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    HomeGovernance, Policy & Regulations ForumPolicy & Regulations ForumNigeria's SEC Proposes New Rules Targeting Startups Raising Capital via Bonds and...

    Nigeria’s SEC Proposes New Rules Targeting Startups Raising Capital via Bonds and Commercial Papers

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    The Nigerian Securities and Exchange Commission (SEC) is shaking things up for startups seeking debt capital. New rules are on the horizon, promising a more organized and secure system for issuing debt instruments. 

    The proposed regulations focus on empowering private companies, including startups, to raise capital through familiar debt tools like bonds and debentures. Think of these as fixed-rate loans with a set repayment schedule, just like borrowing from a bank, but offered to qualified investors. These investors could be wealthy individuals or institutions vetted by the SEC. The framework even embraces Islamic bonds (sukuk) to attract a wider pool of potential backers. 

    While this might involve some adjustments to your fundraising strategy, it also unlocks exciting possibilities. This article equips you with the knowledge to navigate the proposed rules and secure debt financing under the revamped framework.

    Who These Rules Apply To:

    • Startups Issuing Debt: These rules affect private companies (like startups) that want to raise money by selling debt securities to the public, to a select group of qualified investors (private placement), or through any other SEC-approved rules.
    • Trading Platforms: Registered exchanges and platforms that allow trading of these private company debt securities are also included.
    • Capital Market Intermediaries: If you use a registered broker or other intermediary to issue and sell your debt securities, they are covered by these rules as well.

    When These Rules Start:

    These rules will only apply once the SEC officially approves them.

    What About Existing Debt Already Issued?

    • Grace Period: If your startup already has debt securities held by qualified investors, you have 3 months from the approval date to register those securities with the SEC through a stock exchange.
    • Penalty for Non-Compliance: Failure to register on time will result in a fine of at least ₦2,000,000 (Two Million Naira) and a daily penalty of ₦100,000 for continued violation.

    Who Can Issue Debt Securities?

    • Registered Company: Your startup must be a registered business under the Companies and Allied Matters Act (CAMA) or other relevant laws.
    • Three-Year Track Record: You’ll need to be operational for at least three years before issuing debt.
    • No Default History: If you’ve ever defaulted on previous debt (interest or principal payments not made for over 6 months), you can’t issue new debt under these rules.

    Additional Requirements:

    • Credit Rating (Optional for Private Placement): An independent rating agency needs to assess your creditworthiness and assign a rating to your debt (though private placements may be exempt).
    • Investment Grade Rating Required: The rating needs to be “investment grade” or above, indicating a lower risk of default.
    • Regulatory Approvals: If other government agencies need to approve your debt issuance, you must get those approvals and file them with the SEC through a stock exchange. You also need to comply with any conditions set by those agencies.

    General Points:

    • Only Debt Securities: These rules only apply to debt-based fundraising (borrowing money) by private companies, not equity offerings (selling ownership).
    • Shelf Registration: Startups can create a “shelf registration” program with the SEC to allow for future debt issuances without needing new approvals each time.
    • Book Building Option: You can use a “book building” process to determine the interest rate and other terms of your debt offering, following SEC regulations.
    • Penalties for Misconduct: Making false statements to investors or violating these rules can lead to penalties under these rules and the Investment and Securities Act (ISA).

    Restrictions on Public Offerings

    • Startups (private companies) cannot offer their shares (ownership) to the public under any circumstances.
    • They can only issue debt securities (like bonds) to qualified investors, who are typically those with a high net worth or experience in investing.
    • Only registered investment firms can be involved in selling these debt securities.
    • All offerings must be registered with the Securities and Exchange Commission (SEC) before any sales can happen.
    • Once bought, these debt securities can only be traded on a registered stock exchange.

    Types of Securities Allowed

    • Startups can only issue basic debt instruments like bonds and debentures. Specific Islamic finance instruments (sukuk) may also be allowed with SEC approval.

    Limits on Debt Offerings

    • A startup can issue debt securities up to three times in a year, with a maximum total of ₦15 billion (around $34 million USD).
    • If they want to raise more after that, they’ll need to register as a public company, which comes with more regulations.

