You Now Rockin’ With The SEC

Assessing the SEC Crowdfunding Rules

No, not the Show Dem Camp crew.

The SEC is coming to clean house in the crowdfunding space, and here are some of my thoughts on it.

We all have that one friend who has tried to introduce us to a juicy investment opportunity with 80% returns within 6 months. Perhaps you have also been told to bring other people into the loop to access returns on your investment?

Since the crash of MMM, a lot has happened in the crowdfunding space. Legitimate businesses with sound crowdfunding models have gotten muddled up with funny pyramid schemes here and there. Point is, the crowdfunding sector has been mostly unregulated, but with the updated SEC rules, some semblance of supervision has been brought into the sector.

You can access a copy of the new regulations here.

Due to its previously unregulated nature, there were some complications in the crowdfunding sector:

Most businesses did not provide enough due diligence and information for investors. In many cases, the platform with more spending on advertisements gets more subscribers even if it is a Ponzi scheme. Here is an interesting story of how an agro-investing platform failed to deliver on returns in 2020.*

The agreement between investment platforms and participants was hardly enforceable and there was hardly any with the public. This means as an investor, you would have no guarantees for returns on investments and the intermediaries could not be held accountable for failure to dispense accumulated funds appropriately.

The new regulations do a good job of structuring the crowdfunding space.

Under the new regulations, only entities who have met the requirements and criteria for being crowdfunding intermediaries can operate as one. Some of the requirements are also high IMO.

Still, the responsibility of exercising due diligence and being a credible liaison between the fundraiser and the investors lies on the crowdfunding intermediary. Vetting fundraisers, ensuring their business model is sound & keeping records are all responsibilities of the crowdfunding intermediary.

Failure to fulfill any of the obligations makes them liable to indemnify the investors. No, not the fraudulent fundraiser. The intermediary bears the loss. (I am bound to wonder what impact this has on the business model of some services offered by platforms like Farmcrowdy and Investify)

On the matter of compliance, every existing crowdfunding entity (portal or intermediary) is granted 90 days from the issuance of the law. The deadline is April 21, 2021.

You can read more analysis on the Crowdfunding Rules here.

We will be publishing something light on the Crypto Ban and Open Banking Regulations from the CBN. See you Wednesday!

PS: Sorry this came late in the mail! I've had a hard time picking this up to finish for a while. Thankfully, I'm back now, for good.

* An update on this as of May 2021 shows that Thrive Agric has been able to fully repay all outstanding returns, so, good for the agro-tech ecosystem. Access the story here