform.

A crowdfunding intermediary in Nigeria needs NGN 100 million of paid-up capital to register (about EUR 65,320 at the exchange rate quoted at publication). At least three principal officers also need registration as sponsored individuals. The SEC scrutinises possible conflicts of interest between the intermediary and issuers that raise money through its platform. The intermediary cannot admit an issuer in which it or associated persons hold a substantial stake, unless the SEC approves admission under the exception set out below.

Nigerian crowdfunding rules set the cross-ownership threshold at 5%. The restriction concerns beneficial holdings or control of issuer securities by the intermediary, its directors, officers, significant shareholders and associated persons. Holdings above the threshold by significant shareholders, associated persons or directors require the SEC's prior approval for the issuer to use the platform.

Running a crowdfunding platform

A platform seeking Nigerian investors comes within the revised rules for crowdfunding platforms in Nigeria. Eligible fundraisers are:

• a Nigerian-incorporated micro, small or medium-sized enterprise with an operating record of at least two years;
• an enterprise in the same categories, also incorporated in Nigeria, that has operated for less than two years but is backed by a core investor or by a strong technical partner whose own operating record spans at least two years.

Participating companies must satisfy the classification criteria of SMEDAN, the Small and Medium Enterprises Development Agency of Nigeria. SMEDAN now uses annual turnover and workforce size; the earlier asset measure excluded land and buildings.

The earlier asset-based SMEDAN classification had three categories, shown below alongside their 2025 counterparts:

• Micro: the workforce is below 10, and assets are valued at less than NGN 5 million (EUR 3,264). SMEDAN's 2025 guidance instead gives NGN 3–25 million in annual turnover and 3–9 workers.
• Small: the workforce is 10–49, and assets are valued at NGN 5 million or more but below NGN 50 million (EUR 32,645). In the 2025 guidance, annual turnover is NGN 25–99 million; the workforce range is unchanged.
• Medium-sized: the workforce is 50–199, and assets are valued at NGN 50 million or more but below NGN 500 million (EUR 326,456). The 2025 guidance instead uses annual turnover above NGN 100 million but below NGN 1 billion; the workforce range is unchanged.

The intermediary must notify the SEC before admitting an offer; the regulator may then seek further information or prohibit it. Investors must receive the project's essential details, financial information and disclosure of material risks from its organisers. The offering materials for investment-based crowdfunding in Nigeria reach the regulator through the intermediary at the time of publication on the platform. The intermediary approves admission, while the SEC retains the power to intervene.

Restrictions govern both fundraising and crowdfunding platform registration in Nigeria. An opaque ownership scheme is prohibited, as is a project whose purpose is to establish an investment fund. For listed public companies, equity crowdfunding in Nigeria is unavailable.

Project disclosures, confidentiality and users' data protection are mandatory for the platform. Its operators must preserve activity records for seven years. The platform's own funds and investors' money must remain separate. Each funding round needs a separate trust account held at an SEC-registered custodian.

Digital commodities investment platforms also fall within the SEC regime. By linking investors to projects in agriculture or other commodity sectors, these platforms enable investors to receive a return on the money contributed. Their operation requires SEC registration.

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The issuer's part in the process

Investment-based crowdfunding in Nigeria cannot begin simply by opening a platform or advertising for investors. The company first needs to contact a registered intermediary. The issuer supplies company, management and project information for verification. If a company says its revenue is growing, reports gaining customers or says its business model is working, it must document the figures behind those claims and show that the project has a real operating business behind it.

The intermediary needs details of the business, its managers' experience and its financial position. For an assessment of its financial position, the issuer must provide financial records. Under the rules, those records comprise audited financial statements covering two years, where available, or an audited statement of affairs. The company certifies the truth of its offering document and accepts liability for misrepresentations.

