FINTECH CREDIT MARKET - CROWDFUNDING:

AN EVALUATION OF MARKET MODELS

BY:
LAWRENCE OGUAMA*

ABSTRACT
One of the incidences of the emergence and growth of the internet and the vast availability of
computing devices across countries of the world today is the increase in innovation. New ways
of doing things are now on the rise in all spheres of human endeavours, including financing. In
time past, banks used to be the exclusive formal avenues through which individuals and
businesses source for funds, but with the growth of the internet coupled with the somewhat loss
of tastes/dislike for traditional banks, especially after the global financial crisis, this has
changed. Financial services are now being offered by non-banks and even in better, faster and
attractive manners. This paper examines Crowdfunding as an alternative way of financing for
individuals and entities in Nigeria. Further, the paper evaluates the various Crowdfunding
market models, how each one functions, the legal and regulatory treatments of each model as
well as the value of credit generated through them.

Key words: FinTech, Crowdfunding, SEC, Equity, P2P, Reward, Donation, regulation, credit.

INTRODUCTION
The application of technology in the delivery of financial services is fast changing the way
credit is globally sourced in modern day financial markets. The interplay between finance and
information technology has birthed new financial services and upgraded old ones whilst
making the offering and accessing of financial services much easier for individuals and
businesses than what it used to be in the past.

Although the intersection of finance and information technology 1 is not a new development,
the recent and increased application of technology in financial services delivery by new
entrants in the financial services market (FinTechs) has made the relationship seem novel.
Thus it would be agreed that, with the development of telegraph and the laying of the first
telegraph line in the 1800s; the introduction of money transfer services by Western Union in
1871 and the introduction of the Automated Teller Machine (ATM) in the 1900s, the union of
finance and technology has had a long history.

However, before now financial services delivery used to be the exclusive monopoly of legacy
financial institutions (traditional banks), but with the incursion of technology in finance,
especially after the 2008/2009 global financial crisis, this has rapidly changed - especially with
the growth and development of the internet coupled with the vast availability of computing
devices.

Following the increasing rise of FinTech credit platforms, new and innovative ways of offering
and accessing credit facilities, such as Crowdfunding are fast emerging globally. The result of

1
*LL.B, BL, Associate, E&P Legal, Lagos, Nigeria. E-mail: [email protected] , Tel.: +234(0)8176424361
The nomenclature, “FinTech” which is made up of the word “Finance or Financial” and “Technology” is now the
term used to describe the union of financial services and information technology.

FinTech Credit Market - Crowdfunding Page 1

this is that the medium of obtaining credit and other facilities has gradually extended beyond
the traditional bank-based credit intermediaries.

This article examines the meaning and evolution of Crowdfunding; the various Crowdfunding
business models, how each one functions; the legal and regulatory treatments of each model as
well as the value of credit generated through them in recent pasts. Specific discussions in this
article (especially the part relating to the credit value of each model), are however focused on
the three major Crowdfunding markets in the world (United States, United Kingdom and
China) vis-a-vis Nigeria.

CROWDFUNDING
Crowdfunding is the process of financing a project or venture by requesting a large number of
persons to each contribute small amounts of money via an online platform. The Nigerian
Securities and Exchange Commission defines the scheme as “the process of raising funds to
finance a project or business from the public through an online platform”. 2 Simply put,
Crowdfunding is the activity or process of raising money from a large number of people for the
purpose of a project or business, typically through a website.3

The Crowdfunding scheme switches around the traditional financing approach wherein an
individual who intends to startup a business venture but lacks the requisite capital, seeks
needed funds by asking for financial assistance in the form of contributions from immediate
family members, relatives, friends and/or well-wishers. Advancing beyond this traditional
approach, modern financing, through the FinTech Crowdfunding scheme, engages over the
internet, a large pool of individuals (the crowd).

Historically, modern Crowdfunding began in 1997;4 however, it was in 2006 that the dedicated
term “Crowdfunding” was first employed to describe the scheme. 5 The term was coined by
Michael Sullivan with the lunch of his fundavlog project. 6 The scheme is most popular in
China, the US and the UK. It was reported to have first appeared in the UK in 2007 from where
it developed to the US, China7 and then to the rest of the globe. Currently, China is reputed to
be the largest Crowdfunding market in the world with an amazing market share of 70.7% even
in the face of a significant fall in Crowdfunding volumes in 2018. 8 The US and the UK are
respectively the second and third largest markets after China9.

