(SEC) RELEASES CIRCULAR ON SUBSCRIPTION TO FOREIGN SECURITIES
On the 8th of April 2021, the Securities and Exchange Commission (SEC), the apex regulator of securities in Nigeria, issued a circular targeted at the Financial Technology (FinTech) investment platforms in the business of providing access to the purchase and management of securities’ portfolios to the Nigerian Public. The circular issues a strong warning against fintech investment platforms and Capital Market Operators (CMOs) to desist from providing Nigerians access to foreign Securities, on the grounds that these securities are unregistered with SEC, as well as, not listed in the Nigerian Stock Exchange (NSE).

Legal Basis

According to the circular, SEC has relied on the provisions of sections 67-70 of the Investments and Securities Act (ISA), 2007[1]and Rules 414 & 415 of the SEC Rules & Regulations, 2013 in giving this directive.

Rules 414 & 415 of the SEC Rules, dealing with the “Sale or offer for subscription of securities” and “Filing of Application”, provide:

414. A foreign Government, or a company incorporated in a foreign country may issue, sell or offer for sale or subscription its securities to the public through the Nigerian Capital Market; Such securities may be denominated in naira or any convertible foreign currency.

 

415. Every foreign issuer of securities is required to file an application for registration of its securities with the Commission, accompanied by a draft prospectus and under such conditions as prescribed by the Commission. such issuers are required to file their application on Forms SEC 6F accompanied by the registration fee prescribed by the Commission from time to time.

The foregoing sections set out conditions which a foreign government or company incorporated in a foreign country must fulfil before gaining the ability to sell, or offer for sale or subscription, its securities to the Nigerian public. They are as follows:

  ·        Securities must be through the Nigerian Capital Market;


·        Foreign issuer must file an application for registration of its securities with SEC; and


·        Foreign Issuer must pay registration fees as prescribed by the Commission from time to time[2]

SEC’s warning has occasioned worry and an atmosphere of uncertainty in the FinTech space, especially among those engaged in the business of investments and securities (such as Trove, Bamboo, RiseVest, etc.). It been perceived to be an attempt by the regulatory body to disrupt the efforts at innovation of these FinTech companies.

SEC’s recent position on the regulatory compliance status of investment platform did not materialize without precedent. In December 2020, SEC released a statement announcing to the public that the Investments and Securities Tribunal (IST) had on 17 December 2020 issued interim orders restraining Chaka Technologies Limited (a securities investment platform) from advertising or offering for sale shares, stocks or other securities of any entity. SEC instituted this action at the IST against Chaka Technologies[1]on the grounds that the Company was carrying on its business without first registering with SEC and subjecting itself to SEC’s regulatory oversight.

The reason for this action by SEC has been touted as part of the Commission’s intention to encourage innovation within the market space, while ensuring that all market activities are conducted within the ambit of the law and current regulations.

To provide some perspective, the Nigerian Fintech space has experienced a continuous uptick in activities, and the investment technology sub-sector has had its fair share of growing popularity. Tech start-ups now provide App-based, highly streamlined solutions to trading in the stock market on a global level. These technologies are easily accessible and available to any Nigerian with a smartphone, an internet connection and as little as NGN1000 for registration to begin trading securities on these platforms. As a result, users are able to look through a long list of companies, either listed in the Nigerian Stock Exchange or in those of foreign jurisdictions.

These FinTech companies are able to provide the service by partnering with licensed brokerage firms licensed and regulated by the SEC. Chaka Technologies, for instance, released a statement in the wake of SEC sanctions stating that investor’s funds were not managed directly by the company itself, but placed in the care of a duly licensed entity. The foregoing gives an idea of the business structure of the actors in this emerging market and highlights the cause of SEC’s concern. Essentially, SEC is convinced that the proliferation of app-based platforms occupying the securities market will undermine the fulfilment of its mandate to protect the investing public from possible exploitation.

An argument can be made, however, against SEC’s recent pronouncement on the basis of the specific provisions of SEC rules on this issue. Rule 414 of the SEC rules, relating to the conditions earlier listed, refer to a “foreign government” or “company incorporated in a foreign country” that wishes to sell or offer for sale “its [own] securities”. The clear wording of this rule carries the import that it only applies to foreign governments and companies registered in foreign countries desirous of issuing or selling securities to the Nigerian public. The scope of the rule does not cover third parties affording the public, access to the foreign market using technology as a bridge.

It is important to note that Fintech companies who create these avenues for Nigerians to invest in foreign securities are not the investment brokers themselves. FinTech companies instead work in conjunction with SEC licensed brokers. This leads one to the conclusion that neither the ISA nor the SEC Rules contemplated or foresaw the advent of technologies of this nature and as such, did not make adequate provisions for its regulation. SEC has only acted in reaction to a trend that it perceives to be growing out of its control without amending its rules to reflect the changing business landscape whilst formulating a suitable and comprehensive regulatory framework.

To illustrate this point, the options for registration/licensing available for an entity such as FinTechs in the investments space under the extant ISA regime are;

a.    Registration as a stockbroker[1]; or

b.    Registration as a securities exchange or Capital Trade Point[2]

For context, a “Securities Exchange” is defined, in Section 264 ISA as

“a Stock Exchange or an approved securities organisation such as a commodity exchange, metal exchange, petroleum exchange, options, futures, over the counter market, and other derivatives exchanges”

while a “Capital Trade point” refers to

“an Exchange registered by the Commission pursuant to this Act, which constitutes, maintains or provides marketplace facilities for bringing together purchasers and sellers of securities or for otherwise performing, with respect to securities, the functions commonly performed by a Securities Exchange”.

Lastly, a “Stockbroker” means “a person who is a member of a Securities Exchange or Capital Trade Point and registered by the Commission as a market operator”

A rigorous examination of the above quoted definitions for conformity with the nature of investment tech companies leaves more to be desired. The average investment technology company cannot be properly described as a securities exchange because it does not trade commodities, metal, options etc. The only term that somewhat captures the essence of FinTechs in this space is “Capital Trade point”, which describes the bringing together of purchasers and sellers to enable exchange of securities, but even this definition does not consider the peculiarities of digital services of this nature.

Conclusion

If SEC is to carry out its mandate of regulation as well as protection of the investing public amidst the proliferation of investment technology companies, it must formulate and implement forward thinking policies to properly bring these emerging technologies within its regulatory purview without stifling innovation in the sector that will ultimately be beneficial to Nigeria and Nigerians. SEC must also, along with other affected regulators, initiate talks with FinTech companies on the subject of regulatory compliance going forward – FinTechs should be given the opportunity to stay abreast of their regulatory obligations to aid compliance and reduce incidences (such as disputes between SEC and Chaka Technologies in the future) so that these businesses are not ground to a halt as a result of miscommunication in matters of regulatory policy.

 

FinTechs must also take proactive steps to engage regulatory bodies overseeing the sectors within which they operate to ensure that they are compliant with their regulatory obligations, going forward. Ascension Legal Services is uniquely placed, by virtue of its extensive experience in dealing with regulatory authorities both home and abroad, to offer advisory and compliance services to Financial Technology companies that might need them.