FAQ

1. Stocks and bonds, what are they?

Simply, Stocks are shares of ownership issued by a corporation to raise equity; investors in shares literally own part of the company.  Bonds are issued by corporations, municipalities or states and the Federal Government as debt, similar to bank loans where the company owes investors periodical interest payments over the life of the bond plus principal reimbursement at the maturity of the bond.  

2. 2. How can I trade shares/stocks?

Through a registered stock broker; see list of registered capital market operators  https://sec.gov.ng/cmos

3. 3. How am I protected as an investor?

Through regulations by SEC/Exchanges and other operators through the process of registration, rule making, monitoring, enforcement and establishment of Investors Protection Fund (IPF).

4. What Is A Ponzi/Pyramid Scheme?

A fraudulent investment scam that promises high returns with little or no risk involved, but in reality, generates returns for older investors by acquiring new investors. The scheme usually fails when they are not able to get enough new investors to sustain the high returns..

5. How can I identify a Ponzi scheme?

• They do not appear on our list of people/organisations registered to do investment business in Nigeria https://sec.gov.ng/cmos
• They never make legitimate investments or assets sufficient to sustain the promised payouts.
• They require the entrance of new investors to pay existing investors. These new entrants are likely to lose their investment as they will not be able to recoup their investment before the collapse of the scheme.
• They promise high returns on investment, usually higher than the prevailing Central Bank of Nigeria’s Monetary Policy Rate (MPR).
• Their promoters are not known to the investing public.

1. What are pre-registration requirements?

– Fair knowledge of provisions of the Investment and Securities act, SEC rules & regulations and the capital market.

– Satisfactory police reports
– Satisfactory referees’ reports (banker and immediate previous employer’s reports)

2. After applying to SEC and meeting all the requirements, what next?

Interview by the registration committee of the Commission.

3. What happens to applicants who are not successful at the registration interview?

They are required to pay re-appearance fees before being invited for another interview.

4. What duration is given to the applicant(s) to re- appear?

Thirty (30) to sixty (60) days from the date of the last interview.

5. What happens when a sponsored individual of a registered company/firm leaves the employment of that company/firm?

The company/firm is expected to notify the Commission within two weeks of its occurrence and where it fails, a penalty is charged for every week of default and completion of SEC form 7.

6. What happens when a company/firm changes its name/director(s)?

The following documents are required to be filed:

• Copy of form SEC 7 and payment of an amendment fee
• Copy of board resolution authorizing the change of name/information
• Copy of amended memorandum and articles of association of the company/firm (certified by CAC)
• Copy of amended fidelity bond
• Copy of certificate of incorporation (certified by CAC)

Note: * all original copies of the above should be brought for sighting by an authorized officer of the commission.

1. Why do organizations issue bonds? 

• Let’s say a corporation needs to build a new office building, or needs to purchase manufacturing equipment, or needs to purchase aircraft.   A company can gain funding for these projects without diluting ownership in the company through issuance of shares. Banks may lend the money to companies, but these days, the loans are for very short terms and for very high interest rates. Otherwise, generally speaking, a less expensive way is to issue (sell) bonds. The organization will agree to pay some interest rate on the bonds and further agree to redeem the bonds (i.e., buy them back) at some time in the future (the “redemption” or “maturity” date”).
• Or perhaps a state government, like Ebonyi State, needs to construct a new school, repair or construct roads, or renovate the sewers.  
• The Federal Government of Nigeria issues bonds to fund the budget deficit.  FGN bonds and are considered to be safer than corporate bonds, so they pay less interest than similar term corporate bonds. Treasury bonds are not taxable; a Tax Waiver has been signed by the President and awaiting to be published in the Gazette to put ALL bonds on equal tax treatment as FGNs. 

2. What (possible) benefits are there for corporations issuing bonds?

• Less costly than a bank loan, including fees, debt service, and expenses.  Keep in mind that expenses that a company incurs in coming to the market to issue a bond are one-time only and should be amortized over the number of years of the bond. 
• Longer term financing available, greater than tenor of a bank loan (generally a year or two) or through the issuance of commercial paper (less than nine months) 
• The Tax Waiver will provide tax benefits to the issuer and to the investor. 
• A company will not dilute existing share ownership with a bond issuance.
• Can issuer through a shelf registration offering (a medium term note program) issuing a first tranche now and later (within two years) issuing other tranches, e.g., when interest rates fall…at lower coupon rates.
• Greater exposure/enhanced public relations for a company; can be traded or quoted on an exchange.

3. What (possible) benefits are there in investing in Corporate or State bonds?

• Income stream: A predictable income stream is paid to investors on a regular basis (i.e., interest) and the principal is returned at maturity.  Corporate and State bonds generally pay higher returns than FGN bonds and bank deposits, but the risks may be higher too.
• Diversity: Corporate and State Bonds help achieve balance in an investment portfolio weighted with equities.  Bonds provide an opportunity to choose from a variety of sectors, structures, and credit-quality characteristics to meet investment objectives; some institutions have fixed liabilities in the future, e.g., pension funds and insurance companies, and therefore can match liability timeframes with asset maturities.
• Safety: Corporate and State bonds are evaluated and assigned a rating based on credit history and ability to repay obligations. The higher the rating, the safer the investment as measured by the likelihood of repayment of principal and interest.  If a company goes bankrupt, debt holders are ahead of shareholders in the line to get paid. In a worst-case scenario such as bankruptcy, the creditors (debt holders) usually get at least some of their money back, while shareholders often lose their entire investment.
• Planning for life events: Zero coupon bonds are bought at a discount from par value and pay off at maturity the interest accrued plus principal.  Some life events such as children’s university educations, weddings, and retirement may be (partially) financed through investments in these bonds.  During retirement, bonds with coupons will provide a steady stream of income.