2
See Part 1, Rule 1 of the SEC Proposed Rules on Crowdfunding.
3
See http://www.dictionary.com accessed 29th May, 2020.
4
The Startups Team, Brief History of Crowdfunding (2018), available at
<https://www.startups.com/library/expert-advice/history-of-crowdfunding> accessed on 29th May, 2020.
5
ibid
6
A Social History of Crowdfunding (2011), available at <https://socialmediaweek.org/blog/2011/12/a-social-
history-of-crowdfunding/> accessed 29th May, 2020.
7
The Global Crowdfunding Market was valued at 10.2 Billion US$ in 2018 and is expected to Reach 28.8 Billion
US$ with a CAGR of 16% by 2025- Value Reports (2019) available at <https://www.prnewswire.com/in/news-
releases/the-global-crowdfunding-market-was-valued-at-10-2-billion-us-in-2018-and-is-expected-to-reach-28-8-
billion-us-with-a-cagr-of-16-by-2025-valuates-reports-888819175.html> accessed at 29th May, 2020.
8
Crowdfunding Statistics Worldwide: Market Development, Country Volumes, and Industry Trends (2020),
available at <https://p2pmarketdata.com/crowdfunding-statistics-worldwide/> accessed 29th May, 2020.
9
Ibid

FinTech Credit Market - Crowdfunding Page 2

With the global fast rising Crowdfunding markets, accessibility of FinTech credit has
increasingly become easy. In 2017, the volume of funds generated through Crowdfunding was
estimated to be over US$5.5 Billion; and in 2018, the market was valued at US$10.2 Billion.
This figure, if it keeps increasing at a compound annual growth rate of 16% between 2018 and
2025, is estimated to have the potential to almost triple by 2025. 10 Indeed, the Cambridge
Centre for Alternative Finance (CCAF) 2020’ Benchmark Report revealed that, at least
US$304.53 Billion has so far been raised from 171 countries in 2020 through the process of
Crowdfunding.11 In Africa, a report released in 2017 by the Dutch Crowdfunding expert,
Suzanne Wissie-Huiskes titled "Crowdfunding Potentials for Nigeria” revealed that, in Africa
at least US$83.3 Million was raised through Crowdfunding in 2015 and that out of this sum,
Nigeria accounted for US$7 - US$8 Million12. This increasing figure, growth and development
of Crowdfunding thus shows the wide patronage and market share that the emerging innovative
scheme is attracting worldwide.

Despite the traction being gained by this FinTech credit scheme in Nigeria, the country
currently lacks a specific law or regulatory framework for it. However, the Nigerian Securities
and Exchange Commission (SEC) in March 2020 exposed its first Proposed Rules on the
scheme (the “Proposed Rules”)13 and made a call for public comments on the draft. Sequel to
receiving comments, on 8th September, 2020 the SEC re-exposed the Proposed Rules reflecting
certain changes made to it. At present the Proposed Rules are still in drafts and yet to
commence/take effect and it seems the provisions in it are intended majorly for the Equity and
P2P based models.

MARKET MODELS
Broadly, a Crowdfunding model can either be investment based or non-investment based in
nature. It is investment based where funders/donors participate with the aim of making
pecuniary gains; and it is non-investment based where participations are done without any
pecuniary interest at heart. An example of a non-investment based Crowdfunding is the
Donation-based model.

10
Global Crowdfunding Market Size, Status and Forecast 2019- 2025, available at
<https://reports.valuates.com/sreport/QYRE-Auto-
1598/Global_Crowdfunding_Market_Size_Status_and_Forecast_2019_2025> accessed 29th May, 2020.
11
Global Alternative Finance Market Benchmarking Report (2020), available at
<https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/the-global-alternative-
finance-market-benchmarking-report/> accessed 30th May, 2020.
12
Report: Crowdfunding Potential for Nigeria 2017, available at <https://www.crowdfundinghub.eu/report-
crowdfunding-potential-for-nigeria-2017/ > accessed 1st April, 2020. See also Financial Nigeria, New Report
Reveals Huge Crowdfunding Potential in Nigeria (2017) available at <http://www.financialnigeria.com/new-
report-reveals-huge-crowdfunding-potential-in-nigeria-sustainable-photovideo-details-809.html> accessed 1st
June, 2020.
13
See the SEC Proposed Rules to the Rules and Regulations of the Commission released March, 2020. Available
at <https://sec.gov.ng/wp-content/uploads/2020/03/SEC-NG-Crowdfunding-Rules-for-Exposure-March-
2020.pdf> accessed 29th May, 2020. See also the re-exposure available at https://sec.gov.ng/exposure-of-new-
rules-on-collateral-management-company-crowdfunding-other-amendments/ accessed 10th September, 2020.

FinTech Credit Market - Crowdfunding Page 3

Although there are no limits as to the form a Crowdfunding scheme may take, the following
are the four (4) most common forms or models found within the globe including Nigeria:14

1. Peer-to-Peer (P2P)/Loan-based Crowdfunding;

2. Donation-based Crowdfunding;
3. Equity/Investment-based Crowdfunding; and
4. Reward-based Crowdfunding.

Peer-to-Peer (P2P)/Loan-based Crowdfunding

Perhaps the oldest and the most popular, the Peer-to-Peer (P2P) lending model provides an
online market that allows investors (lenders) to trade directly with credit seekers (borrowers)
without the use of a financial institution as an intermediary. The lending model serves as a
platform that directly connects borrowers and lenders of credit.

