Dear Subscriber
Small and Medium Scale Enterprises (SME’s) are known to be the engine room of economic growth as they generate the bulk of business activities in most countries. Nigeria is not an exception to this rule as available data shows the country’s SME’s are the highest employers of labour and usually provide a huge chunk of products and services. SME’s are however hampered by a variety of factors, chief of which is access to capital to propel ideas or business activities because banks typically charge exorbitant rates and also request substantial collateral which is mostly beyond the reach of the start-up.
Crowdfunding is an alternative solution to the problem of inaccessibility of capital and basically involves raising business capital from a pool of individuals contributing little amounts. In developed countries, this model has exploded in popularity over the last decade primarily because of the flexibility it offers as against capital raised from venture capitalists and banks. Our focus this week is the advancement of this alternative finance model {especially for SME’s} and the legal framework required to make it work
DEFINITION
Crowdfunding is the contribution of small amounts of capital from a large number of individuals to finance a business venture or a cause. This financing model usually utilizes an internet portal to bring investors and entrepreneurs together.
BENEFITS
- Flexible access to Capital – Crowdfunding is an easier alternative to sourcing loans from banks or venture capital firms which can often be a complicated process. On the other hand the application process for crowdfunding is a walk in the park compared to these traditional methods.
- Marketing Tool- In the course of pitching an idea to the Crowd, the entrepreneur ultimately introduces the venture’s mission and vision to the market.
- Idea Validation- Pitching a crowd of investors tests the validity of the idea or business process and a successful crowdfunding campaign is a proof of sufficient market validation. This also allows the entrepreneur engage the crowd and receive comments, feedback, and ideas which will help the entrepreneur understand the business better.
LEGAL FRAMEWORK
Being a relatively new form of financing, most countries have no specific legislation tailored for crowdfunding but gradually various countries have started coming up with laws and regulations for crowdfunding platforms e.g. the Jump Start Our Business Act (JOBS Act) which was signed into law in 2012 by President Barrack Obama.
In addition to lack of appropriate legislation to support crowdfunding Nigeria also needs to review some sections of the following laws to enhance the propagation of crowdfunding.
- Companies and Allied Matters Act (CAMA)- Section 22(5) of CAMA, prohibits a private company from inviting the public to subscribe for any shares or debentures of the company or deposit money for fixed periods or payable at call, whether or not bearing interest, except authorised by law. This has the effect of stopping start-up companies from inviting members of the public to invest in a project in return for equity.
- Investment and Securities Act 2007 (ISA)- The ISA stipulates that no person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with anybody corporate for a fixed period or payable at call, whether bearing or not bearing interest unless certain requirements, which include being a public company, publishing a prospectus amongst others are met.
CONCLUSION
Crowdfunding is an excellent way for entrepreneurs to receive the financing and exposure they need in order to grow their ventures. Notable crowdfunding platforms like Kickstarter, Indiegogo, GoFundMe etc. have raised billions of dollars for ventures at all stages. With the industry still evolving and becoming more efficient, there is no better time than now for Nigeria to take advantage of these alternative finance model by putting the proper framework in place.
The content of this document is solely for information purposes only and should not in any way be construed as a legal opinion. If you require specific legal advice on any of the matters covered in this article please contact a professional.
MOTIVATIONAL VIDEO
We understand how tough it is being in business, so the “IOC Weekly” Editorial Team has decided to add inspiring videos to our weekly articles to juice up your week. We hope it serves the purpose.
Cheers,to a fruitful week.
