This is an updated version of an article originally published on businessdayonline
Image Credits: Bigstock
It is common knowledge that Nigeria is not the easiest place to start or run a business. In its 2018 ‘Doing Business Index, the World Bank ranked Nigeria an aggregate 145th out of the 190 countries assessed. In the same report, Nigeria ranked 130 and 6 out of 190 in the ‘Starting a business’ and ‘Getting Credit’ sub-indices respectively, the latter ranking 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 those in the start-up phases of their businesses.
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 responsiveness and speed with which entrepreneurs, financial experts, investors, law/policy makers and regulators often working collaboratively together, have sought to provide alternative financing solutions for start-ups.
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.
Given the current state of the Nigerian economy, I am not certain this is a tenable outcome for local investors, and entrepreneurs in particular; who typically have to bear the brunt of the significant currency risks associated with sourcing and repaying offshore capital, or have the growth of their businesses stunted due to the inability to access capital.
Not creating the enabling environment for crowdfunding platforms to be legally set up and operated in Nigeria has severe limiting effects on entrepreneurship and the generation of alternative sources of start-up and growth capital for SME’s which are the engines of economic growth. It also limits the ability of local investors to play more active roles in supporting local SME’s such as by taking up equity positions in start-ups with strong future growth and earnings potentials, or even those of major strategic importance to the nation, such as food security for example..?
Thank you for reading.