A prospective borrower under a P2P model is simply required to register for a loan on the
platform and provide a range of credit information which will then be verified by the
platform.15 Upon verification, the borrower may choose funds available on the system after
which a loan contract would be established between him and the lender. The P2P platform
assists investors in making appropriate choices by providing them with some form of credit
risk assessments while charging fees on transactions consummated through the platform. In
Nigeria, examples of P2P Crowdfunding models are Fint, Kiakia and Sureloan.

The P2P model operates in different ways across lending platforms: whereas some platforms
allows an investor to directly choose a loan to purchase based on a number of credit
information, such as the loan term, borrower’s industry and income; others directly match
lenders and borrowers.16 However, it is suggested that in spite of the form a P2P model may
take, it must not in any event, directly accept investments (funds) from lenders in order to use
same to fund loan applications while paying interest on the investments to the direct lenders
through the issuance of notes and/or other securities otherwise it would lose its character as a
P2P system. This is because such issuance might qualify as securities under relevant laws.17

An illustration of how the foregoing can play out was aptly captured by the incidence that met
the US’ P2P lending platform, Prosper, in 2008. In Re: Administrative Proceedings of the
Securities and Exchange Commission, (USA) and Prosper Marketplace, Inc.,18 Prosper a
renowned FinTech P2P lending platform was issued a cease and desist order by the United
States Securities and Exchange Commission (the “Commission”) pursuant to Section 84 of the
United States Securities and Exchange Act, 1933, when the Commission discovered Prosper

14
Indeed, apart from them other models include the Notary and the Invoice Financing models.
15
Though, some platforms in some jurisdictions approve loans without verification.
16
FinTech Credit: Market Structure, Business Models and Financial Stability (2017) available at
<https://www.bis.org/publ/cgfs_fsb1.htm> accessed 7th June, 2020.
17
For the definition of “Securities” under investment law, see Section 315 of the Nigerian Investment and
Securities Act, 2007 (ISA). The Act amongst other things, defines Securities to include Notes. The SEC for the
purpose of Crowdfunding considers uses the word “investment instrument” instead of “security”.
18
File no. 3-13296 (Release number 8984), November, 2008, available at
<https://www.sec.gov/litigation/admin/2008/33-8984.pdf> accessed 31st May, 2020.

FinTech Credit Market - Crowdfunding Page 4

was funding its loans through the issuance/sale of notes to the investors whose payments were
dependent on the borrowers’ fully discharging their obligations on the loans, as opposed to
having lenders buying the loans outright. The Commission determined that the notes were
tenable securities which ought to have been registered with it.

Prosper’s case re-enforces the position that, a P2P platform must stick within the traditional
pattern and if it wishes to change this pattern of operation by offering notes or similar
securities, it must duly register and comply with existing legal requirements. In Nigeria, the
SEC Proposed Rules on Crowdfunding does not however require the registration of an
Investment Instrument19 before offer or sale;20 nevertheless, the definition of “Investment
Instrument” seems to have excluded notes as the Proposed Rules defines an Investment
Instrument as ordinary shares, plain vanilla bonds or debentures, and simple investment
contracts approved by the SEC for issuance through a Crowdfunding portal from time to
time.21 The Proposed Rules permits Micro, Small and Medium Enterprises (MSME)
incorporated in Nigeria as a company and possessing a two years operating track record to
raise fund through Crowdfunding in exchange for the issuance of Investment Instruments. 22
The Proposed Rules also permits such a company though lacking the requisite two years
operating track record, to raise funds through the scheme and issue relevant Investment
Instruments in exchange, provided the company has either a core investor or a strong technical
partner that possesses two years operating track record.23

In apparent recognition of the limitations imposed on private companies by the Companies and
Allied Matters Act (CAMA) especially in terms of the total number of members they may
have, the Proposed Rules stipulates that if at the end of a funding round 24 the members of such
a company raising funds through the scheme exceed fifty as required under Section 22 of the
CAMA, such private company shall be deemed a “public company by default”.25

