Overview
On April 8, 2021 the Securities and Exchange Commission (SEC) issued a notice to investment platforms offering securities of foreign corporations to Nigerians in a Circular titled; “Proliferation of Unregistered Online Investment and Trading Platforms Facilitating Access to Trading in Securities Listed in Foreign Markets.”In this Circular, the SEC noted that its attention had been drawn to the activities of these investment platforms that offer these services to Nigerians and claim to be in partnership with Capital Market Operators registered in Nigeria.
It cautions that by the provisions of the extant laws and regulations in Nigeria (Sections 67 – 70 of the Investment and Securities Act, 2007 and Rules 414 & 415 of the SEC Rules and Regulations) only foreign securities listed on an Exchange registered in Nigeria may be issued and offered to the Nigerian public. The referenced sections essentially place controls on invitations to the public to acquire or dispose of securities, amongst other requirements.
In summary, the sections provide for the following restrictions: Prohibitions against the invitation of the public to acquire or dispose of shares of public companies not quoted and the creation of an offence where there has been a violation of this prohibition;Prohibition of public companies from inviting the Nigerian public to purchase its shares without first obtaining the consent of the Commission;Requirement for the registration of the securities of foreign companies with the SEC before they are offered to the Nigerian public through the Nigerian capital market. The SEC further warned that the Capital Market Operators working with these platforms are to desist from doing so. It enjoins the public to seek clarification via its official channels of communication.
ImplicationThis regulatory tussle between the SEC and online investment platforms offering foreign securities in Nigeria started in December 2020. At the time, the dispute was between the SEC and Chaka. SEC claimed that Chaka, by offering foreign securities not traded on the Nigerian Stock Exchange was in violation of the extant legal framework in Nigeria. Chaka issued a notice in March 2021 notifying the general public that it was in discussions with the SEC to seek the relevant regulatory approval by applying for a new license. Although the exact nature of the license appears to be unclear, Chaka also notified the public that its services are offered in partnership with Citi Investment Capital Limited (CICL) who are licensed by the SEC in Nigeria and other financial regulators.
However, with the recently issued circular, it is clear that SEC’s prohibition is going to affect other platforms like; Trove, Bamboo, etc. It is worth noting that none of these platforms was named in the circular but the nature of their operations lends credence to the fact that they are subject to the circular. The reaction by the wider public has been to question the intention of the SEC particular as there are concerns regarding the interpretation of the provisions and whether the circular bans these operators. From our review of the provisions, it is clear that the law restricts sale/ marketing of foreign stocks to the Nigerian public to only those listed on a Nigerian stock exchange.
However, it is arguable that the platforms were able to operate based on the fact that they did not invite the purchase of their shares but merely provided a platform for the purchase and sale of securities. Regardless, it is clear that the SEC seeks to rein in the operations of such platforms for the benefit of the Nigerian customers and to this end, there might be other policy considerations influencing the circular. Based on the public’s reaction, it is clear that the targeted platforms have facilitated alternative financing operations for the average Nigerian and were welcomed innovations. Accordingly, it will be in the interest of the public for a framework to be developed to regulate these platforms and bring them within its regulatory purview – to ensure consumer confidence and encourage innovation.
Such move will also be in line with the SEC’s mandate to regulate the investment environment and the general trading of securities in Nigeria. Pending the release of a subsequent circular or a regulatory framework to clarify and regulate operations of apps that enable the purchase of foreign securities by Nigerians in Nigeria, there is a concern that the circular is just the latest regulatory interventions making investors wary of investing in the Nigerian Financial Technology sector. ConclusionThe existing legal framework does appear to prohibit the activities of such investment platforms. However, given the wholesome consideration of the implications of the recently released circular; it might be important for the SEC to work around creating a license for these platforms as has been suggested by Chaka’s statement to the Nigerian public.
This is particularly because of the ease it offers to Nigerians in diversifying their investment portfolios, the statement it sends to investors in Nigeria’s tech industry, and the impact it can have on the adoption of innovation in Nigeria’s financial services industry. This might not be the last we hear from the SEC on this issue and the general public awaits more information on this regulatory issue.