Raising capital through crowdfunding platforms in Nigeria: the ceilings

Fundraising through crowdfunding platforms in Nigeria has a ceiling, with different amounts according to enterprise size: micro, small or medium-sized. Within 12 months, the maximum for a micro enterprise is NGN 50 million. A small enterprise's maximum is NGN 70 million; a medium-sized enterprise may raise up to NGN 100 million. Raising more means the company cannot use the exemption tied to these ceilings and must comply with any applicable procedure for registering its securities.

A separate offering document is prepared for investors. The document must be short and easy to follow. Along with business and financial information, it gives details of the issuer, the sum sought and the duration of the offer. Publication is confined to the crowdfunding platform: other websites and media cannot carry or distribute the document. Copies of the offering materials go from the intermediary to the SEC, as do particulars of the issuer's shareholders, directors and promoters once the application has been received.

Note: an issuer cannot have simultaneous offers on multiple crowdfunding platforms.

Crowdfunding for start-ups in Nigeria: offer periods

For offers on crowdfunding platforms in Nigeria, the initial period is capped at 60 days; the platform's conditions may allow up to 30 more days. An offer succeeds only if it reaches its stated minimum, which must amount to 50% or more of the target. If the stated minimum is not reached by the end of the approved period, the issuer must withdraw the offer.

The issuer may start a new offer once at least 30 days have passed since the previous offer was withdrawn. In the meantime, the issuer must bring its financial and other information up to date and send it to the intermediary.

A shortfall against the minimum at closing requires the intermediary to refund investors within 48 hours. Once the target is fully funded, the intermediary must direct the custodian to pay the issuer within 24 hours of closing, subject to any applicable securities registration requirements. Reaching the minimum without reaching the target instead requires the issuer to give investors and the intermediary a revised spending plan within one week of closing. The intermediary must then instruct the custodian to release the money to the issuer, provided a smaller project can be executed independently without harming the issuer's operations.

For one year following allotment, investors cannot transfer the investment to another person, subject to exceptions. Subsequent transfers must comply with the SEC's provisions for securities dealings involving unlisted companies and the share-transfer restrictions applicable to private companies.

Equity offers must give retail investors and promoters tag-along rights. These apply if controlling shareholders transfer control to a third party within three years after the offer ends. The protected holders may then exit the company or sell their stake. In a debt offer, the same transfer of control within that three-year period entitles every investor to early redemption.

Investor categories

Investment through crowdfunding platforms is open to several investor categories defined by Nigerian crowdfunding rules.

Despite crowdfunding's apparent suitability for small businesses, they still need to satisfy the criteria for operating history, workforce and annual turnover.

Retail investors face an investment ceiling because crowdfunding carries substantial risk. Risk warnings must appear on intermediaries' platforms. Before contributing money, each investor signs a form confirming that the risks are understood. The cooling-off window allows cancellation until 48 hours remain before closing. Any material adverse change occurring before closing also permits withdrawal, as long as the fundraiser has not yet received the proceeds. The investor has seven days after the change is made public to decide.

Protecting investors

Across crowdfunding platforms in Nigeria, a retail investor's yearly contributions must stay within 10% of annual net income. The ceiling covers all platforms collectively, without a separate allowance for each. No such ceiling binds high-net-worth individuals or qualified institutional investors. They can judge the risks for themselves and choose the sum to commit.

The platform must alert investors to possible risks. These warnings belong on its website, the project page and the investment documents. Investors must be told the main danger: their entire contribution could be lost. Illiquidity may also prevent investors from quickly selling the securities.

Before investing, each investor confirms having read the risk disclosures. A separate confirmation records compliance with the investment ceiling and willingness to bear possible losses.

Conclusion

Crowdfunding makes it easier for investors to find projects and compare them on one platform, while companies can present their businesses to a large group of potential backers at once. Smaller businesses gain a way to raise money, although crowdfunding carries risks. Under crowdfunding regulation in Nigeria, the SEC checks whether platform operators meet its registration and operating requirements.

Companies using investment-based crowdfunding in Nigeria must meet issuer requirements, observe fundraising ceilings and disclosure rules, and keep to specific offer periods. Before submitting an offer, a business needs to check whether it meets the SEC criteria and which documents the intermediary will require.