Depending on the structure of a P2P system and the regulatory frame work in place in the State
or area where it operates, a P2P FinTech Lender may be subject to relevant legislations on
lending and may require a money lenders license to operate in States requiring it. Indeed, the
Money Lenders Law of Lagos State, 197226 provides that a person who lends money at interest
or who lends a sum of money in consideration of a larger sum being repaid shall be presumed
to be a money lender until contrary is proven. The implication of this provision is that a valid
money lenders license must be obtained before transacting in P2P lending in Lagos State and
other States having similar provisions27. In the US, FinTech platforms involved in loan
underwriting, origination or servicing are also subject to lender licensing requirements laws of
19
See footnote 17, supra
20
See Rules 3(1), infra
21
See Part 1, Rule 1 of the Proposed Rules.
22
See Rules 3(1) ibid.
23
ibid
24
A funding round is defined to mean the round of funding a specific project, business, or venture hosted on a
Crowdfunding platform to raise funds from a large number of people in exchange for shares, debt securities or
other investment instruments approved by the SEC. See Part 1, Rule 1 as amended by the re-exposure drafts
Rules.
25
See the meaning of “Public Company by Default” In the re-exposure of the Proposed Rules.
26
See Section 4 Money Lenders Law of Lagos, Cap M7, Laws of Lagos State of Nigeria, 2018

FinTech Credit Market - Crowdfunding Page 5

each State and are in addition subject to usury 28 limits of the various States laws. In the UK, by
virtue of the Bank of England and Financial Services Act, 2016, Money lending is considered a
regulated activity29 and the Financial Conduct Authority (FCA) regulates business to consumer
lending.30

The P2P Crowdfunding model has globally grown and enjoyed considerable market shares. In
2012 alone in the UK, P2P loans to businesses was at a record high £81 Million and in 2015
that figure increased to £1.49 Billion while personal loans jumped from £167 Million to £909
Million just within a space of three years.31 In light of this growth, it is now predicted that in
2020, the volume of P2P transactions in the UK would hit £14 Billion and that by 2022 the
lending model would have equaled £30 Billion.32

The US as the second largest P2P consumer market, has so far had a total of US$24.7 Billion
transaction volume. In China P2P platforms were reported to have generated over ¥965 Million
(approximately US$141 Million) in 201933. The Nigerian P2P eco-system is not left out in this
growing market share. In 2017 it was reported that out of the US$7 - US$8 Million generated
from Crowdfunding in Nigeria, at least 90% came partly from the P2P model.34

Donation-based Crowdfunding
The Donation-based Crowdfunding model is a simple system that an individual or entity can
use to seek for assistance from a large number of people online. It is a process where
individuals donate money to a cause, charity or person without expecting anything in return
other than the satisfaction of having contributed towards something they feel is worthwhile. By
its nature, the model is thus non-investment based.35

This model of Crowdfunding starts with the donee (the person that needs the assistance or his
family/associates) creating a campaign in respect of the particular cause the fund is needed for
and spreading awareness about it using social media platforms. Anybody (donor) who shares in
27
Apart from Lagos State other states of the Federation and the Federal Capital Territory equally has their
respective State’s Money Lenders Laws.
28
A loan is said to be usurious where the lender charges interest rate that are above the rate of interest
permitted in a given State of the United States.
29
The Act defines an “illegal money lender” to mean the carrying on of a regulated activity within article 60b of
the Financial Services and Markets Act, 2000(Regulated Activities) Order 2001(S.1 2001/544) (regulated credit
agreement) in circumstances which constitute an authorization offence. See
http://www.legislation.co.uk/ukpga/2016/14/part/2/crossheading/illegal-money-lending/enacted accessed 21st
August, 2020.
30
Simmons + Simmons LLP, FinTech Regulation in United Kingdom (2019) available at <
https://www.lexology.com/library/detail.aspx?g=9c1c541b-842f-467f-9e52-ceb0c4a506a6> accessed 21st
August, 2020.
31
What Role does Peer to Peer Lending Have in the Economy, available at
<https://www.planetcompliance.com/2020/01/21/what-role-does-peser-to-peer-lending-have-in-the-
economy/> accessed 10th June, 2020.
32
ibid
33
Statista, Annual Turnover of Online Peer-to-peer (P2P) Lending Platforms in China from 2010 to 2019 available
at <https://www.statista.com/statistics/652734/china-online-p2p-lending-turnover/> accessed 10th June, 2020.
34
See footnote 12, supra
35
Donation-based Crowdfunding (2019), available at <https://www.investopedia.com/terms/d/donationbased-
crowd-funding.asp> accessed 10th June, 2020.

FinTech Credit Market - Crowdfunding Page 6

the cause is then welcome to donate funds to it. Examples of the Donation-based Model are
Donate-ng and Gofundme.

In Nigeria, this model of Crowdfunding could be seen in situations where people place adverts
over the internet through social media platforms such as Facebook, Twitter and Instagram
calling for financial assistance in order to make up a sum needed for medical treatment,
educational costs or other causes. The model could also be employed in financing, amongst
other things,36 start-up ideas, businesses, personal and social causes. Typically, bank accounts
are displayed and requests/fund solicitations are made from individuals and or corporate
entities to assist the cause by donating any amount they could afford. Donors contribute to the
cause by simply depositing monies directly to the bank accounts that are provided. There is no
maximum donation that could be made, though the cause may usually have a targeted sum. The
use of this model of Crowdfunding is most often employed by Non-Governmental Institutions
(NGOs).

