Technology has revolutionized the mode of operations of the different sectors of the economy and introduced new concepts and inventions. The financial sector is not excluded from the impact of technology with the introduction of financial technology (“Fintech”) to deliver financial services and products to consumers. The Fintech companies and startups have been expanding with technological innovations in areas such as money lending, insurance, mortgage, deposit of money, fund raising, retail banking, money transfers/payments and so on.
Fintech companies are also becoming increasingly active in the investment space. Some of the Fintech businesses in that space include Chaka Technologies Limited (“Chaka”), Invest Bamboo (“Bamboo”), Passfolio Securities LLC and Passfolio Financial LLC (‘Passfolio”), Trove Technologies Limited (‘Trove”), Trading 212 UK Ltd & Trading 212 Ltd (“Trading 212”), WealthTech Limited (“Wealth.ng”).
These startups provide technology Applications (“Apps”) or digital platforms for Nigerians to participate in domestic and foreign securities and investments such as stocks, Exchange Traded Funds (“ETFS”), money market, bonds, real estate investments, commodities investments, cryptocurrencies and so on.
REGULATORY FRAMEWORK OF INVESTMENTS AND SECURITIES BUSINESS IN NIGERIA
For the most part, the assets provided by these startups are considered as securities under the Nigerian law. The Investment and Securities Act 2007 (“ISA”) defines Securities as:
- debentures, stocks or bonds issued or proposed to be issued by a government
- debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate;
- any right or option in respect of any such debentures, stocks, shares, bonds; or
- commodities futures, contracts, options and other derivatives, and the term securities in this Act includes those securities in the category of the securities listed in (a) – (d) above which may be transferred by means of any electronic mode approved by the Commission and which may be deposited, kept or stored with any licensed depository or custodian company as provided under this Act.
Securities business and investments are mainly regulated by the ISA, the Securities and Exchange Commission Rules 2013 (“SEC Rules”) and the Companies and Allied Matters Act 2020 (“CAMA”). The Securities and Exchange Commission (“SEC”), is the apex regulatory body in the Nigerian capital market. It is authorized by the ISA to, among other functions and powers, regulate and register investments, securities business, collective investments schemes in Nigeria; as well as register and regulate securities exchanges, capital trade points, futures, options and derivatives exchanges, commodity exchanges and any other recognized investment exchange, capital market operators and market intermediaries.
It should also be noted that by virtue of the 2020 Statement on Digital Assets and Their Classification and Treatment (“SEC Statement”), SEC is to regulate crypto-token or crypto-coin investments when the character of the investments qualify as securities transactions. However, the operation of this SEC Statement is still pending, due to the 2021 Central Bank of Nigeria’s letter to Banks and other Financial Institutions which prohibits dealing in cryptocurrency and facilitating payment for cryptocurrency exchanges by Banks and other Financial Institutions.
Flowing from the above, it means that Fintech startups which offer investment platforms to Nigerians, are generally within the purview of the ISA and the regulatory jurisdiction of the SEC. Accordingly, the SEC would not permit person(s) to provide platforms for selling or offering for sale securities, or facilitating the trading of the securities, without first complying with the applicable registration requirements of the ISA and SEC Rules.
The ISA specifically provides that no securities exchange or capital trade point shall commence operation unless it is registered with the SEC in accordance with the provisions of the ISA and SEC rules. The ISA also provides that no person(s) shall operate in the Nigerian capital market as an expert or professional or in any other capacity as may be determined by the SEC; or carry on investments and securities business unless the person is registered in accordance with the ISA and the SEC rules.
WHAT IS THE STATUS OF THE FINTECH BUSINESSES?
Many of the Fintech businesses have expressly stated on their websites that they are only technology platforms, and not registered broker-dealers or investment advisers. They then state that they are working in partnership with Broker-Dealers who are registered with the SEC and registered Exchanges. The assumption is that the registered Brokers are responsible for the provision of the securities offered on the Apps and they are responsible for facilitating and executing the transactions. In fact, some of the companies do not even have a presence in Nigeria or a partnership with any registered Broker-Dealer in Nigeria. Thus, it could be argued that these Fintech companies do not have any obligation to register with the SEC.
It therefore, becomes imperative to determine whether such Fintechs actually have the power to create platforms for the trading in securities without registering in any capacity with SEC. More so, is there any exemption for this category of entities under the Nigerian Law? Or is there a special classification for their status, which demands a unique type of registration, different from the general one? The controversy on regulation of these unique startups is evidence of some of the regulatory challenges being thrown up by these Fintechs and technological innovations generally.
