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SEC vs Chaka: Key lessons for regulators and securities fintech companies

The Dispute

The Securities and Exchange Commission (SEC) published a statement that on the 17th of December 2020, it had secured interim orders from the Investment and Securities Tribunal (IST) restraining Chaka Technologies Limited (Chaka) and its promoters from advertising or offering for sale securities of companies.

SEC contends that Chaka “engages in investment activities, including providing a platform for the purchase of shares in foreign companies, but that the said activities are carried out without requisite registration.” In response, the company’s CEO, Tosin Osibodu, maintains that Chaka is merely a technology company providing a channel for registered brokers in the US and Nigeria to trade.

Position of the law

It is important to first note that the existing capital market regulations are inadequate in providing clarity as to the status and compliance requirements of Fintech companies. Nevertheless, the major regulatory framework for capital market activities in Nigeria is the Investments and Securities Act 2007 (ISA). It empowers the SEC to regulate and register investments and securities business in Nigeria. Now, do the activities of Chaka require it to register with the SEC? If yes, what kind of registration/license must be obtained? Let’s consider some registrable options similar to Chaka’s services.

Stockbroking/Brokerage: This is an entity that acts as an agent, trading company securities on behalf of its clients. Chaka does not broker trades on behalf of its users but provides an avenue for registered stockbrokers to offer company securities. This option, therefore, isn’t applicable to Chaka.

Securities Exchange or Capital Trade Point: According to section 315 of the ISA, a securities exchange is simply an approved trading facility, while a capital trade point is a mini exchange that provides a marketplace or facilities for bringing together purchasers and sellers of securities. Section 28 of the ISA requires securities exchanges and capital trade points to register with the SEC before starting operation. Although the company has denied SEC’s allegations that it offers securities to the public, there is really no denying the fact that it provides a facility that brings together purchasers and sellers of securities. However, this might not be enough to rope the Fintech startup into registration as the provisions of the ISA do not envisage digital trading platforms and their intricacies.

Lessons

The SEC: In its statement, the Commission counter-intuitively stated that the matter brought before the IST is to “encourage innovation within the market space.” Chaka revealed that it only learnt about the SEC’s position after the interim orders were made. This suggests that there were no interactions between the SEC and Chaka prior to the proceedings at the IST. It is insidious moves like this by the SEC that stifles innovation and leaves other Fintech startups in limbo about their future.

As much as there aren’t enough background facts, dialogue should have been first adopted by the SEC, especially since there is little clarity as to the regulatory obligations of Fintech startups engaging in the securities business. Lawsuits only create hostilities and belligerence.

FinTech Startups: Even with the current stalemate between the SEC and Chaka, the latter seems to have had its house in order in terms of partnerships and compliance. It is why the company has been able to assure its users of the safety of their investments. The point here is that with the dearth of proper regulation, Fintech startups must still build from scratch to be regulatory compliant. It will go a long way in mitigating risks.

These startups must also begin to instigate interactions with regulators, even when there is no cause for alarm. This particularly goes for companies with similar business models as Chaka. The instant case is a signal that the SEC could take more frantic steps to bring all market activities within its regulatory purview. Once again, the need for proper dialogue cannot be overemphasized.

Conclusion

While it is the role of the SEC to protect the investing public by regulating market activities, the Commission must do so without discouraging Fintech entrants. It must begin to embrace direct dialogue and clarify its position on Fintech companies offering securities services through circulars and guidelines, rather than an escapade of suits.

As for the tribunal matter between the SEC and Chaka, proceedings have been adjourned to January 15th, 2020. With the state of affairs, it seems both parties could remain at loggerheads as the company’s CEO still insists that it is a Fintech company, not a broker, and isn’t required by law to obtain a license or register with the SEC. We can only wait and watch how events unfold.

Fabusiwa is a corporate law and finance enthusiast, and an advocate of career development. tayofabusiwa@gmail.com.

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