There is currently no legal/regulatory framework for donation based Crowdfunding in Nigeria

and the SEC in its Proposed Rules makes no specific provision(s) for this model of
Crowdfunding. But in spite of the absence of specific framework, it is suggested that this
model of Crowdfunding is restricted in relation to companies in Nigeria as the (CAMA) limits
the powers of a company to make donations in certain cases. Specifically, the CAMA makes it
an offence for any company to make donations of its funds or make gifts of any of its
properties to a political party, political association or any political purpose. 37 Therefore, a
company in Nigeria cannot aid a political cause or purpose by its donation using this model of
Crowdfunding or any model at all.

In the UK, somewhat of the foregoing restriction also exists against the powers of a company
to make donations or gifts. However, the restriction in the UK is not total as the law creates
two categories of donors – permissive and non-permissive donors. 38 A “Permissive Donor’ is
defined to include a UK registered company - mutatis mutandis, a “Non-permissive Donor”
will include non-UK registered companies. A political party is permitted to receive not more
than £500 from Non-permissive Donors but may receive an unrestricted amount from
Permissive Donors. On the other hand a candidate of a political party may receive up to £50
from Non-permissive Donors and is also allowed an unrestricted amount from a Permissive
Donor.39

In spite of the restrictions on this model of Crowdfunding, it has been used to generate huge
amounts for numerous causes. In 2017 Gofundme reported that it has over 50 million donors
and had raised a total of US$5 Billion. 40 In the UK alone, between 2012 and 2017 the
36
The Reason why Everyone Loves Donation-Based Crowdfunding, available at
<https://milaap.org/stories/donation-based-crowdfunding> accessed 6th June, 2020.
37
See Section 43(2) Companies and Allied Matters Act (CAMA), 2020. Previously Section 38(2) of the repealed
CAMA, 1990.
38
See the Political Parties, Election and Referendum Act. 2000 archived at <https://perma.cc/CL4C-FEY8>
accessed 17th June, 2020.
39
Ibid. See also the Representation of the People Act, 1983 and the Political Parties and Elections Act, 2009.
40
Gofundme “About Us” press release, Jan. 13, 2015, cited in Cheryl T. Metrejean, supra footnote32

FinTech Credit Market - Crowdfunding Page 7

Donation-based Crowdfunding market was reported to have reached a sum total of roughly £41
Million;41 and in the US, a report from the Pew Research Centre in 2016 revealed that not less
than 68% of American adults who had contributed to a crowd sourced program, contributed to
help someone in need; and that at least 50% of individuals who made contributions donated at
least US$50.42 In Nigeria, it was reported in 2017 that, 10% of the sum of US$7 - US$8
Million raised from Crowdfunding in the country was partly generated through the Donation-
based model.43

Equity/Investment-based Crowdfunding
This model of Crowdfunding involves raising money from a large pool of persons online
through the sale of securities such as shares and convertible notes. In other words, the scheme
involves the online offering of securities44 --most often than not, securities of a private
company -- for investment by the public where permitted by law. It is more like a process of
the crowd investing in an early-stage unlisted company.

The recently published SEC Proposed Rules on Crowdfunding defines this model of
Crowdfunding as the process of raising funds from a large number of people through an online
platform in exchange for shares, debt securities or other Investment Instruments approved by
the SEC.45

The Equity-based model of Crowdfunding offers benefits to medium and small scale business
enterprises and start-ups that may not have the security to obtain loans from commercial banks
or capacities to withstand the high rates of interests attached to such loans or rely on private
equity.

In Nigeria due to the fact that this model of Crowdfunding involves investment into a
commercial enterprise, it is subject to securities and financial regulations. This is particularly
so because a company that sources and obtains funds from the public to carry out its operations
and projects, indirectly engages in capital market activities. And since the current state of the
law failed to make any provision or envisaged Crowdfunding, on 15 th August 2016 the SEC
through its Director-General released a statement directing that all Crowdfunding platforms
should suspend operations until such a time that rules are made for it and the legal
impediments to it are removed.46 Sequel to this and as earlier discussed, in March 2020 the
41
Annual Volume of Donation Based Crowdfunding in the United Kingdom (UK) 2013-2017 (2020), available at
<https://www.statista.com/statistics/797717/donation-based-crowdfunding-uk/> accessed 17th June, 2020.
42
Cheryl T. Metrejean, Donation-based Crowdfunding and Non-taxable Gifts (2018) available at
<https://www.journalofaccountancy.com/issues/2018/mar/donation-based-crowdfunding.html> accessed 15th
July, 2020.
43
See Footnote 12, supra
44
Under the SEC Proposed Rules a Security is termed an “Investment Instrument”. See footnote 20.
45
See Rule 1 of the Proposed Rules.
46
This Day Newspaper, SEC Rules out Crowdfunding from Nigeria for Now, available at
https://www.thisdaylive.com/index.php/2016/08/15/sec-rules-out-crowdfunding-in-nigeria-for-now/ accessed
27th July, 2020. These impediments are those imposed by both the CAMA and the ISA. Specifically, Section 22 of
the CAMA prohibits a private company not to have more than 50 members and not to invite the public to
subscribe to its securities. On the other hand Section 67(1) of the ISA permits only a public or a statutory body
from inviting the public to acquire its securities or dispose of any security of a body corporate. Till date this
restrictions are still extant, even in the newly enacted CAMA.

