Investor’s Loss and Liability for Negligence in Crowdfunding ; the Operator’s, the Fundraiser’s, or Both?


By Olatunde Olayinka Damilola


The unequal distribution of income and resources among human population is a defining challenge, one integral and indispensable in the human economic environment. While some are extremely rich at the top of the cadre, some sit in between and some, at the bottom of the income chain[1]. Often times, due to this economic disparity, it could be difficult for certain individuals  to single handedly finance their goals, therefore resulting to support from others. This is a succinct description of what crowdfunding is like.

Crowdfunding may be defined as an open call for financial resource, with the aim of  accruing a target sum, by pooling together resources in piece-donations from many[2]. There are majorly two types of crowdfunding, categorized by their form and purposes. They are: investment-based crowdfunding and donation based crowdfunding[3]. While the latter is not contractually enforceable, the former is, and is also specifically regulated by statute in Nigeria. More also, the former is a form of crowdfunding basically involving two parties, one seeking for funds known as the fundraiser, and the other a donor for benefit, the investor. In this form of crowdfunding, the fundraiser receives funds, not as a gift or loan, but rather, an investment in exchange for securities, or shares to the investors [4]. In other words, it could be understood as a form of contract where consideration is being furnished by the fundraiser for donations received.

As a matter of practice, most medium of crowdfunding in the  21st century are largely anchored over the internet. A person/body of persons in need of funds for specific objectives, may register with an online intermediary platform to get investments from investors co-hosted on that platform[5]. By virtue of this, parties to a crowdfunding contract are thereby increased to include the operator; a third-party broker or intermediary. Crowdfunding platforms for practical examples in Nigeria include Kickstarter, GoFundMe, Naijafund, etc.

In Nigeria, crowdfunding investments are governed by the Securities and Exchange Commission rules on crowdfunding, enacted 21st January 2021. This statute provides a framework and requisite guidelines for crowdfunding practices in Nigeria. A brief highlight of certain provisions of these rules include, a provision for the registration of crowdfunding platforms in Nigeria with the SEC[6], permission of SMEs in crowdfunding, notwithstanding the provisions of s.67(1) of the Investment and Security Act 2007, and section 22(5) Companies and Allied Matters Act, 2020 on private companies[7], provision on crowdfunding limit[8], as well as guidelines for  protecting investors from fraudulent practices[9].

Regardless of the SEC regulation on crowdfunding, and its effort to ensure investment safety on crowdfunding platforms, the probability of investors losses are only reduced, but not fully avoided. Crowdfunding, like any type of investment, involves risks. The applicable risks could often differ depending on the actors involved in crowdfunding, albeit that however, by its nature, the risk of fraud and negligent misinformation appears to be its biggest risk[10]. Therefore, where the latter happens, and investors loses their funds, one can only wonder who bears the brunt for negligence in the investor’s mishap. Is it the fundraiser, or the operator? Will the investor’s action likely succeed against both parties if they were to be joined as defendants?

This essay looks to provide answers to these questions, by examining the tort of negligence and the extent in liability of both parties for an investor’s loss in crowdfunding.


The tort of Negligence is the oldest class of action under common law. It is a cause of action, which arises out of a breach of a legal duty to take care by the defendant, which result in damages undesired by the defendant to the plaintiff[11]. For a successful action in Negligence, the three basic element that must be proven include: the existence of a duty of care, a breach of such duty, and damages arising from the breach. These elements will be briefly examined below.

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To start with, a duty of care like the name implies, is a duty to take care, imposed in circumstances wherever it is foreseeable for the plaintiff to suffer damages from the actions or omissions of the defendant. According to Lord Atkin, a person is expected to take reasonable care to avoid acts and omissions, which can be reasonably foreseen to likely injure their neighbour[12]. Flowing from this assertion thereof, the category of negligence could be broad. A driver owes a duty of care to other road users, just as much as an investment company to its investor[13]. Also, a person in a position of trust, owes a duty of care to the trusting party. This was the foundation for the principle of Negligent misstatement affirmed in the case of Hedley Byrne & co. Ltd. V Heller and Partners Ltd[14].

Furthermore, where a duty of care is held to exist, the party with the obligation of such duty must discharge it diligently and carefully. Where by recklessness, he fails to observe such duty, in such a way that a reasonable man in his position would have, then he may be held liable in breach[15].

