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Dealing in foreign securities – the role of the Nigerian regulators (Part I)

Dealing in foreign securities – the role of the Nigerian regulators (Part I)

The Nigerian FinTech Industry has been booming with a focus on payment services, wealth management and investment technology companies (investment tech). An area of the industry that has gained attention recently is investment tech with the emergence of platforms offering securities of foreign companies to investors in Nigeria using technology.

Although the public has been enthusiastic about taking advantage of this opportunity to widen their investments by buying foreign stocks, the Securities and Exchange Commission (“SEC”) and the Central Bank of Nigeria (“CBN”) – have been more conservative in their acceptance.

The Securities and Exchange Commission
On 19 December 2020, SEC released a statement on the decisions of the Investments and Securities Tribunal (“IST”) restraining Chaka Technology Ltd from advertising or offering securities of companies or other entities. The facts of the matter showed that SEC had applied to the IST for the interim order on the grounds that Chaka’s activities – ‘providing a platform for the purchase of shares in foreign companies such as Google, Amazon and Alibaba’ – were outside the regulatory purview of the SEC and without the required registration. Nevertheless, this appeared resolved in March 2021, when Chaka announced that it had obtained a licence from the SEC, created to enable it to provide its services – the Digital Sub-Broker Licence.

However, on 8 April 2021, SEC issued a statement warning providers of online investment and trading platforms, with access to securities of foreign companies registered in other jurisdictions, to desist from offering their services to the investment public in Nigeria, even where they are partnered with capital market operators registered with the SEC. The SEC went on to state that only foreign securities listed on an Exchange registered in Nigeria may be offered to the Nigerian public.

This statement by the SEC seemed to confuse investors and FinTech companies who had thought the issue of selling foreign securities was resolved with the issuance of the Digital Sub-Broker Licence to Chaka.
However, a careful review of the surrounding facts will show that the statements made by the SEC are not in conflict. It is therefore important to examine the regulatory framework of the Nigerian capital markets to understand the parameters under which FinTech companies may offer foreign securities to the Nigerian investing public.

Offering of foreign securities – regulatory framework
The sale or offering of foreign securities to the Nigerian public is regulated by the Investments and Securities Act 2007 (“ISA”) and the Rules and Regulations of the SEC (“SEC Rules”). Section 67 of the ISA provides that invitations to the public to acquire or dispose of any securities of a company must be on securities of public companies, whether quoted or unquoted, while section 313 of the ISA empowers SEC to issue rules and regulations on the procedure and criteria for regulating cross border offerings, listing and trading of securities by foreign issuers (i.e. foreign securities).

a foreign company may be offered to the Nigerian public, provided the foreign securities are registered with the SEC…of course, this poses a challenge to the kind of disruption FinTech companies are looking to garner with their innovation

The SEC Rules provide that 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 and the securities may be denominated in Naira or in any convertible foreign currency. Such securities must be registered with the SEC, except where SEC grants an exemption to the registration requirement as provided in Rule 416 of the SEC Rules. Under this Rule, the SEC has the power to grant exemptions from compliance with the registration requirements, if it is in the public interest to do so and where a reciprocal agreement exists between Nigeria and the issuer’s country, or if the issuer’s country is a member of the International Organization of Securities Commission.

A joint reading of these provisions means that the securities of a foreign company may be offered to the Nigerian public, provided the foreign securities are registered with the SEC. We also note that the SEC’s statement issued on 8 April 2021 states that only foreign securities listed on an exchange registered in Nigeria may be offered to the Nigerian public.

Read also: Nigeria needs FX, subsidy reforms to attract foreign investment – Razia Khan

This means that Nigerian capital market operators, including Digital Sub-Brokers such as Chaka, may aid investors in buying, selling or dealing in securities of foreign companies provided those securities are registered with the SEC and listed on an exchange in Nigeria. In other words, in the current regulatory landscape, a FinTech company wishing to set up a platform to facilitate the sale of foreign securities to Nigerians must obtain the appropriate licence from the SEC and also be aware of the restrictions on the foreign securities it may offer on its platforms unless an exemption applies.

Of course, this poses a challenge to the kind of disruption FinTech companies are looking to garner with their innovation, in terms of the limited number of foreign securities that are currently registered with the SEC or are likely to be registered with the SEC in the near future.

While industry stakeholders continue to engage with the SEC on how best to resolve these issues to ensure innovation in the Nigerian capital markets flourishes while adequately protecting the Nigerian investing public, the industry was shaken by the actions of another regulator in the financial sector – the Central Bank of Nigeria.

The Central Bank of Nigeria
On 17th August 2021, news broke that the CBN had obtained an exparte order from the Federal High Court of Nigeria, freezing the bank accounts of certain Nigerian FinTech companies – including, Rise Vest Technologies Ltd, Bamboo Systems Technology Ltd, Trove Technologies Ltd and Chaka Technologies Ltd – for six months (“the FinTech Order”). According to the news reports, in its exparte application to the court, CBN alleged that the companies were operating as asset management companies without the required licences and were utilizing foreign currency from the Nigerian FX market to purchase foreign securities in contravention of the CBN’s foreign exchange policy – thus, weakening the Nigerian Naira against the United State Dollars.

The companies have released statements assuring their users that their investments and funds remain safe and readily accessible. For example, RiseVest, through its CEO Eke Eleanya Urum, issued a statement on Twitter to its users that investments and funds are safely managed, and funding and withdrawals will continue to be processed as normal, with all its United States operations intact.

While the industry and FinTech companies grapple with the effect of the CBN’s actions on their operations going forward, we will analyse in part 2 of this article series what may have informed the CBN’s actions, including the Nigerian foreign exchange control regime.