Introduction

The Securities and Exchange Commission (SEC) recently introduced a new rule which prohibits dealings (purchase, sale and transfer) in securities of unlisted public companies outside of an approved/SEC registered exchange established for the purpose of facilitating over-the-counter (OTC) trading of securities.

Previously, transactions in respect of securities of unlisted public companies were freely carried out inter partes, subject only to compliance with the basic requirements relating to the purchase, sale and transfer of securities under the Companies and Allied Matters Act. This is because, being unlisted, they were not subject to the Listing Rules of the Nigerian Stock Exchange (NSE) and other applicable rules of the SEC, which require that transactions in respect of the purchase, sale and transfer of the securities of listed companies be carried out through the NSE.

SEC rule

The new rule provides that all securities of unlisted public companies may be bought, sold or transferred only by means of a system approved by the SEC and under such terms and conditions as the SEC may prescribe from time to time. The new rule also prohibits anyone from buying, selling or engaging in the transfer of securities of an unlisted public company except through the platform of a registered securities exchange established for the purpose of facilitating OTC trading of securities. Finally, any unlisted public company, director, company secretary, registrar, broker/dealer or other person that facilitates the buying, selling or transfer of the securities of an unlisted public company other than through the platform of a duly registered securities exchange shall be liable to a penalty of not less than N100,000 in the first instance and not more than N5,000 for every day of default.

Effect of rule

Effectively, all securities of unlisted public companies must now be traded on securities exchanges that are registered with the SEC and under such terms and conditions as the SEC may prescribe from time to time. By implication, this new rule has made it illegal to buy or sell securities other than on registered exchanges.

The rule will also serve not only to ensure that securities of unlisted public companies comply with the requirements of the Investment and Securities Act and SEC rules and regulations (which provide that the securities of public companies must be registered with the SEC), but also to facilitate the creation of a structured, transparent platform on which the securities of unlisted public companies may be bought, sold and transferred. In turn, this will ensure that the market can track the volume of such transactions.

The measure will further make the securities of unlisted public companies increasingly accessible for investors and issuers. In the past, it was often a cause for concern that the securities of certain unlisted public companies were accessible for purchase only to persons who had contacts with senior management and/or the company's secretariat. To a large extent, the new rule guarantees equal market access to all investors or potential investors. The success of investors under the new regime will largely be a function of the capabilities of any broker employed. For issuers, the policy will improve the liquidity of trading in their shares or debt securities.

The new rule will also curb underhand trading in the securities of unlisted public companies and minimise the risk of fraud. This in turn will boost investor confidence in the system.

The new rule has additionally broadened the portfolio diversity available to equity investors. Investors can now access companies from various sectors which would otherwise have been inaccessible. As a result, they can diversify their investments to a greater extent. For instance, as a result of the policy, some of the recently privatised electricity distribution companies have listed their shares on one of the established security exchanges, with sector coverage including consumer goods, consumer services, oil and gas, technology, telecommunications, financials, healthcare, industrials and utilities.

Finally, the financial penalties that failure to comply will incur should help to ensure compliance and improved corporate governance, given the stiff fines to be imposed for breach.

Comment

The issues caused by the wave of private placements by private and public companies in the period immediately preceding the 2008 financial crisis illustrate the need to ensure greater transparency, which in turn fosters accountability. These issues arose mainly as a result of fraud on the part of a number of issuers and their agents, and from a lull in the market. Many of these companies, in breach of the Companies and Allied Matters Act, failed to notify applicants within 42 days as to whether their applications for shares has been wholly or partially accepted, or even rejected. Also, some of these shares were offered to unsuspecting members of the investing public who had no way to verify appropriately the validity of such transactions.

Limiting the purchase, sale and transfer of securities of unlisted public companies to OTC trading facilities provides a trusted platform through which investors can trade their securities and will in turn give the securities market greater depth. Securities that were previously unaccounted for will also be given more structure in terms of pricing, while ensuring their liquidity. Investors will also be confident that they are getting fair prices for their securities. This restriction will further encourage best practice by operators in the OTC market.

The SEC initiative is laudable, as it is expected to bring sanity to a securities market which was largely unregulated and fraught with fraud. It will assure investor protection by centralising trading to a single hub and provide certainty and essential data on trading activities. It is hoped that this centralised trading will bring economies of scale for all participants and ultimately have a positive effect on the Nigerian economy.

For further information on this topic please contact Yilji Dimka or Debo Ogunmuyiwa at SPA Ajibade & Co by telephone (+234 1 472 9890), fax (+234 1 4605092) or email (ydimka@spaajibade.com or dogunmuyiwa@spaajibade.com). The SPA Ajibade website can be accessed at www.spaajibade.com.

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