Security and Exchange Commission (SEC) on 7th of May 2024, passed a Rule ‘Exposure of proposed New Rules on the Issuance and Allotment of Private Companies Securities. Apart from regulating how securities are issued by private companies, the new rule is also aimed at providing alternative fundraising options to private companies. In this article, we’ll examine the scope of this rule as it affects private companies. You may also view a copy of the rules HERE.
WHO DOES THIS RULE APPLY TO?
This Rule is only applicable to the debt securities by private companies which can be offered through public offer, private placement or other methods as may be approved by the Commission. It is also applies to registered exchanges and platforms which admit debt securities issued by private companies for trading, price discovery or information repository purposes .And finally, registered capital market operators who are parties in the issuances and allotment of debt securities of private companies are bound by this rule.
From the above, the rule only covers debt securities by private companies to the public as equity securities from private companies are prohibited from being issued to the public.
ARE PRIVATE COMPANIES IN NIGERIA SUBJECT TO SEC RULES?
In Nigeria, private companies are regulated by the SEC and within the context of allotting equity securities by private companies, the new SEC guidelines was made pursuant to the provision of section 43(1) (b) of Business Facilitation (Miscellaneous, Provision) Act, 2022, which amends section 67(1) of Investment and Security Act and empowers the SEC to prescribe regulations and procedure for private companies that want to issue and allot securities.
ELIGIBILITY OF PRIVATE COMPANIES UNDER THE RULES TO ISSUE SECURITIES
A private company wishing to issue securities under this guideline must satisfy the following criteria;
a. The company must be duly incorporated with Corporate Affair Commission or other enabling laws.
b. The company must have at least three (3) years track record of operation
c. Shall not issue any bond if it is in default of payment of interest or repayment of the principal in respect of previous debt issuances for period of more than six (6) months.
d. The credit rating of a bond issued by the private company shall not be less than investment grade.
e. If there is any approval required from other regulatory authorities, such must have been obtained and the requirement of the authority complied with and same will be filed with the Security and Exchange Commission about the satisfaction of the requirements of the other enabling authority.
f. All the issuers and bonds to be issued shall be rated by a rating agency(this is not compulsory for private placements).
Upon the fulfilment of the above conditions, the private company is said to be eligible for the issuance of securities. And if those things are not met, the application to the Commission for permission to issue debt securities to the public may be denied.
RESTRICTION ON THE ALLOTMENT OF SHARES BY PRIVATE COMPANIES
The new Rule places restrictions on private companies trying to issue its securities. For instance, a private company cannot offer its equity securities to the public under any circumstance. However, it can offer its debt security only to the qualified investors and only the registered capital market operators can be the parties to the debt securities issuances under this rule. Furthermore, private companies are not allowed to offer or allot securities to the public without the approval of the SEC.
REGISTRATION OF SECURIES WITH SECURITY AND EXCHANGE COMMISSION
Considering the provision of the new Rule, any private companies that want to offer its debt securities to the public has to register same with the Commission stating the amount of the securities and the basic terms of the securities to be offered. The application will show that both the board and the shareholders have reached resolution of the issuance of the securities.
It is also the requirement of the rule that report shall always be filed to the Commission from time to time. And failure to file periodic report is an offence that will attract a fine of N1,000,000(one million naira) in the first instance and a further sum of N50, 000 (fifty thousand naira) for every day the default continues.
The company who applied for the registration of the securities for the purpose of issuance of same to the public is prohibited from using the proceeds for any other thing other than the purpose stated in the offer document without the express approval of the Commission. For this reason, it is required that the company should file a report to the commission on the detailed information of the usage of the proceeds got from the securities issued in not later than 90 days after the conclusion of the issue. And this report shall continue on quarterly basis until the proceeds are fully utilized.
CONDITIONS FOR SECURITIES ISSUANCE BY PRIVATE COMPANIES
The new rules also state the conditions the private companies will issue its shares. The rule state that a private company can only issue shares so far as it is only plain vanilla bonds or debentures and other debt instrument including sukuk as the commission may approve. In the case of issuance of sukuk, the issuer must comply with rules applicable to sukuk as provided in rules 569-588 of the Commission’s rules. It is also stated in the new rule that the securities will only be offered to qualified investors. A private company may undertake a maximum of three debt securities in a year and the total amount to be raised shall not be more than N15billion naira. Where a private company want to issue more debt securities beyond the limit, it shall register as a public company. See Rule 8 of the Guidelines
REGISTRATION OF EXISTING DEBT SECURITIES WITH THE COMMISSION
It is expected of the private companies who have existing debt securities held by qualified investors after the issuance of this rules to apply for the registration of the securities with the Commission through the security exchanges. This application must be made not later than three (3) months from the date of issuance of this rules. Worthy of note is that failure to register the existing debt attracts liability to a penalty of N2,000,000 (two million naira) for the first time and a further sum of N100, 000 (hundred thousand naira) for every day the violation continues. See Rule 4 of the Guidelines.
PENALTIES FOR FAILURE TO COMPLY WITH THE RULES
Rule 18 of the Guidelines prescribes punishments for failure to adhere to the guidelines. The Rule provides a penalty of not less than N10, 000,000 (ten million naira) in the first time and a further N100, 000 (one hundred thousand naira) for everyday the valuation continuous. The company may be suspended or the registration of the capital market operator (s) involved may be withdrawn. Defaulter may also be made to refund/disorge proceeds/income from the transaction. Finally, the Commission may ratify or rescind a transaction if it is in the interest of the public to do so. As provided by the rules, the Commission may choose to impose any other sanction that is due and fit in the circumstance.
CONCLUSION
The new guidelines is a formal approach toward regulating security allotments by private companies. Although commendable, we hope to see measures put in place to enforce compliance of the Guidelines in the coming days.
For enquiries please reach out to us through the WhatsApp icon on this page or HERE, and we’ll attend to you.
Latest posts by Cynthia Tishion (see all)
- WHAT HAPPENS WHEN A BANK LICENCE IS REVOKED - June 13, 2024
- HOW TO SET UP A PHARMACY IN NIGERIA - June 6, 2024
- REGULATORY UPDATE: CBN WITHDRAWS CIRCULAR ON CYBERSECURITY LEVY - May 30, 2024
Leave a Reply