WHAT IS CROWDFUNDING?
The practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.
It is also the use of small amounts of capital from a large number of individuals to finance a new business venture. It is a way for people, businesses and charities to raise money. It works through individuals or organisations who invest in (or donate to) crowdfunding projects in return for a potential profit or reward. Investing this way can be risky, so make sure you know what you're doing.

HISTORY OF CROWDFUNDING.
The history of crowdfunding is said to date as far back as 1700. However, crowdfunding in its modern state (taking advantage of the internet) is said to date only as far back as 1997 while the term, "crowdfunding" was recorded to be first used in 2006 by Michael Sullivan. In its modern form, crowdfunding usually takes place on a website platform that allows businesses or individuals to raise money, and investors to provide the money.

For an investment scheme to be classified as crowdfunding, from the definition above, there are some elements that must be present:
• It must take place on a website platform; and
• It must be an offer to the general public to finance the company on a particular project, business or venture.

HISTORY OF CROWDFUNDING IN NIGERIA.
The startup space in Nigeria has received a big boost over the past few years. One of the major challenges faced by startups is availability of funds to properly function. Startups are usually registered as private limited liability companies. Hence, they are faced with restrictions in terms of raising funds and must rely on family, personal funds, bank loans, private equity firms or venture capitalist to raise funds. The bureaucracy involved in obtaining capital from the private equity firms and venture capitalists and the high interest rates on loans offered by commercial banks have led a lot of startups in Nigeria and globally to seeking alternative means of funding for their businesses. One of such alternatives is crowdfunding.
The concept has been in existence prior to the advent of the internet. Long before the internet was developed, people took up commitments to provide small amounts of money to support public projects. The Statue of Liberty in New York Harbor is an evidential result of a “crowdfunding” project. The first reported online crowdfunding project is said to have occurred in 1997. Rock band Marillion, were unable to afford to tour after the release of their seventh album. Their American fans used the then emerging internet to raise $60,000 so they could play in the US.
Today, Equity Crowdfunding is an important part of the global financial markets because it provides SMEs with a more cost-effective strategy to raise capital as against the traditional means earlier identified. Premised on the fact that for the nation’s economy to grow, there is need to pay proper attention to the funding, growth and development of startups in the country. The regulator of the Nigerian capital markets, the Securities and Exchange Commission (SEC), deemed it necessary to relax the ban on equity crowd funding and in this stead provided a regulation to control the market. This regulation is borne out of SEC’s determination to maintain investor’s confidence in the capital market.

THE LEGALITY AND VIABILITY OF THE CROWDFUNDING RULES.
The concept of Crowdfunding is yet to receive full regulatory acceptance in Nigeria. Recognizing the risk involved in Crowdfunding, the Securities and Exchange Commission (SEC) on August 15, 2016, released a statement imposing a ban on equity crowdfunding activities in Nigeria until the “legal impediments” are removed. The impediments referred to are the extant provisions of Investment and Securities Act and the Companies and Allied Matters Act.
Section 67 (1) of the Investment and Securities Act (ISA) 2007 provides that “no person shall make any invitation to the public to acquire or dispose of any securities of a body corporate…” unless it is a public company or a statutory body empowered to do.

Section 22(3) & (5) of the Companies and Allied Matters Act (CAMA) are both to the effect that unless authorized by law, a private company shall not invite the public to subscribe to its shares or debentures and that the number of members shall not exceed fifty (50).

Section 67(2) of ISA goes further by imposing a fine of N50,000 on a body corporate as well as N100,000 for the officers and directors of any company in contravention of section 67 of ISA.

Pursuant to the powers conferred on it by Section 313 of the ISA, The Securities and Exchange Commission released a document in March 2020 titled “Exposure of Proposed New Rules to the Rules and Regulations of the Commission” (The rules) which is among other things aimed at providing an insight into SEC’s plans to make the Crowdfunding market a safe, conducive and profitable space for all stakeholders. The rules define Crowdfunding as “the process of raising funds to finance a project or business from the public through an online platform”. The provisions of the rules would be analysed in line with; The Relevant Enterprise, Investors, the Operator of a Crowdfunding Portal and the Issuers.

TYPES OF CROWDFUNDING PLATFORMS.
There are several types of crowdfunding platforms:
1. Equity crowdfunding
2. Peer-to-peer crowdfunding
3. Rewards-based crowdfunding
4. Donation crowdfunding


EQUITY CROWDFUNDING.
An equity crowdfunding platform allows small business owners to sell shares in their company in exchange for funding. It’s a similar approach to raising money from venture capital firms or angel investors, but with lots of smaller investors buying tiny chunks of equity in your business.
Equity crowdfunding involves a start-up launching a fundraising campaign. This outlines the level of equity available, and how much money it is trying to raise – essentially valuing the business. For example, if a business puts up 25% of equity and wants to raise £250,000, it is valued at £1m. Investors can then buy a portion of the available equity.

