The Regulator’s Role is to Protect the Investing Public but Investors and Developers must be Compliant with the Law

Chuba Agbu

On Apr 22, 2021

Conversations on the Capital Market Industry have been trending due to a bleak recession and questionable regulatory activity. Chuba Agbu of Legal Business sat down with Kenechi Ezezika, Partner, Oake Legal, to discuss some of these trending issues including the Securities and Exchange Commission (SEC); its ban on fintech apps like Bamboo and Trove, demutualisation of the Nigerian Stock Exchange (NSE) and other pertinent areas concerning capital markets in Nigeria. Below are excerpts…

You’re a specialist capital markets lawyer. Was this always part of the plan? If not, where along the way did you decide to zero in on this area?

Not really. As a student, I did not really know a lot about capital markets, save for a vague idea of owning a stock portfolio for investment purposes. The plan, however, was to combine my knowledge of the law with my love for finance and finance-related matters. This has led me to specialise in finance matters, including, of course, capital markets.

To switch gears to the industry of focus, what are your thoughts on the demutualisation of the Nigeria Stock Exchange, and what do you think it holds for listed companies?

The recently concluded demutualisation of the NSE is a sign of development in Nigeria’s securities industry as it aligns the NSE with most of its international counterparts and opens the door to extensive possibilities for the industry. As a publicly listed company, the new non-operational holding company can attract local and foreign investments, enabling it to (further) expand its capabilities. As a “for-profit group of companies”, greater emphasis will be placed on increasing efficiencies to ensure growth and greater investor returns. Companies listed (and intended to be listed) on the NSE will benefit from these new capabilities and, hopefully, increased efficiencies that the demutualisation will bring about in the NSE (specifically) and in the industry (generally). The SEC as a watchdog also has a greater role to play to ensure that the new NSE does not abuse its dual position as a market operator as well as a market participant.

What do you think about SEC’s crowdfunding regulations and the prospect that it brings for raising capital virtually?

The SEC’s crowdfunding regulations are not only important but necessary and timely. It is important to note that these regulations apply solely to “Investment-Based Crowd Funding”, which is defined as “the process of raising funds from the public through an online portal in exchange for shares, debt securities or other investment instruments approved by the Commission”. Thus, not all forms of crowdfunding are subject to these regulations. The regulations seek to protect the investing public by striving to ensure transparency, credibility and accountability in investment-based crowdfunding while reducing the risk of fraudulent activities, misrepresentation and complete loss of savings for the regular investor. The regulations give validity to the small and medium-sized businesses that intend to access funds via crowdfunding. Investors will be reassured by the knowledge that such businesses have been vetted according to the relevant SEC Rules. Such companies will also quite easily leap publicly-traded stocks as they become more successful, thereby deepening the capitalisation of the stock markets. Of course, there may be a lag in these businesses being able to fundraise while the prospective crowdfunding intermediaries are completing their registration process. Nevertheless, it is expected that as more players come into the market, this form of fundraising will become more popular and rewarding in Nigeria. Think of a Fintech company, for example, which is able to access funds for its operations through crowdfunding and the potentially exponential returns that will accrue to its investors upon the company raising institutional finance.

Can you speak about the role of regulators and if their interference indeed hinders a free market?

In my view, independent regulators are an essential part of a free market, and there cannot truly be a free market without regulators, in the same way as laws are an essential part of a free society. Regulators need to understand their role and ensure that the focus is on facilitating the growth of the regulated industry without overreaching. In particular, as the apex regulatory body of the Nigerian Capital Market, SEC is responsible for ensuring the protection of investors. It does this by requiring efficiency and transparency in the market, thereby reducing investment risks. This is a very vital role because just as there are genuine businesses out there, there are also fraudulent ones, and the SECs Rules are made, amongst others, to protect the everyday investor from falling victim to such schemes.

SEC just recently declared fintech trading platforms like Bamboo, Risevest and Trove as unregistered and therefore, illegal. This has been met with much criticism from the public. What are your thoughts on this from a legal perspective?

The SEC merely reminded us of all of the extant laws and regulations which exist on the subject matter. It behoves companies to ensure compliance with relevant laws while structuring their businesses. Perhaps, it may be that the Rules need to be updated in line with the current technology-driven trends and realities, as indeed the world is shrinking by the day. As investors and developers are getting more creative, the regulator is also expected to exercise creativity to determine the best way to protect the investing public whilst allowing access to other markets and opportunities offered by technology, but until so done, there must be compliance with the law. We also need to consider the impact on our own markets and economy and consider ways to improve both so that they remain a viable investment option for the regular Nigerian.

Can you discuss untapped investment opportunities in Nigeria: for example, real estate investment schemes and areas in the amendments in the finance act that make such schemes further attractive?

There is a housing deficit in Nigeria that continues to grow as our population increases. A number of real estate developers have difficulty accessing funds required to develop and deliver large scale housing projects, which has been further compounded by the slump in the industry arising from the COVID pandemic. Real estate investment schemes are thus useful in bridging this infrastructure gap and as an alternative class of investment.

With the introduction of several tax incentives in the 2019 Finance Act (and the clarification in the 2020 Finance Act), investment in real estate investment companies may yield higher returns to investors. These incentives, which should ultimately lead to an increase in the funds available for distribution to investors of a real estate investment company, include—

non-taxability of dividend and rental income of real estate investment companies where at least 75% of such income is distributed within 12 months of the end of the financial year in which the income was earned;
exemption of dividends and distributions paid to real estate investment companies from withholding tax, and
exemption of distributions to shareholders from the provisions of excess dividend tax.

Finally, can you briefly discuss the macroeconomic outlook of the capital markets industry in Nigeria?

With inflation and unemployment rising at historically high rates, the path to recovery does appear bleak. The increase in coupon rates makes the markets less attractive for businesses seeking to raise funds via debt instruments, while the apparent illiquidity in the market does not inspire new companies to foray into the equities market. Nevertheless, with sound government policies aimed at addressing inflation and unemployment, Nigerians may once more find themselves turning to the capital markets, which will foster social-economic development in the country.