On Thursday the 8th of April, the Securities and Exchange Commission (SEC) of Nigeria issued a directive on the “proliferation of unregistered online investment and trading platforms” in the country. The statement said that foreign securities should not be sold to Nigerian investors by these platforms. 

The new directive comes at a time when investment technology companies like Bamboo, Trove and Chaka have become popular with Nigerian investors. These companies offer the opportunity to buy the shares of publicly-traded companies in the U.S.

One of the reasons their popularity has soared is because of the bull run American tech shares have enjoyed in the last year. Tesla shares, for instance, gained 774% in 2020 alone and Jumia’s shares jumped from $3 per share in 2020 to $60 per share in February 2021. 

The promise of investment-tech companies is that with as little as $5, you can get in on the action happening outside the Nigerian Stock Exchange. Yet, these startups have operated in a regulatory grey area and last year was the first sign of things to come. 

Regulatory grey areas for investment-tech companies

On December 15, 2020, the SEC barred the investment-tech startup Chaka from operating because they were “outside the regulatory purview of the Commission and without requisite registration, as stipulated by the Investment and Securities Act 2007.”

It was a curious decision because it singled out Chaka in a market where there were similar players offering the same service. While there are no regulations that govern the activities of these startups, most of them partner with brokerage firms recognised by the SEC. 

Chaka, for instance, partners with Citi Investments Capital Ltd, a Lagos-based firm. Yet, this partnership did not stop the SEC from wielding the big stick and it has asked operators like Citi Investments to stop partnering with these startups. 

Part of the SEC’s new directives reads, “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.”

The rules are mind-boggling and will once again draw accusations that Nigerian regulators always stifle innovation. Yet, the bigger issue is the fact that there are no clear regulations for online trading platforms.

The closest attempt was in July 2020 when the Nigeria Stock Exchange published a draft document with proposed rules for collaborations between these startups and brokers. The rules, which are not official yet, are silent on the need for investment-tech companies to be registered.

Without any clear rules, is the SEC acting within its powers to bar the activities of these investment-tech startups? 

The SEC’s powers

Part II of the Investment and Securities Act (ISA) 2007 describes the SEC’s functions and powers. The act gives the SEC the power to give directives like this to “protect the interests of the investing public.”

Section 67-70 of the same act and Rules 414 & 415 of the SEC Rules and Regulations say 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.

Basically, the action of the SEC is within its powers and in fact, these rules show that the investment-tech model of offering foreign stock to Nigerians is illegal. But this is hardly an indictment of these startups, it’s instead a reflection of how fast innovation moves. 

The way forward for these startups is to engage the regulators and work out a framework under which they can continue to provide what is undoubtedly an important service to the investing public. 

According to a source at the SEC who spoke off the record, registration conversations are already in the works. Our source also said that Chaka is already in the process of getting the necessary approval.

Risevest, another startup in the space that may not be affected by the new rules because they don’t offer retail trading of stocks shared a statement on Twitter. Part of the statement said, “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 big question is what these regulations are. TechCabal contacted the SEC for clarification and at the time of this article, they did not provide any timeline for a response. 

Olumuyiwa Olowogboyega | Author

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