    Registration Requirements

    • To offer debt securities publicly or privately, a startup needs to register with the SEC through a stock exchange.
    • They’ll need to submit a variety of documents, including:
    • Resolutions from the board and shareholders approving the offering.
    • Up-to-date company information from the Corporate Affairs Commission (CAC).
    • Company documents like the Memorandum and Articles of Association.
    • Audited financial statements for the past 3 years.
    • A detailed prospectus outlining the offering details, risks, and company information.
    • Legal agreements related to the offering, like trust deeds and underwriting agreements (if applicable).
    • Various confirmations and letters from relevant parties.

    Registration is Key

    Under the new rules, unregistered startups won’t be able to raise capital from the public. This means you’ll need to register your startup before offering securities (shares or ownership units) to investors.

    Documents and Deadlines

    • Prospectus: This is a key document outlining your company’s details, financial situation, and plans for using the raised capital. It needs to be signed by directors and other involved parties, then submitted to the Securities and Exchange Commission (SEC) for approval.
    • Offer Documents: These include various agreements and details related to your capital raising, like underwriting agreements and allotment procedures. You’ll need to file these with the SEC along with the prospectus.
    • Time Limits: There are deadlines to follow. For instance, if you don’t receive investment within 6 months of registration, you’ll need to revalidate your registration with the SEC before offering securities again.

    Review and Approval Process

    • Securities Exchange Review: Your application for issuing private company securities will first be reviewed by a registered securities exchange. They’ll check if it complies with regulations.
    • SEC Approval: The final approval comes from the SEC. They’ll assess your application and ensure everything is in order before allowing you to proceed.

    Allotment of Securities

    • Fair Allocation: The proposed SEC rules dictate how to allocate securities (shares) to investors. There are guidelines to ensure fairness, such as pro-rating allocations in case of oversubscription.
    • Transparency: The issuing house (company managing the capital raising) must publish allotment details on your company website within 5 working days.

    Listing and Reporting

    • Listing on Exchange: You can list your company’s securities on a registered stock exchange within 30 days of completing the allotment process.
    • Reporting Requirements: There are ongoing reporting obligations. You’ll need to submit reports on things like how you’re using the raised funds and your company’s financial statements.

    Penalties for Non-Compliance

    The SEC rules come with penalties for non-compliance. This includes penalty fee of not less than ₦10,000,000 (Ten Million Naira) in the first instance and a further sum of ₦100,000 (One Hundred Thousand Naira) for every day the default continues.

    Registration Fees

    There are registration fees to be paid to the SEC and the securities exchange based on the amount of capital you’re raising.

    You are a law Student, dissect and explain in clear and vivid details the implications of the Proposed Rules on Nigerian startups using the details below. Argue that if a startups intends to raise more than N15bn, it must convert to a public company as per the new rules. Include other implications of the proposed rules. 

    The Implications of This 

    These proposed rules by the Nigerian SEC would significantly impact how startups raise capital through debt financing. The implications include: 

    Public vs. Private Classification:

    • Since some Nigerian startups — Interswitch — NGN23 billion, Moove — NGN30 billion — have historically raised over N15 billion through private placements, this rule indirectly pushes them to become public companies.
    • Why? Private placements under these rules likely have limitations on the total amount that can be raised. If a startup needs more than the allowed limit for private placements, converting to a public company would be the only way to access the public debt market without violating the regulations.

    Increased Scrutiny and Costs:

    • The requirement for credit rating and regulatory approvals adds a layer of complexity and cost to the debt issuance process. Smaller startups may find this process burdensome and expensive.

    A Possible Silver Lining:

    • Increased Investor Confidence: The stricter SEC rules could make Nigerian startups more attractive to qualified investors seeking secure investments.
    Charles Rapulu Udoh is a Lagos-based lawyer, who has several years of experience working in Africa’s burgeoning tech startup industry. He has closed multi-million dollar deals bordering on venture capital, private equity, intellectual property (trademark, patent or design, etc.), mergers and acquisitions, in countries such as in the Delaware, New York, UK, Singapore, British Virgin Islands, South Africa, Nigeria etc. He’s also a corporate governance and cross-border data privacy and tax expert. As an award-winning writer and researcher, he is passionate about telling the African startup story, and is one of the continent’s pioneers in this regard.

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