One of the biggest challenges of starting a new business is getting capital. This is because most founders do not have buoyant backgrounds, or they simply need to involve investors in their ideas. Not all ventures need government grants or a bank loan, actually. How do I effectively crowdfund my business in Nigeria? This article will help you understand the concept of crowdfunding, its models, advantages, provisions of the regulating body in Nigeria, and how to crowdfund your business or idea.
For clarity, crowdfunding means the practice of raising various financial contributions to fund a business, a project, a venture, an idea, or an enterprise. Crowdfunding is usually pulled from a large pool of people, usually through an online platform. This is a giant leap from the old and traditional caucus of involving relatives, greedy venture capitalists, friends, etc.
In recent years, several crowdfunding portals have emerged. Amongst the popular crowdfunding platforms are KickStarter, gofundme, NaijaFund, Microventures, WeFunder, and so on. The major enabler of the crowdfunding industry is the internet through social media and the major online-based crowdfunding platforms.
Advantages of Crowdfunding
The crowdfunding industry now grows at a blistering pace. US businesses raised an estimated $1.04billion for startups in 2018 alone, $915 million in 2017. The continuing popularity of the crowdfunding industry only reveals its value and usefulness in the contemporary entrepreneurial world. Here are a few of its advantages:
- Crowdfunding lifts a huge burden off the shoulders of the government who have had to provide bailouts and grants to businesses and startups.
- A duly regulated crowdfunding industry eliminates challenges on transparency and assurance of rewards
- More ideas, businesses, and ventures are now surviving the uneven terrains of the entrepreneurial sphere due to the availability of funds
- Crowdfunding platforms are also focused on different industries – this makes the funding process faster and better. For example, Kickstarter focuses on the entertainment industry players.
The Models of Crowdfunding
Typically, there are 3 main models of crowdfunding. The models are based on reward expectations.
1. Reward-based Crowdfunding
Money is not expected in this model of crowdfunding, but rewards can come in other non-monetary ways. Some investors want to be named as part of the project, sit on a futuristic board, and make decisions. For example, a rich admirer of a business contributes his resources to be rewarded by being a named-partner.
2. Goodwill Crowdfunding
This model of crowdfunding involves people that donate to a cause. They typically do not expect ANY form of return from this donation. This is not even an investment. Efforts here are non-profit humanitarian gestures just to see an idea, a good project, or a struggling business relive good times. The popular platform – gofundme.com is the world’s major enabler of this model.
3. Equity Crowdfunding
This model of crowdfunding is the most common. It basically involves investors that offer their own resources in return for equity e.g shares in the target company.
Crowdfunding in Nigeria
In Nigeria, and many other African countries, who are still struggling to handle conventional concepts, small and medium scale founders met a roadblock. However, this is not unconnected to sheer lack of honesty of many recipients of previous crowdfundings. Scams, busted ‘419’ campaigns, and lies are really not hard to find in our day-to-day dealings, talkless businesses. The African community posed a different type of risk.
This caused crowdfunding platforms and foreign bodies to impose damning sanctions and restrictions on the African community. Restrictions became necessary. These restrictions have affected our accessibility to mainstream crowdfunding e.g, you cannot register and start a GoFundMe from Nigeria. In fact, SEC – the Nigerian Federal Government agency in-charge of securities transactions, activities of financial professional, and mutual fund trading to prevent fraud and intentional deception, had to pull the brakes on the whole industry.
However, we now have renewed hope in Nigeria. On Saturday 28th March 2020, the SEC released a brand new proposed regulatory framework for crowdfunding in Nigeria. The new proposed regulatory framework reveals requirements and guidelines for public and private business entities that wish to crowdfund their business in Nigeria.
The new framework now allows private MSMEs to raise capital from any registered crowdfunding platform of their choice. There are some stiff regulations attached to this permission, nevertheless, it is a huge step forward. Besides, the burden on the Nigerian government which currently funds several schemes in a bid to help small scale businesses can now be eased.
Provisions of the New SEC Act of Crowdfunding
Eligibility for MSMEs in Nigeria
According to SEC regulations, MSMEs incorporated within Nigeria must have at least 2 years operating track record to be eligible to raise capital through crowdfunding. Returns for investment can be through debentures, issuance of shares, board position, investments, and so on as the commission may deem fit from time to time. Hitherto, the privilege to engage in crowdfunding in Nigeria was granted only to public companies.
“All MSMEs incorporated as a company in Nigeria with a minimum of two-years operating track record shall be eligible to raise funds through a Crowdfunding Portal registered by the Commission, in exchange for the issuance of shares, debentures, or such other investment instrument as the Commission may determine from time to time.” – SEC NIGERIA
The regulating agency SEC was also specific on the maximum capital enterprises can raise:
- i. The maximum amount which may be raised by a Medium enterprise shall not exceed N100Million;
- ii. The maximum amount which may be raised by a Small enterprise shall not exceed N70Million;
- iii. The maximum amount which may be raised by a Micro enterprise shall not exceed N50Million
Eligibility Criteria for Crowdfunding Platforms in Nigeria
The SEC has also made sure that the activities of the crowdfunding platforms are highly regulated to avoid service failure, fraud, and arbitrariness. The SEC may only allow a platform to crowdfund a business in Nigeria if the SEC is satisfied with the following:
- (i) the operator will be able to operate an orderly, fair and transparent market in relation to the securities or investment instruments that are traded through its electronic platform;
- (ii) the operator’s board, chief executive, and any person who is primarily responsible for the operations or financial management of the Crowdfunding Portal, are fit and proper persons who have not: been convicted, blacklisted by a professional body which he belongs to, disobeyed any written law of Nigeria, engaged in unlawful business practices, etc
- (iii) the operator will be able to manage any risk associated with its business and operation;
- (iv) the operator will be able to take appropriate action against a person in breach including directing the person in breach to take any necessary remedial measure;
- (v) the rules of the Crowdfunding Portal assure investors and all other stakeholders of fairness and transparency
- (vi) the operator has sufficient financial, human and other resources for the operation of the Crowdfunding Portal, as prescribed by the commission from time to time.
Apart from crowdfunding portals regulations, the SEC also placed restrictions on individual investors. They are allowed to invest at most 10% of their annual income in a calendar year. This means that on a net income of ₦1,000,000 a month, a user cannot invest more than ₦1,200,000 a year.
How to Crowdfund your Business in Nigeria
It is not sufficient to only plan your business carefully, you must also be able to present your business idea or venture in the best possible light. You can hire experts, if possible.
You must also create a viable online presence for your idea or business. The more popular the profile of your campaign is, the bigger your chances of success.
How Do I Crowdfund my Business in Nigeria?
- Get your a comprehensive and clear vision, mission, and projection for your business, or idea.
- Visit a crowdfunding portal that suits your craft or business. We have quite a few available crowdfunding platforms in Nigeria:
- Register your details and create a profile
- Present your business, venture, or idea
- Raise awareness on social media platforms such as Instagram, Twitter, and Facebook.