It is common knowledge that Nigeria is not the easiest place to start or run a business. In its 2017 ‘Doing Business Index, the World Bank ranked Nigeria an aggregate 169out of the 190 countries assessed. In the same report, Nigeria ranked 138 and 44 out of 190 in the ‘Starting a business’ and ‘Getting Credit’ sub-indices respectively, the latter perhaps being testament to the consensus among experts that finance may not the biggest problem facing Nigerian entrepreneurs.
Be that as it may, most experts nevertheless agree that ‘access to finance’ ranks among the top five challenges confronting Nigerian entrepreneurs, especially for those in the start-up phases of their businesses. Similar opinions were expressed by a number of senior officers representing foreign trade missions and multilateral agencies at an alternative financing event held last week in Lagos.
Raising capital for start-up businesses especially from traditional sources such as banks, who are not necessarily in the business of funding start-ups can be extremely difficult in Nigeria and this has had a somewhat stunting effect on the dreams and aspirations of many Nigerian entrepreneurs. Seeking funding from alternative sources of capital such as Angel investors and/or venture capitalists can also be equally challenging.
However, this challenge of capital raising for entrepreneurs is not peculiar to Nigeria. All over the world, from the US to Australia, entrepreneurs encounter similar challenges when raising capital to either start or scale up their businesses. What has been the difference however, is the degree of speed and responsiveness with which entrepreneurs, financial experts, investors, law/policy makers and regulators often working collaboratively together, have sought to provide alternative sources of investment finance.
An increasingly popular method for raising start up and growth capital within the rapidly expanding alternative finance industry is ‘Equity Crowdfunding’ which is a mechanism by which a broad group of investors can fund start-up companies and small businesses in return for a share in profits. According to the Februray2016 WEF ‘Alternative Investments 2020’ report; ‘Since 2010, funding levels on Crowdfunding Platforms have grown at an annual rate of more than 110%, reaching a projected total volume of new issuance of almost $70 billion in 2015’.
As a concept, equity crowdfunding first developed in the US in the mid 2000’s and took off in the UK in 2011. However, it was not until President Obama signed the JOBS (Jumpstart our Business Start-Ups) Act into law on April 5, 2012 that this form of investment fundraising, hitherto limited to ‘accredited investors’ and ‘high net worth individuals’ (whose wealth was enough to buffer the impact of financial risk), became open to ordinary citizens to take equity positions in companies raising funds through crowdfunding platforms which are typically hosted online.
By virtue of Title III of the US JOBS ACT, an exemption was made from the registration requirements of Securities Act Section 58 for certain crowdfunding transactions.
To qualify for the exemption under Section 4(a) (6), crowdfunding transactions by an issuer (including all entities controlled by or under common control with the issuer) must meet specified requirements, including the following:
- the amount raised must not exceed $1 million in a 12-month period;
- individual investments in all crowdfunding issuers in a 12-month period are limited to:
- the greater of $2,000 or 5 percent of annual income or net worth, if annual income or net worth of the investor is less than $100,000; and
- 10 percent of annual income or net worth (not to exceed an amount sold of $100,000), if annual income or net worth of the investor is $100,000 or more; and
What needs to happen now for entrepreneurs and investors alike in Nigeria, is for key stakeholders including the SEC and other financial services institutions to come together and have a series of dialogues/and or consultations to agree the broad outlines of a similar act to be passed by the National Assembly.
Already, European and US based crowdfunding platforms through their respective trade missions in Nigeria, have been showcasing the power of web-based crowdfunding and closing deals with Nigerian entrepreneurs funded by offshore investors.
One of the effects of not creating the enabling environment for such platforms to be legally set up and run in Nigeria is that financial services institutions and Nigerian investors who may be in good positions to launch and seed crowdfunding platforms respectively, will be unwittingly kept out of the loop of such opportunities for the foreseeable future.
Given the current state of the Nigerian economy, I am not certain that this is a tenable outcome for local investors, financial services institutions and entrepreneurs in particular; who will still have to bear the brunt of the significant currency risks associated with sourcing and repaying offshore capital.
Shaninomi Eribo
Shaninomi Eribo is the Donor Relations & Fundraising Manager at the Nigerian Economic Summit Group (NESG), where he also anchors the SME, Finance & Financial Markets Policy Commission