The startups seem to have been operating in the manner above, without any obstruction until the recent and ongoing case of the Securities and Exchange Commission V. Chaka Technologies Ltd & Anor.
THE SECURITIES AND EXCHANGE COMMISSION V. CHAKA TECHNOLOGIES LTD & ANOR
The SEC seems to have attempted to answer the queries above by bringing an action against Chaka to put a stop to its operations, which the SEC claims offend the provisions of the ISA. This was because Chaka was in the business of providing an electronic platform for securities trading and investments to members of the Nigeria public, including cross-border securities transactions, without registering with the SEC. The action is also seeking for an order compelling Chaka to apply to the SEC for registration.
Chaka’s defence is that it is not involved in the trading of the securities and investments being offered on its platform; it only provides a technology that enables licensed brokers to serve their customers. More so, the assets on offer on their App are the assets in care of Citi Investment Capital Limited (“CICL”), a registered broker. The Chaka App is only powering the investment and security offerings and assets of CICL. Chaka is therefore not a capital trade point or capital market operator, as all investments and securities trades on their App are executed by the partners of Chaka who are duly licensed by the SEC, and their App permits their partner (CICL) to acquire customers through same.
WHAT THEN IS THE REGULATORY STATUS OF THESE FINTECH BUSINESSES?
The ISA has defined Capital Market Operators as persons (individual or corporate), duly registered by the Commission to perform specific functions in the capital market. The functions would include investments and securities business or operating in the Nigerian capital market as an expert or professional or in any other capacity as may be determined by the SEC. Capital Trade Point means a mini exchange registered by the SEC, which constitutes, maintains or provides market place for facilities for bringing together purchasers and sellers of securities or for otherwise performing, with respect to securities, the functions commonly performed by a securities exchange; and Securities Exchange means an exchange or approved trading facility such as commodity exchange, metal exchange, petroleum exchange, options, futures exchanges, over the counter market and other derivatives exchanges.
It was argued by Chaka in the above suit (and possibly the opinion being held by similar startups) that since the Fintech startups are only providing technology Apps for Nigerians to buy securities which are being facilitated by the SEC registered entities, and given that the Fintechs are not directly involved in the execution and settlement of such transactions, the definitions of Capital Market Operator, Capital Trade Point and Securities Exchange do not apply to them. According to them, they are a totally different category, not envisaged by the ISA and the SEC; therefore, the extant legislations cannot apply to them.
However, it is the writer’s opinion that as long as these Fintechs are participating in the capital market in one capacity or the other, they would still fall within the purview of the SEC, notwithstanding that the ISA and the SEC Rules may not have envisaged their mode of operations (through a digital platform), The ISA and SEC rules contain ample provisions to regulate all participants in the Nigerian capital market, irrespective of the manner/mode through which their operations are being carried out.
Thus, it is opined the real cause of the controversy of regulation is inadequacy of the existing legal framework, and not the complete absence of a legal framework. The existing framework would be inadequate to comprehensively regulate this mode of operation of such market participants. However, given the far-reaching and mandatory provision of the ISA and the sundry Rules, no entity may participate in the Nigerian capital market in whatever capacity, without prior registration with the SEC first. It is therefore important that these startups are conversant with their legal status and the need to register with the SEC.
For that purpose, both existing and prospective Fintechs in the capital market space would do well to avail themselves of the opportunity provided by the SEC through the Fintech Assessment Portal.
FinPort and Capital Market FinTech Assessment Form
The SEC has on its website, the Innovation and FinTech Portal (“FinPort”) which has as its objective, the provision of regulatory demands or requirements relating to the Nigerian capital market for new and existing Fintech businesses. Fintech companies can access this portal to know the regulatory requirements and access the Capital Market FinTech Assessment Form. In filling the Assessment Form, Fintechs would be required to provide details such as the nature of their innovations and the benefit of such innovations to the Nigerian Capital Market. This would enable the SEC to determine the appropriate category for the Fintech startups and provide the latter with the registration requirements.
Sub-Broker/Sub-Broker Serving Multiple Brokers through a Digital Platform Rule
The SEC has attempted to address the inadequacy of the laws with the released amendment of Rule 67 of the SEC Rules on 22nd April 2021, which creates a new sub-section 3 dealing with Sub-Broker/Sub-Broker Serving Multiple Brokers through a Digital Platform. This Rule is to specifically address Fintech startups providing digital platforms for registered brokers.
A Sub-broker is a person not being a trading/dealing member of an Exchange, but who is acting on behalf of a trading/dealing member of the Exchange (a Broker/Dealer) as an agent or otherwise helping investors in buying or selling securities through such trading/dealing member. The amendment of Rule 67 – Sub-Broker Serving Multiple Brokers through a Digital Platform explains a Sub-Broker Serving Multiple Brokers through a Digital Platform Regulations as “a sub-broker who utilizes a digital platform to serve clients and interact with the sponsoring broker. This sub-broker has an agreement with multiple brokers.”