BENEFITS AND DOWNSIDES OF EQUITY CROWDFUNDING.
Good quality investors – Many angel investors use the platforms full time, so, along with financing, a start up can benefit from angel support and advice. Once in, investors may continue to invest in the business over the longer term.

Pooled investments – Some equity crowdfunding platforms pool all the investments from individuals into a single investment that buys shares in your business. Therefore you need to only deal with one point of contact rather than lots of individual investors.

Larger investments – Equity crowdfunding can raise serious investments. There’s the potential for larger sums invested due to equity and pooled funding. Many platforms have a minimum investment of £1,000, compared to other crowdfunding types where investors can chip in as little as £5 into a business.

Increased transparency – A potential downside is the need to disclose lots of information about your business. You’ll need to share details such as turnover, profit, financial forecasts and management approach with all investors.

Expensive money – You are giving away equity in your business in exchange for finance, making raising capital expensive especially as your business grows in the longer term.


PEER-TO-PEER CROWDFUNDING
Peer-to-peer crowdfunding platforms pool investments and lend money to businesses. The expectation is that the startup will be successful and the crowdfunded investment will be paid back along with interest. It’s a similar approach to getting an unsecured loan from a bank. It’s sometimes referred to as ‘debt crowdfunding’.

BENEFITS AND DOWNSIDES OF PEER-TO-PEER CROWDFUNDING

Unsecured funding – As you’re not issuing equity or shares, nor tangible assets such as plant equipment or premises, it’s effectively an unsecured loan. Default and you won’t have assets exposed to investors.

Niche funding – Peer-to-peer crowdfunding is more suitable for less mainstream businesses. It tends to attract investors interested in niche businesses that would find it difficult to secure traditional funding.

Increased pressure – With the need to repay investors with interest and investors having a keen interest in your day-to-day progress, it can result in added pressure for a startup. The higher interest rates can place an additional strain on resources.

REWARDS-BASED CROWDFUNDING.
Rewards-based crowdfunding platforms allow businesses to reward investors in ways other than simple equity or interest. Rewards can be the chance to test prototypes, lunch with the founders or getting one of the first models off the production line. Rewards are usually tiered, so the more money someone invests, the greater the reward.

BENEFITS AND DOWNSIDES OF REWARDS-BASED CROWDFUNDING

Cheap money – There’s no equity or interest swaps in exchange for funding and as rewards can be inexpensive, it’s a cheap way to raise finance.

Create a customer base – Rewards-based investors tend to be enthusiasts or fans of projects or campaigns, making rewards-based crowdfunding suitable for more creative projects, innovative products and software such as video games. Investors are usually happy to take part in market research and are keen to buy the completed product as well as act as advocates for your business.

Time consuming – Rewards-based crowdfunding is usually all-or-nothing. If the fundraising goal isn’t reached, no money is invested. This means you can spend a lot of time trying to drum up investors and creating rewards that ultimately don’t result in a single penny of investment.


DONATION CROWDFUNDING.
This is the best way to raise finance through the sums are usually small. Investors simply donate to your business. No strings. You’ll need to update investors on progress, but any donations you get are yours to keep.

BENEFITS AND DOWNSIDES OF DONATION CROWDFUNDING

Free money – Donations are exactly that: free money given to your business to help it succeed.

Small investments – Because donations are usually by individuals attracted to your business idea, it’s similar to like tossing spare change into a hat. Don’t expect to raise huge sums through donations.

Niche businesses – Donations are usually made by people who are supporting social enterprise activities or businesses that support local communities, rather than mainstream limited companies.

HOW TO GET STRARTED WITH CROWDFUNDING?
To get the best from crowdfunding, you’ll need to consider the following:

Business case – You’ll need a compelling business case, a detailed business plan, sound financials and robust market insights.

Choose the platform – Investigate different crowdfunding platforms like www.donate-ng and decide if you’re offering equity, interest or rewards to investors. Look at similar business pitches to yours. How much did they raise? How many backers did they attract? Which platforms do similar businesses use? Read the terms and conditions and check fees and the legal commitments you’re making. Take independent financial advice before you launch a campaign.

Pitching – The pitch matters. You need to capture the imagination of investors, demonstrate commercial potential and keep it human with presentations by the team. Remember, people invest with head and heart.

Set rewards and goals – Establish what investors will get – from equity to access to initial products – and what funding targets need to be met to trigger investments.

Engage the community – Crowdfunding is about community. Be active on forums, talk to potential investors, post updates and use social media to tell people about your campaign to drum up support.

Get seed money – Investors like backing a winner. Get friends and family to make a few ‘investments’ in your business on the platform so it looks as if people are keen to chip in. A few pounds in the campaign fund can spark further interest.

Please, feel free to reach out if you ever have any questions, curiosities or feedback @ info@donate-ng.com