4. What are common lengths of maturities of bonds?

• Bonds around the world commonly have maturities up to 30 years.  In Nigeria, the FGN bonds have maturity ranges from a few months to 20 years.  Corporate and State bonds in Nigeria have maturities up to 7 years, but can be longer.

5. How are bonds sold?

• Like stocks, bonds can be packaged into a bond collective investment scheme, or mutual fund. This is a good way for an individual investor to let an experienced mutual fund manager pick the best selection of corporate and other bonds. A bond fund can also reduce risk through diversification.  Otherwise, contact your brokerage firm for more information on purchasing bonds.  Keep in mind that units of bonds sold are for large quantities of bonds that represent larger amounts of money for investment. Bonds can be bought on a Securities Exchange or the over-the-counter markets in Nigeria.

6. How are bonds regulated?

All organizations that obtain funds from the market are expected to prepare and submit statutory returns on utilization of issue proceeds to the Commission for review. The returns are reviewed for compliance with the utilization plan approved in the offer documents. Thereafter, on-site inspection is conducted to corroborate information disclosed in the returns and cases of deviation from the approved plan attract appropriate sanctions. The Commission may engage the services of other professionals to complement.  

7. How is the risk rating determined in Corporate and State issued bonds?

A credit rating agency (CRA) analyzes each bond issued in Nigeria as to its capabilities of paying off interest and principal on a timely fashion.  If a company or State does not pay interest and principal on a timely basis, that bond is deemed to be in default.  Although five CRAs are approved by the Securities and Exchange Commission of Nigeria (SEC), only two to three of them are active.  The SEC also recognizes international CRAs for their ratings, such as those from Standard and Poors, Moody’s, and Fitch.  The SEC requires that all publicly traded bonds be issued with at least an “investment-grade” rating, i.e., “BBB” rating or above.  The PenCom requires that all bonds purchased by pension funds have at least two investment grade ratings.  Ratings are generally provided from the highest of “AAA”, then “AA”, then “A”, then “BBB”, etc., down to the lowest (i.e., in default) of “D”.  Like grades in school, these ratings have gradations of “-” and “+”. Regardless of the CRA rating(s), an individual investor should always perform his/her own due diligence or would rely on a third party to perform such due diligence as to the creditworthiness of a particular bond, i.e., whether or not the company or State will be able to pay interest

1. What is regulatory innovation?

It is the regulatory response to advancement in financial innovation

2. Is the plan by Regulators to regulate innovation an attempt to stifle innovation and entrepreneurship?

No. Rather it’s a concerted effort to support innovation and make it safe for investors, operators and the Capital Market in general

3. What internal structure has the Securities & Exchange Commission introduced so far, to support innovation?

The SEC has created a Fintech and Innovation Office (FINO) to facilitate internal & external information dissemination, communication with innovators and provide guidance on regulatory requirements

4. What other roles does the Fintech and Innovation Office (FINO) play?

It reviews submissions from Fintech firms and coordinates collaboration between operational departments of the SEC which supervise and monitor products and processes in the Capital Market

5. How can one access the Fintech and Innovation Office?

• Via e-mail-innovation@sec.gov.ng.
• via the sec website-sec.gov.ng to fill the enquiry form or use the chat feature
• visit the FINO at SEC Head Office in Abuja

6. Does the SEC have an engagement plan with the Fintech community?

Yes the SEC has an engagement timetable (place link here) with various discovered Fintech Firms. This engagement timetable will be expanded as more firms are discovered

7. What other external mechanisms has the SEC deployed to understand the Fintech eco-system?

The SEC has inaugurated the Fintech Roadmap Committee in November 2018, comprising Fintech entrepreneurs, technology experts, Capital Market trade groups, financial sector regulators, banks, legal firms, innovation hubs and Fintech organizations

8. What is the mandate of the Fintech Roadmap committee?

To produce a snapshot of the current status of Fintech developments in the Nigerian Capital Market and propose a holistic plan for facilitating & developing Fintech as a tool for deepening the Market

9. What is the status of progress made by the Fintech Roadmap Committee?

The Committee has produced a draft report, presently undergoing reviews.

10. How many Fintech and innovation firms has the SEC engaged so far?

The SEC has engaged over fifty (50) firms via its assessment form (place link here) on the SEC website and through formal meetings

11. Has the SEC engaged with any innovation hub in the country?

Yes the SEC has engaged with innovation hubs in Abuja and Lagos and is in constant communication with them.

12. Have any Fintech firms come forward to apply for regulation?

Yes a number of Fintech Firms have applied for permission to operate.

13. Has any Fintech Firm received approval from the SEC?

Two Fintech firms have been approved for registration by SEC Management

14. What is the status of the registration process of Fintech firms approved by the SEC?

Some Rules are in the process of being amended to facilitate their registration

15. How long before the registration is achieved?

Before the end of the fourth quarter of 2019

16. Will Fintech firms already operating be closed down immediately they come forward to engage the SEC?

The SEC will not close down any firm immediately it comes forward. Rather the firm will be assessed on its risk exposures and guided towards coming under SEC regulation. However, if its operations are too risky for investors, it will have to accept and operationalize SEC guidance on investor protection and market stability.

17. How long will it take to receive SEC approval to offer a Fintech product or process?

The length of time depends on the nature of product and whether or not the SEC has existing Rules or Guidelines to regulate them.