SEC’s Regulation of Crowdfunding in Nigeria-What is going on!

sec.gov.ng

The Securities and Exchange Commission (‘the SEC’) via its circular of June 11, 2021, entitled ‘Deadline for Registration as a Crowdfunding Intermediary/Platform’, informed all existing Investment Crowdfunding Portals/Digital Commodities Platforms operating in Nigeria that the deadline for registration with the SEC as a crowdfunding intermediary is June 30, 2021.

The circular concluded by informing operators that failure to comply with the registration requirement by that deadline will result in the operation of such platforms being categorized as illegal and attract regulatory sanctions.

The SEC’s position requiring digital commodities platforms to register as crowdfunding intermediaries conveyed via the circular is frankly curious.

The SEC’s Crowdfunding Rules came into effect on January 21, 2021.

From its effective date, all existing investment crowdfunding portals/digital commodities platforms operating in Nigeria were given a 90-day grace period to apply for registration as crowdfunding intermediaries.

The said 90-day grace period elapsed on April 21, 2021. However, the SEC extended this grace period to June 30, 2021.

Curiouser, one cannot help but wonder which existing investment crowdfunding portal/digital commodities platform the SEC refers to in its circular.

This is because, to my mind, there is really no entity/ operator that comes under the purview of the Crowdfunding Rules.

Why do I say this?

The Crowdfunding Rules clearly restrict the applicability of the Rules to Investment Based Crowdfunding, defined in the Rules as…

‘…the process of raising funds from the public through an online portal in exchange for shares, debt securities or other investment instruments approved by the Commission’.

Maybe commodities are ‘…. other investment instruments approved by the Commission’.

But the Rules defines ‘Investment Instrument’ to include ordinary shares, plain vanilla bonds or debentures, and simple investment contracts approved by the Commission for issuance through a crowdfunding portal from time to time.

From the above definition of ‘Investment Based Crowdfunding’, I am in fact convinced that there is no entity in Nigeria, currently offering investment-based crowdfunding services.

Instead, it seems that the SEC intends to, via a roundabout way, regulate all crowdfunding platforms in Nigeria and not just investment-based crowdfunding.

This is because the circular extends the registration requirement to ‘…all existing investment crowdfunding portals/digital commodities investment platforms’.

Now it gets curiouser.

What are digital commodities investment platforms?

Going by the definition contained in the Rules, ‘Commodities Investment Platform’ is an electronic platform that connects investors to specific agricultural or commodities projects to sponsor such projects in exchange for a return.

Examples which we may know include platforms such as Piggyvest’s ‘Investify’, Farmcrowdy, ThriveAgric, FarmFunded etc

Why is the SEC interested in these platforms that connect investors who wish to sponsor commodities projects (which includes agricultural projects)?

A simple google search of ‘commodities’ will show that-

A commodity is a basic good used in commerce that is interchangeable with other goods of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers.

Major commodities include cotton, oil, gas, corn, wheat, oranges, gold, and uranium. Basically, they are the raw materials needed by manufacturing companies in running their businesses.

The SEC, in Part 8 of the Rules entitled ‘Additional Requirements for Commodities Investment Platforms’, essentially permits a crowdfunding intermediary to operate a commodities investment platform.

The SEC then proceeds to say, in the portal requirements, that such a crowdfunding intermediary shall not facilitate, on its portal, any other crowdfunding business other than sourcing funds for investment in agricultural or other commodities. This essentially precludes such intermediaries from offering investment-based crowdfunding.

The Rules clearly states that-

‘i. the portal operated by the crowdfunding intermediary for investment in agricultural or commodities projects shall not be utilised for any other funding or marketing purpose.

ii. a crowdfunding intermediary registered to operate a commodities investment platform shall not host a different crowdfunding portal where funds would be sourced for non-agricultural or commodities projects’.

If the crowdfunding intermediary is only sourcing funds for investment in agricultural or other commodities and not engaging in any type of investment-based crowdfunding, why should that intermediary or its portal be regulated by the SEC?

Thus, one cannot help but wonder why the SEC, via this roundabout manner is attempting to regulate crowdfunding intermediaries operating commodities investment platforms.

In fact, the Rules should have specifically excluded such commodities investment platforms from its regulatory purview.

Part 8 of the Rules is an overreach by the SEC of their powers pursuant to the Investment and Securities Act, 2007 and under which Act, the Crowdfunding Rules were made.

Of course, the SEC regulates the Nigerian capital market.

And yes, Section 13(k) of the Investment and Securities Act, 2007 (‘ISA’) empowers the SEC to…

‘…act in the public interest having regard to the protection of investors and the maintenance of fair and orderly market, and to this end establish a nationwide trust scheme to compensate investors whose losses are not covered under the investor’s protection funds administered by securities exchange and capital trade points.’

So yes. The SEC has a responsibility to protect investors in the Nigerian market.

The question this raises is — does this responsibility extend to crowdfunding for commodities?

According to Section 13(a), one of the functions of the SEC is to regulate investments and securities business in Nigeria as defined by the ISA.

Securities were defined by the Act to include ‘commodities futures, contracts, options and other derivatives which may be transferred by means of any electronic mode approved by the Commission and which may be deposited, kept or stored with any licensed depository or custodian company.’

The second schedule of the ISA defines investments to include commodities futures and options but not commodities.

Commodities are not investment instruments approved by the SEC. Commodities via futures and options, yes. But not commodities per se.

So, no.

The SEC has no regulatory oversight over crowdfunding to source for funds to invest in commodities and hence, the digital platforms through which these crowdfunding activities are carried out.