Background  

• The Securities Exchange Commission in Nigeria (SEC or the Commission) recently published the proposed rules on the issuance and allotment of securities by private companies which govern the issuance of debt securities by private Companies in Nigeria (the Proposed Rules).  
• These rules have been proposed in furtherance of the recent amendment of Section 67(1) of the Investments and Securities Act (ISA) by Section 43 of the Business Facilitation (Miscellaneous Provisions Act) of 2022 (the Amendment). Prior to the Amendment, private companies were prohibited under Section 22(5) of the Companies and Allied Matters Act, 2020 (as amended) from inviting the public to subscribe to their securities (whether share or debenture, etc.) unless authorized by law. Unlike the foregoing provision of CAMA, Section 67(1) of the ISA which contained similar restrictions (on private companies) did not permit any form of variance (to the prohibition) under any appliable law.[1]  
• Therefore, the Amendment seeks to create consistency between CAMA and SEC by outrightly amending Section 67(1) of ISA to permit the Commission to regulate the issuance of securities by private companies to the public.[2]
• Further to the Amendment, the SEC has published the Proposed Rules to regulate the issuance of (debt) securities, by private companies in Nigeria. Therefore, this Newsletter highlights the key provisions of the Proposed Rules and implications for private Companies in Nigeria. 

Highlights of the Proposed Rules 

Scope and Applicability  

• The Proposed Rules apply to debts instruments such as plain vanilla bonds and debentures, equity.[3] Plain vanilla bonds and debentures are defined as non-complex debt instruments with fixed rates and defined maturities, with the investor receiving periodic interest payments and amortized or bullet principal repayments at maturity.[4] Thus, debt securities issued by private companies under the Proposed Rules must have clear terms regarding periodic interest, rates, and other provisions. 
• Additionally, the Proposed Rules are applicable solely to private companies issuing debt securities through public offers or private placement approved by the SEC. It extends to registered exchanges, platforms, and capital market operators issuing debt securities on behalf of the private companies.[5]

Existing Debt Securities of Private Companies 

• The Proposed Rules also apply to private companies with existing debt securities held by Qualified Investors. These companies are required to file an application for the registration of the already issued securities to the SEC.  
• Failure to register within three months after the official publication of the Proposed Rules will result in a penalty of not less than N2,000,000 (Two Million Naira) and a further sum of N100,000 for every day the violation continues.[6]

Eligibility 

• The SEC, in its commitment to protecting the interests of investors, stipulates in the Proposed Rules that eligible companies must be duly registered and have been in operation for at least three years.[7] 

• Additionally, such companies must not be in default of payment of any previous debt issuances. This ensures that only financially stable companies can issue debt securities under the Proposed Rules.[8] 

Restrictions and Conditions  

• Similar to the existing rule that private companies cannot issue shares, the Proposed Rules maintain that a private company cannot offer its equity securities (shares) to the public under any circumstance.[9] Therefore, for the avoidance of doubt, the Proposed Rules may not be leveraged as the basis for the issuance of shares by private companies to the public; the existing prohibitions under CAMA and the ISA remain valid.  
• Debt securities issued under the Proposed Rules can only be sold to Qualified Investors[10] and only registered capital market operators can be parties to debt securities issuances under these rules.[11] 
• In addition, the Proposed Rules further provide that no private company or any person acting on its behalf shall offer, sell, or allot securities to the public without prior clearance of the securities exchange and registration of the securities by the Commission. Securities purchased in a public offer pursuant to the Proposed Rules may also only traded on a registered securities exchange. 

