Crowd Funding as Alternative Financial Model

Olisa Agbakoba

In order to give entrepreneurship a boost, Ugo Aliogo and Jemima Bolokor highlight the opportunities in crowd funding

In every economy, small and medium scale enterprises (SMEs) play a significant role in stimulating growth. It has been proven over the years that SMEs are the engine of growth and industrialisation because they contribute immensely to the Gross Domestic Product (GDP) of the country.

In Nigeria, SMEs have not performed to optimum expectations due to a combination of certain factors. One of such factor is access to adequate funding. The financial institutions don’t lend to SMEs because many of them (SMEs) are not well structured and do lack the basic requirements to qualify for such loans.

Therefore in order to provide an alternative source of funding for SMEs, corporate organisations and individuals, a new funding strategy known as crowd funding has been developed by the Olisa Agbakoba Legal (OAL). The new business model would help revive the growth of SMEs, give more access to capital and strengthen their financial base.

According to investopedia, crowd funding is the use of small amounts of capital from a large number of individuals to finance a new business venture. Crowd funding makes use of the easy accessibility of vast networks of friends, family and colleagues through social media websites like Facebook, Twitter and LinkedIn to get the word out about a new business and attract investors. It has the potential to increase entrepreneurship by expanding the pool of investors from whom funds can be raised beyond the traditional circle of owners, relatives and venture capitalists.

A Managing Partners of OAL, Mrs. Olabisi Akodu described the model as an alternative financing option by which small businesses, corporate organisations and individuals can raise money from the general public through an online portal called a crowd funding portal.
She stated that the theory behind this business model is that if a large number of people, individually provide monetary contributions, then it is possible to raise substantial sums of money, without the need to go to the traditional lending sources.

Furthermore, she stated that crowd funding provides an alternative financing model, which is fast and it is being used in Europe, US and Asia to raise capital for various financial and non-financial projects.
She added: “There are today some 1000 crowd funding portals worldwide supporting a multi-billion dollar industry. Global crowd funding experienced accelerated growth in 2014 to reach $16.2 billion in the United States (US). In 2015 the industry raised over $34.4 billion.”

She explained that the crowd funding market is made up of various funding models such as consumer lending, debt and equity financing for SMEs and donations for philanthropic causes, adding that the funds raised through crowdfunding ensures that small businesses have the credit to grow their businesses, which in turn creates jobs and stimulates economic growth.

Akodu noted that there are three broad platforms for crowd funding: the philanthropic and promotional – this platform allow individuals and charities raise money for philanthropic causes and artist promotions through online donation portals. While the second and third platforms are for investment. They provide for both debt and equity online transactions, which are referred to as Equity-based and Loan-based.

Regulatory Framework
Akodu noted that in most countries such as Nigeria, soliciting finance from the public without legal authorisation is considered illegal, stressing that Crowdfunding arrangement that require people to contribute money to a company in exchange for shares.

She explained that such a company comes under the securities laws in Nigeria, which comprised of the Investment and Securities Act, 2007 and Securities and Exchange Commission Rules 2013 (SEC Rules) ‘however, there is no specific crowd funding legislation in Nigeria.’

She remarked that the US Securities and Exchange Commission recently adopted rules to permit companies offer and sell securities through crowd funding, adding that the new SEC rules and proposed amendments to the Securities Act are designed to assist small companies with capital formation and provide investors with additional protection.

The legal practitioner stated that in UK, the FCA introduced new rules that apply to the distribution of “non-readily realisable securities”, ‘these are shares or debt securities in new or existing businesses that are not listed on a regulated stock market.’

 SEC regulates all securities offered for sale by public companies in Nigeria and there are no provisions relating to crowd funding in the SEC rules. What is interesting is that SEC is partnering with the Ontario Stock Exchange to develop a framework and rules on crowd funding for Nigerian capital markets.

As welcoming as this news may appear, it may not be a simple task bearing in mind the fact that Nigeria’s financial sector has not been successfully coordinated to accommodate new innovations such as this.
The Companies and Allied Matters Act, 2004 (CAMA) regulates the formation and operation of all types of companies and enterprises in Nigeria. However, to meet the objectives of crowd funding for small businesses, it would be expedient for such business to register as a private company under CAMA.