FinTech Credit Market - Crowdfunding Page 8

SEC pursuant to its powers under Section 313 of the ISA exposed its Proposed Rules on
Crowdfunding.

The Proposed Rules makes certain provisions to regulate this model of Crowdfunding in the
country. Amongst others, it requires that a Crowdfunding portal 47 be registered with the SEC
and that such a portal be operated by a Crowdfunding Intermediary 48 who must be a duly
registered entity. Under the Proposed Rules, the SEC reserves the right to revoke the
registration of any Crowdfunding portal where it fails to meet up with the requirements of the
rules contained therein; or fails to operate or maintain the portal for a period of six consecutive
months; or fails to pay the prescribed fees.49

The Proposed Rules also stipulates the categories of businesses that are allowed to raise funds
from the Crowdfunding scheme. Specifically, Rule 2 provides that MSMEs who are
incorporated as a company in Nigeria with a minimum of two-years operating track record can
raise funds through a Crowdfunding portal operated by a registered Crowdfunding
intermediary in exchange for the issuance of investment instruments. Furthermore, even those
without two years’ operating track record may also do so provided they have a core investor or
a strong technical partner that possesses a minimum of 2 years’ operating track record.50

However, the Proposed Rules set a limit to the amount that MSMEs can raise within a space of
12 months through the scheme. Rule 3(1) (b) provides in effect that the maximum amount to be
raised by a Medium enterprise shall not exceed N100 Million (approximately US$263,157);
and the amount to be raised by a Small enterprise shall not exceed N70 Million (approximately
US$184,210.00) while that to be raised by a Micro enterprise shall not exceed N50 Million
(approximately US$131, 578.00).51 A Fundraiser is allowed to offer or sell Investment
Instruments under the Proposed Rules without the need for prior registration of the Investments
Instruments (as required under to the ISA) so long as the Fundraiser is an entity incorporated in
Nigeria and accredited and/or accepted by a Crowdfunding intermediary to utilize its portal;
and the aggregate amount of Investment Instruments to be offered and sold by the Fundraiser
within the space of 12 months complies with the limit stated above.52

47
A Crowdfunding portal is defined in paragraph of the draft Rules as a website, portal, intermediary portal,
application, or other similar module that facilitates interaction between fundraisers and the investing public
48
Crowdfunding Intermediary means an intermediary organized and registered as a corporation to facilitate
transactions involving the offer or sale of securities or investments through an online electronic platform. See
Rule 1, ibid
49
See Rules 7 of the Rules. However, these registration requirement do not apply to; (i) a technology service
provider providing the infrastructure; (ii) software or the system to an operator; (iii) an operator of a
communication infrastructure that enables orders to be routed to an approved stock market and; (iv) an
operator of a financial portal that aggregates content and provides links to financial sites of service and
information provider.
50
See footnote 22 above.
51
However, by Rules 3(2) of the Proposed Rules as re-exposed by the SEC, these limits do not apply to
commodities investment platforms, or such other MSMEs as may be designated by the SEC from time to time.
See
52
See the amendment in the re-exposure made to Rules 3(2) of the Rules.

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The Proposed Rules also set a limit as to the maximum amount that Retail Investors can invest
within that 12 months period - Rule 3(3) prohibits Retail Investors 53 from investing more than
10% of their annual income in a calendar year. However, no investments limits are imposed on
Sophisticated,54 High Net worth and Qualified Institutional Investors.55

The above investment limits for an investor(s) under the Proposed Rules slightly differs from
that obtainable in other jurisdictions such as the United States and the United Kingdom. In the
United States, following a minor modification of the Securities Act, 1933 (as amended) in the
Jumpstart Our Businesses and Startups Act (the “JOBS Act”) 2012, an investor whose annual
income is below US$100,000.00 is allowed to invest the greater of 5% of such income or
US$2,000.00; but where the investors annual income is above US$100,000.00 he may invest
up to 10% of it provided that the investment does not exceed US$100,000.00 in a year. 56 The
JOBS Act 2012 by modifying the Securities Act of 1933 for initial public offerings thus allows
funds to be raised from a larger pool of investors with lesser restrictions in the US.

