Funmilayo Odude, Legal Practitioner, Damod Law Practice

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SEC Rules and curbing Ponzi schemes in Nigeria 15 Nov 2021

Last month, the Nigerian online media was agog with the story of what some have termed one of the biggest Ponzi schemes in the country in over a decade. A couple, Mr. and Mrs. Bamise Samson Ajetunmobi, are alleged to be on the run with investment funds of over N20 billion obtained through their company, Imagine Global Holdings Company Limited. Earlier in August, another Nigerian couple, Gloria Igberaese and Muyiwa Folorunsho, was accused of absconding the country after committing a multi-million-dollar fraud. It is alleged that they used their company, Divergent Enterprise, and its various investment channels such as Landlagos, Porkmoney, Hyberfactory, etc. to run a Ponzi scheme that fleeced finessed Nigerians. These are just two of many of such stories.

According to a The Guardian newspaper article in September 2021, of the N300 billion lost by millions of Nigerians to Ponzi schemes in the past few years, over 2,000 speculators lost N900 million to Yuan Dong Ponzi. Galaxy Transport Ponzi schemes defrauded victims of N7 billion, while N2 billion was lost to Famzhi Interbiz Limited. Nigerians who invested in Cowlane and Dureil also lost N100 million to each of the outfits. The newspaper further reported that the Economic and Financial Crimes Commission (EFCC) arrested and was prosecuting about 10 Ponzi scheme operators who have allegedly fleeced Nigerians of over N12 billion between October 2020 and August 2021 only.

With the increase of fintech products and digital investment platforms in the country, there has also been an increase in digital Ponzi schemes. While Imagine Global and Divergent Enterprise are clearly very sophisticated, there are numerous home acquisitions, agro-produce export and other ‘investment’ schemes that have cost Nigerians dearly. What is perhaps alarming about some of the schemes, particularly those run at the level of Imagine Global and Divergent Enterprise, is how legitimate they appear, as opposed to the more obvious schemes like MMM and Racksterly.

For example, microfinance banks, investment houses, fintech companies and even churches are said to have invested in the Imagine Global fund. This has a twin-devastating effect. Not only are investors left stranded, but it also becomes more difficult for genuine fundraisers to raise funds where Ponzi schemes run riot. This undermines efforts to safeguard investment, which is critical to attracting more investments through various instruments and vehicles. Crowdfunding is one of the relatively new tools for startups seeking to raise funds outside of family and friends, or other angel investors and venture capitalists. The investment space in a developing and thriving tech environment like Nigeria must be protected.

The Securities and Exchange Commission (SEC) has recently developed a framework to provide some level of regulation in the digital investment and crowdfunding space. The Commission has actively been warning against questionable investment companies and has now developed a framework for crowdfunding and digital investment platforms through its Crowdfunding Rules published on the 21st of January 2021.

According to the regulation, from the 30th of June 2021, “no person or entity shall operate any product that pools investors’ monies except such person or entity is registered as a fund/portfolio manager with SEC.” The importance of registration is highlighted in both the criteria for eligibility and the ongoing regulatory compliance mechanisms, which were drafted to ensure some level of seriousness by operators.

The SEC crowdfunding rules makes provisions for three classes of people: the fundraiser, the crowdfunding intermediary (CFI) and the investor; and are applicable to both crowdfunding platforms operated or maintained in Nigeria and platforms located outside Nigeria but actively target Nigerian investors. For the fundraiser, the SEC rules provide for the minimum number of years in operations (two years) and the prohibition of public companies and their subsidiaries; companies with no specific business plan or with ‘complex structures’ (an entity without immediate transparency of ownership and/or control thereby making it difficult to immediately ascertain the beneficial owners of the entity); or companies which propose to use the funds to provide loans or invest in other entities, from raising funds through a crowdfunding portal.

The CFI must have a minimum paid-up share capital of N100 million and at least three principal officers registered with the Commission as sponsored individuals. They must develop guidelines and by-laws that govern the conduct of fundraisers and investors on its platform/portal. The CFI’s responsibilities as prescribed under the SEC Rules include the verification of the legitimacy of the businesses on its portal, educating investors, risk disclosures, and depositing of the funds raised on its portal with a SEC-approved custodian appointed by it.

The Rules expressly mandates that “a Crowdfunding Intermediary shall carry out due diligence on prospective fundraisers intending to use its portal.” The Rules further require every crowdfunding intermediary to ensure every investor affirms a risk acknowledgement form. This is to ensure that each investor understands the risk element of the investment and that the portal will not be responsible if the investor loses all or some of the money invested. A CFI cannot change its ownership structure or discontinue operations of a crowdfunding portal without the prior approval of SEC.

The rules protect the investor’s contractual right to withdraw from an offer or agreement to purchase the securities upon giving notice to the funding portal up to 48 hours before the close of the offer. Investors can also rescind their investment if there is a material adverse change prior to the closing date of the offer.

It is clear that a good regulatory framework that has provided an innovative way for private companies to raise capital from the public exists. What seems to be missing is the enforcement mechanism to ensure adequate compliance by investors. While SEC has maintained an accessible list of registered fundraisers and CFIs on its portal, it is clear from the data on Ponzi schemes above that this is not enough to eliminate the operations of unlicensed and illegal crowdfunding schemes or to prevent funding of such schemes by investors.

While the elements of greed and gullibility cannot be completely removed from the rising increase in Ponzi schemes and illegal fund managers; the poor performance of the capital market, the volatility of the stock market and the low returns on government and other traditional securities, coupled with rising inflation, are other factors that make the schemes even more attractive.

To reduce the prevalence of Ponzi schemes, we must, therefore, tackle the high levels of poverty, unemployment and income equality. Consistent investor education is very important, too. Also, regulatory enforcement mechanisms that identify and shut down the schemes at an early stage need to be developed. But perhaps, most important of all, perpetrators must not get away with the crime.

Funmilayo Odude is a Partner at Commercial and Energy Law Practice (CANDELP).