A review of some of the restrictive provisions of CAMA dealing with transfer of shares, and invitations to the public to subscribe for shares, for private companies may need to be made more flexible or there may need to be special provisions for public companies applying to register on a crowd funding platform.

The provision of CAMA restricting the number of members of a private company to 50 could be an advantage in that it would ensure crowd control and may encourage high net worth investors, thereby establishing a class of self-certified sophisticated investors that would have sufficient knowledge to understand the risks associated with such an investment.

Crowd funding may very well be the answer to funding SMEs in Nigeria and there can be no better time than the present to review all legal and regulatory framework required to invigorate our capital markets and financial sector services.
It has been recommended that a centralised body akin to the Financial Conduct Authority be created to administer the financial sector. In the UK the FCA protects consumers and financial markets by enhancing the integrity of the UK financial system while also promoting competition.

The FCA aims to support and empower a healthy and successful financial system, where firms can thrive and consumers can place their trust in transparent and open markets. It also makes sure that firms stick to the rules and take appropriate measures to prevent them from being used as a channel for financial crime.

The recommended review of the SEC rules should enable investors finance crowd funding projects subject to certain thresholds to be determined on a case-by-case basis. Companies seeking to raise funds should also be required to disclose information about their company and the securities on offer. There should also be enabling legal framework for intermediaries that may be involved in facilitating crowd funding transactions. The new rules should prohibit online portals from offering investment advice, soliciting sales or offers to buy securities and any information that would be considered to mislead or misrepresent prospective investors.

Establishing the legal and regulatory framework for crowd funding is a pragmatic move for SEC, which should involve a holistic review of our securities laws, company legislation and other related legislation. The on-going study should not be restricted to the Ontario Stock Exchange but should be broadened to include the UK that has similar laws as Nigeria. The next step will be for SEC to adopt a robust plan to ensure that crowd funding in Nigeria becomes a reality.


When THISDAY sent an SMS to the Assistant Director Corporate Affairs of the commission on the need to state the commission’s side of the story, he neither called nor replied the  SMS.
Also, when THISDAY contacted him on the commission’s statement on the demonstrating workers, he replied: “It is an in-house affair, we don’t want it in press, you can close your eyes against it.”

Looking at the scenario involving the commission and its work force, and lack of response by the commission which might tempt one into concluding that the commission has no genuine defense, one can simply say that the commission failed to allow the corporate governance code which it has set to implement among insurance firms to guide its operations especially in handling the affairs of its workforce.

Both golden rules and principles of corporate governance
demands that an organisation should put in place an  effective strategic process which incorporates stakeholder value.

The reporting principle of corporate governance says that the  reporting systems should be structured to provide transparency and accountability in  everything done in  an organisation and recognises that the interests of different stakeholders carry different weight which in order words does  not, by any means, suggest that those with a major interest matter and the rest don’t. On the contrary, best corporate governance practice dictates that all stakeholders should be treated with equal concern and respect.

From the points raised by both the existing and disengaged staff of the commission, there is lack of transparency and non consideration of interest of the workforce in decision taking by the executive management of the corporation.

This started from the regime of the immediate past commissioner Fola Daniel and like the disengaged staff said, the present commission does not know what to do with some of the illegal foundations laid by the former commission especially as regards staff affairs.

But like the Biblical Pilate, on whose shoulder lies the passage of final judgement against Christ, the present commissioner, is currently faced with the challenge of following the due process of the law to put right,most of the things his immediate predecessor had done wrong.

The commissioner should carefully address issues relating to staff management in the commission so as to have the moral justification to control and correct management of the insurance firms it is regulating on similar issues when they are not getting it right.

It is said that Caesar’s  wife should be above suspicion, therefore the commission as a regulator, should hence forth endeavor to sort out staff issues in-house before it escalates to industrial action in order to set good example for the industry it regulates.

Most importantly, NAICOM should be at the vanguard of respecting and complying with government’s circulars and directives  especially the one on eight year tenure for the commission’s directors  because the commission  as a regulator suppose to set good precedent for the industry it regulates.

The present commissioner, in a recent interview with THISDAY  said one of the reasons for implementing corporate governance code and risk based supervision is to build succession plan in the industry and correct the trend in which a chief executive behaves like a sole administrator without putting in place a plan for his successor.
Since the commission expects industry chief executives to comply with this directive from its end, it should also comply with government’s circulars and directives on its directors and staff treatment.