With this amendment, Fintech startups can apply to be registered with the SEC as a Sub-Broker Serving Multiple Brokers through a Digital Platform.
Requirement for incorporation with the Corporate Affairs Commission
Generally, only corporate bodies can apply to be Securities Exchange and Capital Trade Points; or apply for the role of Broker/Dealer, Underwriter, Issuing House, Registrar, Trustee, Fund/Portfolio Manager, Rating Agency, Market Makers and Receiving Bankers. This implies that individuals or Business Names can apply for the other roles such as Investment Advisers, Sub-Brokers (there is actually a category for individual Sub-broker).
However, the Fintech Assessment Form requires startups filling this form to provide their Certificates of Incorporation and other corporate documents. This is also a mandatory requirement by virtue of the provisions of the amended Rule 67 – Sub-Broker Serving Multiple Brokers through a Digital Platform. It can therefore be implied that Fintech startups have to be incorporated with the Corporate Affairs Commission in Nigeria before they can explore these modes of registration.
STATUS OF THE FOREIGN SECURITIES OFFERED ON FINTECH PLATFORMS
It is important to note that many of the Fintech startups are not just offering Nigerian securities to the investing public in Nigeria, but also foreign securities listed in foreign markets. Prior to the SEC’s Circular on 8th April 2021, the only issue seemed to be bordered on the regulatory status of Fintech startups. However, following the SEC’s Circular, there arises a second issue as to whether a registered Fintech can offer foreign securities to the Nigerian public.
The SEC’s Circular is titled Proliferation of Unregistered Online Investment and Trading Platforms Facilitating Access to Trading in Securities Listed in Foreign Markets. The SEC claimed in the Circular that their attention has been drawn to the existence of several providers of online investment and trading platforms facilitating direct access of the investing public in Nigeria to securities of Foreign Companies listed on Securities Exchanges registered in other jurisdictions. The Circular then warned that by the provisions of Sections 67 – 70 of the ISA and Rules 414 and 415 of the SEC rules, only foreign securities listed on any exchange registered in Nigeria may be issued, sold or offered for sale or subscription to the Nigerian public. The SEC then notified all the Capital Market Operators working in concert with the referenced online platforms to desist henceforth and also advised the investing public to seek clarification via its established channels of communications.
Implication of the SEC’s Circular
The SEC has the power to authorise and regulate cross-border securities transactions. Section 67 of the ISA referenced in the Circular, provides that any corporate body offering securities to the Nigerian Public, must be a public company or a statutory body or bank established by or pursuant to an Act of the National Assembly. Rule 415 of the SEC Rules provides that every foreign issuer of securities is required to file an application for registration of its securities with the SEC.
The reference to section 67 of the ISA means that the SEC wants foreign companies, whose securities are offered to the Nigerian public, to be public companies. In addition, Rules 414 and 415 of the SEC Rules require that such foreign securities must be registered with the SEC, before they can be offered to the investing public in Nigeria.
It is not certain how the SEC hopes to regulate these foreign securities. The most plausible approach to this challenge would be to accord these securities a unique category. In the process of registration with the SEC, the Fintech startups can be made to provide a list of the foreign securities being offered on their platforms, with the respective documentations for each of such securities, which will then be examined and subjected to approval by the SEC.
There are several dangers associated with an inadequate and ineffective regulation of the capital market. Therefore, it is important for comprehensive regulations to be put in place to address the unique challenges and operations of the Fintech companies and startups involved in securities trading and investments.
As the SEC continues to strive to maintain a tolerant disposition towards innovations in the Nigerian capital market, it also retains the duty to balancing tolerance with the need for an effective regulation and investor protection. In that wise, the SEC is to be commended as it has continued to make pioneer regulatory efforts to understand and effectively regulate Fintech operations within the capital market space, through the creation of its Fintech and Innovation Office (FINO), its inauguration of the FinTech Roadmap Committee and now the amendment of Rule 67 of the SEC Rules.
-  Investment and Securities Act (“ISA”), 2007, section 315.
-  ISA, section 13.
-  ISA, section 28.
-  ISA, section 38.
-  Suit No: IST/OA/01/2020.
-  Supra.
-  ISA, section 315.
-  ISA, section 315.
-  ISA, section 35.
-  https://sec.gov.ng/finport/
-  SEC Rules, Rule 45 (2).
-  SEC Rules, Rule 67 (2).
-  ISA, section 13 (q).