In the United Kingdom, following the regulations issued by the Financial Conduct Authority
(FCA) on Crowdfunding, the position of the law now is that, before a Restricted Investor could
be allowed to invest in this model of Crowdfunding, he would first make a declaration that in
the previous 12 months and in the succeeding 12 months, he had not and will not invest more
than 10% of his net assets on non-readily available securities. 57 This declaration is also
required to be made before investing in a P2P platform58.

Even in the face of the investment limitations on this model of Crowdfunding, it has over the
years been used to generate huge amount of funds globally. In 2019 alone, the US’ Wefunder
and StartEngine which are the two top funding portals were reported to have surpassed a total
of US$100 Million for startups;59 it was also reported that at the close of 2019 Wefunder had
almost 400,000 investors on its portal. In the UK, the total annual volume of Equity-based
Crowdfunding grew from under £30 Million in 2011 to over £360 Million in 201860 while in
2019 Seedrs alone (an Equity-based Model) raised approximately US$366 Million. With this
growth, it is now estimated that by 2021 the model would have generated over US$500

53
A Retail Investor is defined in the re-exposed Rules to mean any investor other than a High Net worth,
Sophisticated Investor or Qualified Institutional Investor.
54
The re-exposure now defines a Sophisticated Investor. For the purpose of the Rules a Sophisticated Investor is
defined to mean any person with 3 years’ experience of actively investing in the capital market and understands
the relationship between risk and return
55
A “Qualified Institutional Investor” means a purchaser of securities that is financially sophisticated and as
defined by the Commission. See Rules 3(3) (a) and (b) of the Proposed Rules.
56
Willis, Jobs Act analysis, available at
<http://www.willis.com/documents/publications/industries/Financial_Institutions/June-2012-Issue-22-JOBS-
ACT.pdf> accessed 27th July, 2020.
57
See Conduct of Business Sourcebook (COBS) 4.7.10 of the Financial Conduct Authority, UK available at
<https://www.handbook.fca.org.uk/handbook/COBS/4/7.pdf> accessed 1st August, 2020.
58
Ibid
59
Brian, 2019 U.S Equity Crowdfunding Stats – Year in Review, available at <https://crowdwise.org/funding-
portals/2019-equity-crowdfunding-stats-data/> accessed 1st August, 2020.
60
James Cherowbrier, Annual Volume of Equity Based Crowdfunding in the United Kingdom (UK) 2013-2018,
available at <https://www.statista.com/statistics/797673/equity-based-crowdfunding-uk/> accessed 1st August,
2020.

FinTech Credit Market - Crowdfunding Page 10

Million.61 Nigeria is equally not left out in this growing market share as at least 90% of the
total sum generated through Crowdfunding in 2015 was reported to have been raised partly by
this model62.

Reward – based Model

As the name suggests, the Reward-based model involves participating individuals contributing
small amounts of money to a project in return for some kind of rewards. Under this model,
entrepreneurs solicit donations from individuals in return for a product or service (the reward).
The size of the reward which may accrue to a person is dependent on the amount donated by
the individual.63

A business intending to raise funds for its project through this model may do so by describing
the business or idea and the fundraising goal on the Crowdfunding platform and then call for
donations while offering a unit of the product as the reward for donations. However, it is not in
all situations that units of the products are given as a reward for donations made; in some
cases, the reward(s) might just be something unrelated to the product or even a mere “thank
you”.64

Whether or not the Reward-based model would be subject to regulation by securities law seem
to be dependent on the purpose for the donation. If the donation is found to have been made as
an investment it would be subject to the securities laws; but if it is made for consumption
purpose (i.e. donating for purpose of getting something e.g. a unit of the product as a reward
and not as an act of investment in the company), it would not be subject to securities law as the
product/reward will have a pre-order character.65 This is because the donations made under a
Reward-based model by nature, are considered to be made for consumption purposes and not
as investments. Indeed, the US Supreme Court, in United Hous. Found, Inc. V. Forman66 has
drawn a distinction between investment and consumption. The Court held that “when a
purchaser is motivated by a desire to use or consume the item purchased… the securities laws
do not apply”. This decision however, only applies to the US federal Securities Act; it does not
apply to state securities laws.67

Thus, for the purpose of determining whether a reward offered under this model of
Crowdfunding constitutes tenable securities under the California Securities Act, the California
Supreme Court in Silver Hills Country Club V. Sobieski 68 developed a test (the Risk Capital
Test). This test states that, a security is an investment in the risk capital of an enterprise with

61
ibid
62
See footnote 12, supra
63
The Definition of Reward-based Crowdfunding, available at
<https://www.syndicateroom.com/learn/glossary/reward-based-crowdfunding> accessed 8th August, 2020.
64
Jackie Zimmermann, Rewards-Based Crowdfunding: What It Is, When It Works, available at
<https://www.nerdwallet.com/blog/small-business/reward-crowdfunding/> accessed 8th August, 2020.
65
The assumption is that the donor has paid for the product and is only waiting for it to be delivered to him.
66
421 U.S. 837, 852-853 (1975)
67
Under Federal Law, in determining whether something qualifies as security, the Courts uses the Howey test.
See SEC v. Howey 328 U.S. 293 (1946).
68
(1961) 55 Cal.2d 811