Registration Requirements and Execution of Offer Documents  

• A private company intending to offer its debt securities to the public or through private placement must file specific documents with the SEC. These include copies of board and shareholders’ resolutions authorizing the issue, a current CAC report on statutory information, and the Memorandum and Articles of Association.[12]
• The company must also submit a signed copy of its latest audited accounts for the preceding three years, with the most recent account being no more than nine months old at the time of filing and remaining valid throughout the offer period. Additionally, a draft prospectus must be provided, detailing the amount of securities offered, the basic terms of the securities (including bond status, minimum subscription, coupon rate, maturity, and listing), the offer period, the purpose of the offering, investment risks, tax considerations, the company’s profile and business, management and Board information, an extract of three years of audited accounts, a reporting accountant’s report, and rating reports if applicable.[13]
• The Proposed Rules stipulate that issuers of the securities must publish a prospectus and other offer documents to ensure transparency and provide potential investors with essential information to make informed decisions.[14] 
• Executed documents such as executed shelf prospectus, supplementary prospectus/pricing supplement, vending agreement, series trust deeds, underwriting and sub-underwriting agreements, specimen e-allotment notice, signed newspaper advert material, power of attorney for absentee parties, and any other material information must be filed with the SEC through the securities exchange handling the issuance.[15]
• According to the Proposed Rules, where securities are not offered to the public or Qualified Investors within six months of registration, the issuer must revert to the SEC through the securities exchange for revalidation of the registration before offering them to the public. 

Allotment and Listing of Securities  

• Securities are required to be listed on registered securities exchange within 30 days of allotment and a summary report of the completion of the offer must be submitted to the SEC within 21 working days of allotment of the securities.[16]
• Furthermore, in the case of a fixed price offer, if less than 50% of the issue is subscribed, the offer must be aborted, and the SEC notified within 24 hours.[17] 
• For over-subscription, a minimum modified pro-rating approach is proposed for all subscribers to receive the minimum subscription units, with any remaining balance pro-rated. If the minimum subscription cannot accommodate all subscribers, it will be reduced accordingly. As such, the allotment must be published on the issuer’s website within five working days.  
• From the foregoing, the rules set stringent requirements similar to its other regulations regarding allotment and minimum subscription, etc.  

Fees and Sanctions 

• Fees for registering securities under the Proposed Rules are structured based on the amount registered, starting at 0.15% for the first N500 million, decreasing to 0.145% for the next N500 million, and further reducing to 0.1425% for amounts exceeding N1 billion. Additionally, a non-refundable filing fee of N100,000 must be paid to the securities exchange issuing the securities on behalf of the Company.[18]
• These fees are divided in a 70:30 ratio between the Commission and the exchange, with the exchange responsible for remitting the Commission’s share. All fees must adhere to the Commission’s fee regime. 

• Violations of registration rules incur significant penalties, including a minimum penalty of ₦10,000,000 initially, with an additional ₦100,000 for each day of non-compliance.[19] 
• Sanctions also include suspension or withdrawal of registration, disgorgement of proceeds, and the Commission’s discretion to ratify or rescind transactions in the public interest.  

Our Thoughts 

• The Proposed Rules would likely promote private companies’ access to a larger pool of capital. However, for private companies considering issuing securities approved by the SEC, it is important to evaluate their capacity to meet the regulatory requirements. The rules impose significant obligations, stringent disclosure standards, and responsibilities that demand careful consideration before proceeding. 
• It’s pertinent to mention that the Proposed Rules do not specify a minimum threshold for the amount of securities that private companies can raise, but the maximum is N15 billion as stated in Section 8 (d) of the Proposed Rules. This opens opportunities for private companies that meet the other general criteria to also leverage the rules to raise more funding.  
• Moreover, the Proposed Rules may also pave the way for the implementation of the NGX Technology Board, a specialized platform designed for technology-based companies to list and raise capital on the Nigeria Exchange Group. 

Conclusion 

• In conclusion, the Proposed Rules (on the issuance and allotment of securities by private companies) mark a notable evolution in regulatory oversight and increased participation by private companies within Nigeria’s capital markets.  
• With these rules in place, private companies stand to gain access to a broader pool of capital, while investors will also benefit from a wider range of investment opportunities.