CEM REPORT, MARKET| The Nigerian Securities and Exchange Commission (SEC) has taken a decisive step towards bolstering the integrity and transparency of private company fundraising within the country. The introduction of a novel regulatory framework governing the issuance and allotment of securities by private companies signifies a substantial shift in the landscape of Nigerian private capital formation.
A noteworthy aspect of the new regulations pertains to the establishment of a cap on the amount a private company can raise within a one-year timeframe. As stipulated by the framework, private companies are limited to a maximum fundraising amount of ₦15 billion (approximately $34 million based on current exchange rates).
This cap serves the purpose of ensuring that companies with aspirations to raise larger sums transition to the more robust public company framework, which offers greater investor scrutiny and regulatory oversight.
Qualified Investor
Investor qualification has been emphasized by the SEC within the new regulations. Debt securities issued under these regulations can only be sold to entities classified as “qualified investors.” The stipulation aims to safeguard less sophisticated investors from the inherent risks associated with private company debt offerings.
Enhanced Reporting Obligations
The new regulations impose more stringent reporting requirements on private companies raising capital through debt securities. Issuing houses are now mandated to submit a comprehensive report to the SEC within 21 working days of allotment. This report must encompass details such as applications received, allotment information, and a comprehensive list of major investors (those acquiring 50,000 units or more of securities or 5% or more of the offering).
Existing Debt Considerations
For private companies with existing debt securities held by qualified investors, the regulations mandate the registration of these securities with the SEC within three months of the issuance date. Failure to comply with this provision incurs a penalty of N₦2 million, with an additional daily penalty of ₦100,000 for continued non-compliance.
Prohibitions and Penalties
The SEC has outlined a series of clear prohibitions alongside corresponding penalties for violations of the new regulations. Private companies are strictly prohibited from offering equity (shares) to the public under any circumstances. Additionally, debt securities can only be sold through registered capital market operators, and any offering must be pre-approved by the relevant securities exchange and registered with the SEC. Publicly offered securities can only be traded on a registered exchange.
The SEC has established a system of robust penalties to deter violations of the new regulations. Individuals or entities found to be issuing or allotting securities without prior approval or violating any other provision face a range of sanctions. These include a first-instance penalty of ₦10 million, followed by a daily penalty of ₦100,000 for continued violations. The Commission also reserves the right to suspend or withdraw the registration of involved capital market operators, order the disgorgement of proceeds from the transaction, and even ratify or rescind the transaction itself if deemed to be in the public interest.
“Any other sanction the Commission deems fit in the circumstance,” it added.
Eligibility, Track Record, and Listing Requirements
Companies seeking to raise funds under these regulations must be duly incorporated under the Companies and Allied Matters Act (CAMA) or other enabling legislation and demonstrate a minimum of three years of operational track record. Additionally, while private companies are permitted to list their securities on a registered exchange, such listing must occur within 30 days of completing the allotment process.
Ensuring Proper Utilization of Capital
The new regulations place a strong emphasis on ensuring that the proceeds raised by private companies are used for the purposes outlined in the offer document. Issuers are prohibited from diverting funds without prior SEC approval and are required to submit detailed utilization reports quarterly until the proceeds are fully expended.
“the issuer shall file with the Commission not later than 90 days after the conclusion of an issue on the appropriate SEC Form, detailed information on the utilization of proceeds.
Evidence of such utilization shall be provided as an appendix to the report. The rendition shall be quarterly until issue proceeds are fully utilized.
“The issuer is prohibited from using the proceeds of the issue for purposes other than those stated in the offer document without the prior approval of the Commission.
“The issuer shall file with the Commission not later than ninety (90) days after the conclusion of an issue on the appropriate SEC Form, detailed information on the utilization of proceeds.
“Evidence of such utilization shall be provided as an appendix to the report. The rendition shall be quarterly until issue proceeds are fully utilized.”
SEC Openness to Public Input
The SEC has underscored its commitment to receiving feedback on the new regulations. Stakeholders are encouraged to submit comments and suggestions to the Commission’s Rules Committee within two weeks of the publication date via rulescommittee@sec.gov.ng or through the DG SEC not later than two weeks from the date of the publication on the website.
Read Also: Proposed Tax Relief for Nigeria’s Informal Sector
If You Ask Me
The introduction of these new SEC regulations represents a significant development for private company fundraising in Nigeria. The focus on investor protection, increased transparency, and responsible use of funds is likely to be welcomed by many market participants. However, the specific details of investor qualification and the potential impact of the ₦15 billion cap on fundraising activities remain to be seen. As companies and stakeholders navigate this new regulatory landscape, further guidance from the SEC will be crucial in ensuring a smooth and successful implementation of these rules
