On April 8th, the Securities and Exchange Commission (SEC) of Nigeria issued a directive addressing the “proliferation of unregistered online investment and trading platforms” in the country. The statement specified that these platforms should not sell foreign securities to Nigerian investors.
This new directive comes at a time when investment technology companies like Bamboo, Trove, and Chaka have gained popularity among Nigerian investors. These companies provide the opportunity to purchase shares of publicly traded U.S. companies.
Their popularity has surged, partly due to the impressive performance of American tech shares over the past year. For instance, Tesla shares soared by 774% in 2020, while Jumia’s shares increased from $3 in 2020 to $60 per share by February 2021.
Investment-tech companies promise that with as little as $5, investors can participate in international markets beyond the Nigerian Stock Exchange. However, these startups have been operating in a regulatory grey area, and recent events indicate potential changes.
Regulatory Ambiguities for Investment-Tech Companies
On December 15, 2020, the SEC barred the investment-tech startup Chaka from operating, citing that they were “outside the regulatory purview of the Commission and without requisite registration, as stipulated by the Investment and Securities Act 2007.”
This decision was notable because it singled out Chaka in a market with several similar players. Despite the absence of specific regulations for these startups, many partner with SEC-recognized brokerage firms.
Chaka, for instance, partners with Citi Investments Capital Ltd, a Lagos-based firm. Nevertheless, this partnership did not prevent the SEC from taking action and instructing operators like Citi Investments to cease collaborations with these startups.
The SEC’s new directive states, “accordingly, Capital Market Operators (CMOs) who work in concert with the referenced online platforms are hereby notified of the Commission’s position and advised to desist henceforth.”
These rules may attract criticism for stifling innovation, but the broader issue is the lack of clear regulations for online trading platforms.
The closest attempt to address this was in July 2020, when the Nigeria Stock Exchange published a draft document with proposed rules for collaborations between startups and brokers. However, these proposed rules, which are not yet official, do not address the need for investment-tech companies to be registered.
The SEC’s Authority
Part II of the Investment and Securities Act (ISA) 2007 outlines the SEC’s functions and powers. The act grants the SEC the authority to issue directives to “protect the interests of the investing public.”
Sections 67-70 of the same act and Rules 414 & 415 of the SEC Rules and Regulations state that only foreign securities listed on any exchange registered in Nigeria may be issued, sold, or offered for sale or subscription to the Nigerian public.
Essentially, the SEC’s actions are within its powers, and these rules indicate that the investment-tech model of offering foreign stocks to Nigerians is illegal. However, this reflects the rapid pace of innovation rather than an indictment of these startups.
The way forward for these startups is to engage with regulators and develop a framework that allows them to continue providing valuable services to investors.
According to an off-the-record source at the SEC, discussions about registration are already underway, and Chaka is in the process of obtaining the necessary approval.
Risevest, another startup in the sector that may not be affected by the new rules due to its different operational model, shared a statement on Twitter. The statement reads, “we are in full compliance with all regulatory requirements, and the recent announcement from the SEC is no exception. We are in touch with all the relevant stakeholders to ensure that we continue to stay on the right side of regulations.”
The key question remains: what exactly are these regulations? At the time of writing, the SEC has not provided a timeline for further clarification.
