In a recent circular dated 8th April, 2021, the Securities and Exchange Commission (SEC) warned the investing public against platforms that facilitate the purchase of securities on foreign capital markets. The circular further stated that only foreign securities listed on Nigerian Exchanges could be issued to the Nigerian public. Hence, Capital Markets Operators were directed to stop working with those platforms and the investing public were enjoined to seek clarification on these issues.
What platforms are affected by this circular and what do they do?
Unlike some previous circulars of the SEC, the platforms to which this circular is addressed are not named. However, the platforms that provide the services being spoken of are: Bamboo, Trove, Chaka etc. These platforms facilitate the purchase of securities on foreign capital markets with easy payment solutions.
Ordinarily, it is very difficult for a Nigerian to purchase securities listed on the stock exchanges of foreign countries. This is as a result of the difficulty in accessing foreign stock exchanges and the payment issues involved. Hence, without these platforms, it would be very difficult or almost impossible for a person living in Nigeria to purchase stocks listed on stock markets such as the New York Stock Exchange, London Stock Exchange etc. These platforms remove these barriers and provide access to these stock markets.
What does the law say?
In banning these platforms, the SEC relied on the provisions of sections 67 to 70 of the Investments and Securities Act (ISA) and the provisions of Rules 414 & 415 of the SEC Rules & Regulations. The SEC stated that by virtue of these laws, only foreign securities listed on any registered Nigerian Exchange can be offered for sale to the public.
Section 67 of the ISA provides that the stocks that can be issued to the public are stocks of a public company that has complied with the provisions of section 73 to 87 of the ISA and stocks of a statutory body or bank created by an Act of the National Assembly.
Section 68 of the ISA provides that a public company shall obtain the consent of the SEC before inviting the public to deposit money with them. Section 69 defines the meaning of invitation to the public. Section 70 of the ISA provides that it shall be deemed to be an invitation to the public where a company allots or agrees to allot its securities to a person with a view to inviting the public.
Rule 414 of the SEC Rules & Regulations provides that foreign governments and companies may sell securities to the Nigerian public through the Nigerian capital market and such securities may be denominated in the Naira. Rule 415 of the SEC Rules & Regulations provides that such foreign companies are required to register their securities with the SEC. The rule further lists 3 instances where this requirement could be exempted.
However, it is debatable as to whether these platforms truly offer securities for sale in the context of the laws cited by the SEC. These platforms only facilitate the purchase of shares listed on foreign capital markets and do not offer stocks for sale. Furthermore, the SEC mainly claims that these platforms are unregistered. However, there is no category for the registration of these types of platforms on SEC forms. This is also debatable as these laws could always be interpreted to suit the arguments of both the SEC and the affected platforms.
What is the rationale behind this circular?
The SEC stated no reason for this circular. However, it could be said to be one of those desperate attempts of Nigerian regulatory agencies to salvage what is left of the economy. Local investments in Nigeria are volatile and very unpredictable. Hence, Nigerians are seeking alternative means of investing their funds in secure business and a stable currency. The US capital markets and other foreign capital markets offer this alternative.
With Nigerians now purchasing securities of foreign capital markets, there is a possibility that it has reduced the demand for securities listed on Nigerian stock markets. More so, the purchase of foreign securities puts pressure on the Naira which is continuously weakened as a result of too much Naira chasing other foreign currencies. However, these are speculations as the SEC stated no reason for this policy.
What has been the response of the affected platforms?
Some of the affected platforms have mailed their customers that their money is safe and all is well. In its mail to its customers, Bamboo assured its customers that there is no cause for fear and they had started discussions with the SEC. In another mail, Bamboo told its customers that they are still able to perform their operations notwithstanding the SEC circular. Bamboo further stated that every Bamboo user automatically has an account with Drive Wealth LLC, the US broker partner of Bamboo which is registered with the US Securities and Exchange Commission.
Is this the first circular of this kind from the SEC?
This is not the first time that the SEC is coming after these platforms. In 2020, the SEC made an application to the Investments and Securities Tribunal (IST) that Chaka be restrained from further carrying out its activities of facilitating the purchase of securities on foreign capital markets. As published on the website of the SEC, the IST granted an interim injunction to restrain Chaka. Not much is known about the rest of the case as Chaka still operates fully well and SEC has not published any other circular on this issue.
Chaka has subsequently informed the public through a blog post that it is committed to regulatory compliance and have registered their platform with the Securities and Exchange Commission. They assured their users of the safety of their assets and Chaka still operates without any hindrance or complaint from their users.
What has changed so far?
Nothing much has changed so far. The platforms are still fully functional and their applications can still be downloaded from App stores. Stocks can still be bought and users can still deposit money on their account to purchase foreign securities. Foreign capital markets can still be accessed from these platforms and nothing has changed so far.
What impact does this have on the economy?
This adds to the many policies of Nigerian regulatory agencies driving businesses out and hindering innovation. Some weeks ago, the Central Bank of Nigeria issued a circular forbidding financial institutions from facilitating the purchase of virtual currencies. Some start-ups had to fold up and some had to find innovative means of keeping their business alive. Some days ago, Twitter announced that it was establishing its African headquarters in Ghana despite having several Nigerian roles. Many attribute this to the unpredictability of Nigerian policy makers. This trend makes it very difficult for an investor to choose Nigeria as a destination for their investment.
What should be expected from now on?
One can never predict what would happen next. However, the affected platforms are still in operation and have stated that they are discussing with the authorities. Though very unlikely judging from the attitude of Nigerian regulatory agencies on issues like this, it is possible that this policy is reversed. We can all wait and see what happens.
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