The Securities and Exchange Commission (SEC) in Nigeria, which regulates securities and investments, has officially terminated all partnerships between online stock trading companies and licenced stockbrokers in Nigeria for the purpose of trading unregistered international stocks. The commission issued a statement in which it ordered all stock market operators (including brokers) who partner with online trading platforms to stop doing so.
The new order follows a recent court case against Chaka Technologies Limited, a local fintech startup that provides digital platforms for the selling of bonds, stock, and other assets of corporations and other organisations..
“The attention of the Securities and Exchange Commission…has been drawn to the existence of several providers of online investment and trading platforms which purportedly facilitate direct access of the investing public in the Federal Republic of Nigeria to securities of foreign Companies listed on Securities Exchanges registered in other jurisdictions. These platforms also claim to be operating in partnership with Capital Market operators (CMOs) registered with the Commission,” the statement from the commission reads.
“The Commission categorically states that by the provisions of Sections 67–70 of the Investments and Securities Act (ISA), 2007 and Rules 414 & 415 of the SEC Rules and Regulations, only foreign securities listed on any Exchange registered in Nigeria may be issued, sold or offered for sale or subscription to the Nigerian public. Accordingly, CMOs who work in concert with the referenced online platforms are hereby notified of the Commission’s position and advised to desist henceforth,” it adds.
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A Crushing Blow To Startups Trading In Foreign Shares
The SEC’s latest strike, as compared to applicable Nigerian rules, is unsurprising, but it is fraught with suspense.
It is illegal for anybody to operate in the Nigerian stock market as an analyst or specialist or in any other capacity or carry out investments and securities business unless they are licenced with the Securities and Exchange Commission, according to Section 38 of Nigeria’s Investments and Securities Act, the country’s main legislation on securities and investments.
But despite the provisions of the above regulation, the Nigerian Stock Exchange (NSE), which is governed by the Securities and Exchange Commission (SEC), issued draft rules on broker-fintech partnerships in July 2020.
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According to the rules, any brokerage firm registered with the NSE who wishes to collaborate with a fintech business to offer products and services via an online portal must formally obtain approval prior to executing the arrangement.
The rules were possibly inspired by the absence of a clear regulatory framework governing such collaborations between fintechs and brokerage firms.
However, notwithstanding the NSE’s rules, the SEC ambushed Chaka Techologies from facilitating dealing on shares of international companies such as Google, Amazon, and Alibaba, with a restraining court order.
“The Commission is concerned that without proper regulation, the genuine aspirations of market innovators and investors could be subverted through the activities of unscrupulous actors who would try to exploit the growing popularity of Fintech investment options, to the detriment of the investing public,” SEC noted in a statement that followed.
One way of providing clarity on the differences between the proposed rules introduced by the Nigerian Stock Exchange and the Securities and Exchange Commission’s action against Chaka Technologies is that while both the NSE and the SEC’s actions contemplate the possibility of a fintech-broker partnership for purposes of trading only on stocks listed in Nigeria, NSE’s rules only concern themselves with trading on stocks listed on the exchange.
Again, all of the SEC’s moves have expressly been to disallow the trading of unregistered foreign stocks within the territories of Nigeria no matter what platform was used for the trading operations.
“The objective of the proceedings,” SEC said in its statement on Chaka’s ordeal, “is to ensure that all investment activities and market players are duly regulated by the Commission, in line with the requirements of the law.”
But problems begin to arise when the combined provisions of Sections 67–70 of the Investments and Securities Act and Rules 414 & 415 of the SEC Rules and Regulations, cited by SEC as grounds for disallowing trading in foreign stocks, are considered.
For its part, Sections 67–70 of the Investments and Securities Act prohibit anyone from inviting members of the public to buy or sell shares of a company unless it is a public company that has obtained the SEC’s approval prior to making any such invitations. This is reinforced by Section 54 of the same Investments and Securities Act, which requires the registration of all securities issued by a public company as well as all securities or investments issued by a collective investment scheme with the commission.
The provisions of Rules 414 and 415 of the SEC Rules and Regulations, on the other hand, have the direct effect of requiring any international issuer of securities in Nigeria to apply for registration of its securities with the SEC. But the commission may exempt a foreign issuer from registration on grounds of public interest and agreement between Nigeria and the issuer’s country; or if the issuer’s country is a member of the International Organization of Securities Commissions (I.O.S.C.O.). But it must equally be noted that the such exemptions will not prevent the foreign issuer from reporting to the SEC from time to time.
What is, however, unclear from the above laws is whether the SEC has the authority to regulate voluntary subscriptions by Nigerians of publicly traded shares on foreign stock exchanges through online platforms located outside the country; or even within the country, if the platforms’ target markets include individuals residing in foreign countries other than Nigeria.
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At best, what the SEC’s latest statement would achieve is to discourage any local collaborations between fintechs and brokers which have the ability of lending some form of legitimacy to the operations of the fintechs as regards trading in international stocks.
And without this legitimacy, the credibility of the stock-trading platforms will be severely harmed.
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer
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