crowdfunding

Peer-To-Peer Lending and Crowdfunding

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Crowdfunding is becoming prevalent as an alternative method of financing a business venture

 

By Davidson Oturu

Financial technology (Fintech) has taken on many forms and countries around the world are struggling to provide regulations that adequately cover these ever evolving innovations.

Crowdfunding and Peer-to-Peer (P2P) Lending are relatively new concepts that have become very popular all over the world, with business models like Farmcrowdy and GoFundMe paving a simpler path for alternative financing.

Crowdfunding is the process of pooling small amounts of capital from a large number of individuals to finance a business venture or project.

The great thing about crowdfunding is that it operates via social media channels or crowdfunding websites/portals and as a result, expands the pool of investors typically available to a business owner.

The forms that crowdfunding can take include:

  1. Reward-based crowdfunding: Where funds are contributed in return for a product, services or other non-monetary compensation.
  2. Securities/equity crowdfunding: Where funds are contributed in exchange for equity or as a loan to be paid back by the Company.
  3. Donation crowdfunding: Where funds are contributed with no expectation of returns.

P2P Lending is a method of debt financing that enables individuals obtain loans directly from other individuals, through online services, without any financial intermediary.

 

How Crowdfunding and P2P Lending are Regulated in Other Countries

In the United States of America (US), securities crowdfunding is exempted from registration with the Securities and Exchange Commission (‘SEC’) provided the proposed amount to be raised is restricted to a maximum of $1.07 million dollars.

However, US laws consider crowd-funding portals as ‘broker-dealers’ and require intending crowdfunding companies to seek approval from the Financial Industry Regulatory Authority (‘FINRA’) before commencing operations.

In line with this, FINRA published its ‘Funding Portal Rules’ to regulate the operations of crowdfunding portals.

Furthermore, crowdfunding investors in the US are restricted in their investment contributions.

The maximum amount an investor can contribute is restricted to a percentage of their net-worth or annual income- using whether an investor has an annual income of over or under $100,000 as the distinguishing benchmark.

The exception to this rule is where the law makes room for ‘accredited investors’ to be free from the shackles of investment limitations.

In India, P2P lending regulations were published, making all P2P lending platforms subject to the supervision of the Reserve Bank of India (‘RBI’).

The basic rules of P2P lending in India are: performing credit assessment and risk profiling of the borrowers and disclosing the same to their prospective lenders; undertaking relevant loan documentation; providing assistance in disbursement and repayments of the loan amount; and providing services for recovery of loans originated on the platform.

Like the US, the RBI set a liability cap on the borrower and lender; however, unlike the US, the RBI set the minimum capital requirements for lending platforms so high that by June 2018, only 5 companies were documented to have registered as P2P lending platforms.

Interestingly, a consultation paper presented by the Securities and Exchange Board of India (SEBI) classifies P2P lending as a subset of crowdfunding.

In Singapore, the capital requirement to qualify as a security-based crowdfunding platform is ‘start-up’ friendly making it a more popular means of alternative funding. P2P lending is viewed as ‘crowdlending’ and like with crowdfunding platforms, requires a Capital Markets Services (CMS) licence before the company can commence operations.

 

The Nigerian Position

At the moment, the Nigerian Securities and Exchange Commission (SEC) and the Central Bank of Nigeria (CBN) are yet to take a stance on crowdfunding and P2P lending.

However, certain provisions may cover some of these processes until specific regulations are published.

The Investment Securities Act would also need to be amended to accommodate these models of alternative financing.

An important provision of the law to note is Section 22 of the Companies and Allied Matters Act CAP C20 LFN 2004 (CAMA) which provides that a private company shall have not more than 50 members, and is prohibited from inviting the public to subscribe to any shares or debentures of the company.

The implication of this is that since Nigerian law does not presently provide for crowdfunding and P2P lending, alternative finance providers will fall under the general classification of either private or public companies and may have to obtain licences from the CBN In order to operate in the finance sector.

Furthermore, given that several start-ups may not be able to meet the minimum capital requirements to operate as a public company, it goes without saying that they would typically fall under the Private Company structure which ultimately subjects them to a restriction on offering subscription to more than 50 members.

 

Conclusion 

Crowdfunding and P2P lending in Nigeria and Africa are here to stay and there is no doubt that regulatory bodies are working steadfastly to adequately provide for these forms of alternative financing.

In the meantime, Crowdfunding and P2P lending start-ups in Nigeria are advised to stay abreast of CAMA and other relevant regulations.

 

Editor’s Note: This article was originally published in The Spark Magazine. Find the magazine here to read other articles.

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