24 th November 2016

1. Capital Market Financing for SMEs Crowdfunding of small entrepreneurial ventures IN NIGERIA 24th November 2016

2. OUTLINE • Introduction • What is Crowdfunding? • History • Models - • Legal impediments • Required Actions 1

3. Introduction • Micro, Small and Medium Enterprises (MSMEs) enterprises constitute an important driving force for any economy • Financial capital however is of critical importance for MSMEs. • According to data from the National bureau of Statistics (NBS), Nigeria has an estimated 37,067,416 MSMEs, 99.8% of which constitute micro enterprises. • Despite their perceived importance and potential, these enterprises face a financing gap in the country. Bank credit remains the main source of external formal financing • The relatively high interest rates on Government securities provide additional disincentive to banks in Nigeria to engage MSMEs in lending. • SME-focused equity platform development have not provided the necessary support for MSMEs’ to access financing.

4. What is Crowdfunding ? Crowdfunding is a potential solution for the liquidity crisis of MSMEs; it presents an opportunity to overcome the challenges of traditional access to finance According to Bi, Liu, & Usman(2016), crowdfunding is an emerging approach for entrepreneurs to implement their ideas despite not having traditional monetary resources such as banks and venture capital. it is a method of collecting many small contributions, by means of an online funding platform, to finance or capitalize a popular enterprise. Through crowdfunding platforms, the crowd can invest in business ideas and projects, and entrepreneurs can raise funds via the Internet.

5. History • Crowdfunding has been described as a new way to do something old. It employs the Internet to facilitate capital formation in the same way that communities financed transactions as far back • In 1876, one of the United States’ most iconic monuments, the Statue of Liberty was finance through crowdfunding. • The crowd was brought to aid in the creation of the iconic statue. In 1884 Joseph Pulitzer used the most advanced technology of the time to communicate to the masses, the printing press. •  In the modern era, the rise of the Internet and e-commerce, the foundational tools were in place for nonprofits to begin raising money online. • Crowdfunding is an online money-raising strategy that began as a way for the public to donate small amounts of money, often through social networking websites, to help artists, musicians, filmmakers and other creative people finance their projects

6. Models Crowdfunding is an umbrella term which covers the following different forms

7. Models • Donation-based crowdfunding is a Crowdfunded financing used to solicits contributions in the form of donations (gifts) in support of causes and projects • Reward crowdfunding typically describes crowdfunded financings in which funders funders receive non-monetary rewards in exchange for their contribution • Peer to peer lending otherwise known as Crowdlending describes a financing in which funders are offered pecuniary gain in the form of interest on debt, profit sharing (including in the form of dividends), or revenue • Equity based crowdfunding offers an equity stake in the target company

8. Crowdfunding Statistics • Statistics from the 2015 Massolution Crowdfunding Industry report show that total global Crowdfunding Industry is growing with an estimated $34 billion raised in 2015. • Of this amount, Peer to Peer crowdfunding which is the fastest growing accounted for $25billlion; Reward and Donation Crowdfunding made up $5.5B, while Equity Crowdfunding stood at $2.5B. • A 2013, world Bank published report on Crowdfunding Potential for the Developing World forecast a $96 billion sector by 2025. However Crowdfunding for Nigerian entrepreneurs is still in a nascent stage and this is attributed to the regulatory environment.  

9. Risks for capital-seeking businesses of crowdfunding • • Provides a boost to economic growth through flows of credit to SMEs and other users in the real economy. Crowd-funding can help economic recovery by financing small and medium enterprises (SMEs) which are a key engine of economic growth • Fills a credit gap left by banks • • Offers lower cost of capital/high returns, leveraging off a lower cost basis • • The ability to raise capital, in most cases without giving up large parcels of equity interest. • • Lower cost of capital/high returns • • Portfolio diversification; • • Cost efficiency of relatively simple infrastructure; • • Convenience of online platform; and • • Increased competition in a space traditionally dominated by a few providers

10. Benefits for capital-seeking businesses of crowdfunding • Risk of default, the risk of default/investment failure is estimated to be around 50%. • Platform risk • Risk of fraud/ money laundering • Risk of illiquidity (i.e., the absence of secondary market/exit strategy) • Risk of investor inexperience • Lending default and high failures of start-up businesses and Information asymmetry.

11. Legal Impediments to the proposed Crowdfunding Framework • Section 22 of CAMA places a restriction on the transferability of shares of private companies and on invitation by private companies to the public to subscribe to its shares or deposit monies. Section 22 (2) provides that “Every private company shall by its articles restrict the transfer of its shares” • While Section 22 (5) provides: “A private company shall not, unless authorized by law invite the public to: • Subscribe for any shares or debentures of the company or • Deposit money for fixed periods or payable at call whether or not bearing interest” .

12. Legal Impediments to the proposed Crowdfunding Framework • Further S. 67 and S. 71 of the ISA, presents bottlenecks to private companies regarding “invitations” to the public. Additionally, there is a requirement under S. 71 for intending companies looking to raise capital from the public to file a Prospectus. • Section. 67, provides: “No person shall make any invitation to the public to acquire or dispose of any securities of a body corporate or to deposit money with anybody corporate for a fixed period or payable at call, whether bearing or not bearing interest unless the body corporate concerned is: • A public company, whether quoted or unquoted • A statutory body or a bank established pursuant to an Act of the National Assembly and is empowered to accept deposits and savings from the public or issue its own securities (as defined under this Act), promissory notes, bills of exchange and other instruments. .

13. Conclusion  • Crowdfunding is held back by law that prevents small investors from taking equity in firms. • The ISA and the CAMA needs to be amended to allow certain entities operating as private companies to solicit funds from the public under terms and conditions prescribed by the SEC. This amendment is necessary to aid the Commission’s objective of market development and the wider economic aspiration of financial inclusiveness. • There is a need engage the CAC towards amending CAMA, a need for an amendment to the relevant sections of the ISA or engage the National Assembly towards enacting a Crowdfunding Law  • Section 22(5) prohibits crowdfunding but also creates room for an exception. At the end, the Securities and Exchange Commission will have to adopt rules and propose amendments to existing Securities Act rules to facilitate/permit companies to offer and sell securities through crowdfunding.  .

14. Conclusion  THANK YOU FOR LISTENING

15. The State of SME Finance in Nigeria • Nigeria’s businesses are starved of capital, poor access to finance constitutes a major constraint for Nigerian SMEs and is continuously touted as the main challenge affecting MSMEs in Nigeria. • The exorbitant lending rates (ranging from 21% - 30% for commercial banks to as high as 48% - 60% per annum for microfinance banks) discourage MSMEs from accessing bank loans. • Nigeria is also reported to have the shortest average loan maturity (21 months) among comparison countries, such as Kenya, Brazil, China and India • High interest rates on Government securities also act as disincentive to banks to intensify lending to MSMEs.