Finally, where a duty of care exists, and such duty sufficiently proven by the plaintiff to be breached, the onus further lies on the plaintiff to prove, that he has suffered a remediable damage from such breach. These damages, must not  be vague or  too remote to the breach. The plaintiff is expected to prove that the breach of the duty is the major cause of the damages and nothing else.[16]

Haven briefly discussed the tort of negligence, it is now important to relate this to the scenario of the topic in determining the liability of the operator and the fundraiser, individually and collectively, in an action for negligence by the investor.


The Operator in crowdfunding is an intermediary between the fundraiser and the investor. It is the platform which hosts and links both the fundraiser and the investor for an online crowdfunding. Due to its vantage position, it shares a fiduciary relationship with both parties, and is trusted by them for the accuracy of information disseminated by it. From this point of view, it can only be expected that an operator in  such a position of trust, is to execute his duty carefully and diligently.

Furthermore, in specific reference to the interest of the investor, the SEC Rules on Crowdfunding, imposes certain duties of care on operators as a crowdfunding intermediary.

To start with, Rule 11(a) of the SEC Rules on Crowdfunding, 2021, provides that the operator ( crowdfunding intermediary) must disclose information on fundraisers in details of ownership, including certification possessed by the business, management and overall control structure, as well as details of control measures to guard against loses to the investor. Furthermore, Rule 11(g) places the onus of investigation and attestation on the operator, to investigate and attest to the fundraisers’ business and to ensure that their operation is in tandem with the disclosed objective for the crowdfunding[17]. The operator is also expected in Rule 11(b) and 11(2) respectively,  to educate investors on risk and make appropriate risk disclosures when available.

Most importantly, the statute commissions operators to exercise due diligence in discharging these duties of care to investors, especially in verifying documents of fundraisers and in informing investors on any adverse changes to them[18].

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Going from the foregoing therefore, where the operator defaults in the discharge of these duties, they will be culpable for a breach of duty created by statute and their fiduciary relationship with the investors. They may therefore bear the liability of the investor’s losses on this ground.

However, it is important to note that the conclusion in the preceding paragraph above, is not absolute, or final. Operators even though culpable, maybe able to suspend their liability for the investors losses by consent, or by indemnity.

The doctrine of consent or violenti non fit injuria is premised on the supposition that there is no remedy for he who consents. The SEC Rules in offering some protection to the operator, provides in  Rule 11(c), that a risk warning must be issued to all investors, and that investors should be made to complete a risk acknowledgement form in Rule 16(c). This form should contain a clause for the operator’s liability exclusion, where the investor loses all or some of the money invested as in part (IX). Where an operator complies with this provision, and an investor attest to the risk acknowledgment form, he shall be held to have consented to any losses thereafter, and loses any right of action against the operator[19]. Nevertheless, it is important to note that this exclusion clause might not be applicable in a case where the loss of the investor is due to the operator’s negligence in breach of his statutory duty. Part (IX) of Rule 16 is specifically silent on whether the clause could extend to matters of losses from  negligence.[20]

On the other hand, indemnity is a sort of insurance process, through which an individual agrees to cover another for specified expenses or losses in response to litigation risk. Indemnity is borne on the idea, that if one can not prevent claims from being brought or refuted, then one may be able to transfer some or all of the associated cost to another party[21]. Going by popular practice among operators in crowdfunding, most operators do insert an indemnity clause in their contract with the fundraisers which transfers litigation risk totally to the latter. Where an indemnity clause exists, actions on losses borne from negligence will be deflected from the operator, and borne solely by the fundraiser. This unlike the doctrine of consent is absolute.


The fundraiser under the SEC Rule 2021 is the originator, maker or obligor of the investment instrument to be issued pursuant to the rules for donation[22].

The fundraiser generally shares a fiduciary relationship with the investors to give accurate advice/information on their business, therefore, he is expected to do so diligently, lest the investor suffer avoidable losses.

Moreover, the SEC rules on crowdfunding also imposes certain duties on the fundraiser to the investor.

To start with, Rule 21(b) of the aforementioned statute, provides that, fundraisers shall provide key information on their businesses to the investor, whilst also ensuring under part (IV) of the rule, to attest that such information issued to the investor are not a misrepresentation of fact, and where they are, grant  the investor a right of action. Therefore, where the fundraiser by negligence issues an untrue statement of their business, which causes the investor to incur losses, they may be held liable in negligence under this attestation.