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the expectation of a benefit.69 In this case, the Supreme Court held that the sale of membership
to a country club as reward for donations made for the purchase of a land for the development
of the club, were securities as the reward fell under the realm of the regulatory intent of the
Californian Securities Act.70 This test has now been adopted and applied in some form by at
least sixteen US States in addition to California.71

Just as discussed under the P2P model and taking a hint from the position in the United States,
it is suggested that a Reward-based model in Nigeria would come under relevant securities’
law regulation if the intent of the reward offered and obtained qualifies as security under the
ISA and/or any other securities law or rules.

In light of the above, it may be thought that no distinction exists between the Reward-based
model and the Equity-based model. But a good difference exists between the two: the Reward-
based model differs from the Equity model in the sense that while donors in the equity model
are certain of getting monetary rewards, donors under the Reward model may get non-
monetary rewards.72 An example of Reward-based model of this nature is Kickstarter which
promises rewards in form of anything that is not monetary. This is perhaps the reason why this
model of Crowdfunding is also called Non-equity Crowdfunding.

The scheme just like other model of Crowdfunding has equally generated huge funds for its
users. According to Statista, in 2017 alone the Reward-based model reached a total transactions
value of US$179.4 Million in the US; 73 while in the UK the year 2016 saw the Reward-based
model experienced its peak with a total sum generated amounting to £48 Million.74

In China, the top-ten Reward-based platforms had 1,155 successful campaigns and were able to
raise more than ¥300 Million (approximately US$43 Million) in June, 2019.75 In Nigeria, it
was reported in 2017 that at least 10% of the total sum generated through Crowdfunding in
2015 came partly from the Reward-based.76

69
C. Steven Bradford, Crowdfunding and the Federal Securities Laws, 2012 COLUM. BUS. L. REV. 1, 61. (2012)
70
The test laid down in Sobieski’s case considers: whether funds are raised for a venture or enterprise; whether
the transaction is offered indiscriminately to the public at large; whether the investors are substantially
powerless to effect the success of the enterprise; and whether the investor’s money is substantially at risk
because it is inadequately secured. The risk test “focuses on what the investor stands to lose retrospectively and
not what he stands to gain prospectively.
71
The Risk Capital Test – list of states, available at
<https://www.theselc.org/which_states_apply_the_risk_capital_test_when_deciding_what_is_a_security>
accessed 15th August, 2020.
72
Kickstarter vs Equity Crowdfunding, available at <https://www.seedinvest.com/blog/crowdfunding/this-is-not-
kickstarter> accessed 15th August, 2020
73
James Cheroswbrier, Reward-based Crowdfunding Transaction Value in Europe (excluding the UK) from 2013
to 2018, available at <https://www.statista.com/statistics/412439/europe-alternative-finance-transaction-value-
reward-crowdfunding/> accessed 17th August, 2020
74
ibid
75
Statista, Leading Reward-based Crowdfunding Companies in China in June, 2019, Based on Funds, available at
<https://www.statista.com/statistics/1155656/china-leading-reward-based-crowdfunding-platforms-based-on-
funds-raised/ > accessed 20th August, 2020
76
See foot note 12, supra

FinTech Credit Market - Crowdfunding Page 12

CONCLUSION
Crowdfunding provide easy and convenient avenues for generating funds towards the
execution of a project or a personal need/cause. It affords individuals and entities a less
demanding and less bureaucratic ways of meeting up financial needs especially in this period
when obtaining funding from traditional financial institutions has been made unattractive and
difficult as a result of high interest rates and other bottlenecks. Thus, the Crowdfunding
scheme portends great financial implications for the Nigeria’s economy and it would be a most
encouraging thing for the legislature to remove all bottlenecks to its growth and further
development in the country.

Though it is true that regulations are needed to prevent abuses; however, too much of
regulation can kill or stifles innovation. It is therefore recommended that the SEC in its bid to
put regulatory framework in place on Crowdfunding in the country should not over regulate the
same by making herculean regulatory demands from players in the eco-space as doing so
would discourage further involvement in the scheme by individuals and entities.

While the SEC is applauded to have begun the process of regulating Crowdfunding in Nigeria,
it is suggested that the restriction on private companies under the CAMA and the ISA be
amended as they constituted the bulk of impediments to the Crowdfunding scheme in the
country. This is because though the Proposed Rules can deem a private company as a public
company, it is doubtful if it can supersede the provisions of the CAMA and the ISA which are
extant Acts of the National Assembly. Therefore, an amendment of these pieces of legislations
is the best bet to fully maximize the investment opportunities that Crowdfunding portends for
the Nigeria’s financial economy.

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