Nevertheless, whether the provisions of part (IV) can be read to infer an absolute restriction of exclusion clauses in my opinion would be a moot point. The intention of the legislator may be broadly read with the mischief rule, to avail an investor a right of action for misrepresentation under any circumstances. The provision for the inclusion of warnings in the fundraiser offering under Rule 33, and Rule 21 should also not be read as an exclusion clause into the investment contract, such that excludes the investor’s action in negligence, since it would most likely contradict the draftsman’s intention for part (IV).

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In summation therefore, haven fully examined the liability of  crowdfunding operators and fundraisers, in  light of salient provisions  in the SEC Rule on Crowdfunding 2021 vis-a-vis other relevant authorities, it is safe to conclude that both the operator and the fundraiser may be liable for the losses of an investor in negligence. However, the balance of liability may shift heavily towards the fundraisers, especially in circumstances, where an indemnity clause exists, shifting full liability to it, or the investor consent is read to exclude all right of action against the  operator as examined above..

Olatunde Olayinka Damilola is a student of Law at Adekunle Ajasin University and a researcher/content writer at SAN RESEARCH INSTITUTE. Contact: Phone number: +2349060557789 (WhatsApp number)


[1] Aghion, P., Caroli, E. and García-Peñalosa, C. (1999). Inequality and economic growth: The perspective of the new growth theories. Journal of Economic Literature, 37(4), pp. 1615–1660., A. Alesina, R. Perotti Income distribution, political instability and investment Natl. Bur. Econ. Res. Work. Pap. no. 4486 (1996).

[2] Belleflamme P, Omrani N, Peitz M. (2015). The economic of crowdfunding platforms, pp.1.,  accessed March 28th, 2022.

[3] Somtochi A. (2021). Crowdfunding for small to medium scale businesses (an analysis under the Nigerian Law. Modaq web-blog:, accessed March 28th, 2022.

[4] Joan Macleod Hemingway (2016), Managing third party platform litigation risk in crowdfunding: Terms, pricing and reputation, A Presentation paper at University of Tennessee College of Law, pp.2-3.

[5] Ayodeji, O., Damilola, A., Gregory, Y. (2021), The SEC approved rules on crowdfunding, A Publication of Aluko & Oyebode. See also, Rule 1, Security Exchange Commission (SEC) Rules on Crowdfunding, 2021.

[6] Rule 5, SEC Rule on Crowdfunding, 2021.

[7] Rule 4(a), SEC Rule on Crowdfunding, 2021.

[8] Rule 4(b), SEC Rule on Crowdfunding, 2021.

[9] Rule 11(2) & (3), Rule 19, SEC Rule on Crowdfunding, 2021.

[10] Union Bank of Nigeria Plc (Registrar’s Dept) v Securities & Exchange Commission (Appeal No. IST/APP/03/2003)

[11] G. Kodilinye (1999), Nigeria Law of Torts . Spectrum Publishers, Ibadan. P.38, Lochgelly Iron & coat co v McMullan (1934) A.C 1 at p.25.

[12] Donoghue v Stevenson(1932), A.C 562, at p.597.

[13] Anne Hakvoort (2016). Crowdfunding, Cross Border. Accessed 28th March, 2022.

[14] (1964) A.C. at 465.

[15] Blyth v Birmingham Water works co. (1843-1860), All E.R Rep.478.

[16] Barnet V Chelsea & Kensington Hospital Management (1969) 1 OB 428.

[17] Rule 11(h) SEC Rules on Crowdfunding, 2021.

[18] Rule 12 (a-c), Rule 11(3), Rule 11(4), SEC Rule on Crowdfunding, 2021

[19] Smith v Charles Baker & Sons [1891] AC 325

[20]  Lord Denning MR in Nettleship v Weston [1971] 3 WLR 370: “Knowledge of the risk of injury is not enough. Nothing will suffice short of an agreement to waive any claim for negligence. The plaintiff must agree expressly or impliedly to waive any claim for any injury that may befall him due to the lack of reasonable care by the defendant.”

[21] Joan MacLeod op.cit p.12

[22] Rule 1, SEC Rule on Crowdfunding 2021.


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