SEC vs Chaka: Key Lessons for Regulators and Wealthtechs

The Dispute

The Securities and Exchange Commission (SEC) published a statement that on the 17th of December 2020, it had secured interim orders from the Investments and Securities Tribunal (IST) restraining Chaka Technologies Limited (Chaka) and its promoters from advertising or offering for sale securities of companies.

Chaka is a wealth technology (wealthtech) startup that creates room for users to buy, hold or sell company securities listed on multiple local and international stock exchanges. The company simply makes it cheaper and seamless for Nigerian investors to trade in a wider international market. According to the company, all brokerage investments on Chaka are facilitated by Citi Investment Capital Limited, a licensed Nigerian stockbroking firm registered with SEC, as well as other duly registered US brokerage firms.

SEC contends that Chaka “engages in investment activities, including providing a platform for the purchase of shares in foreign companies, but that the said activities are carried out without requisite registration.” In response, the company’s CEO, Tosin Osibodu, maintains that Chaka is merely a technology company providing a channel for registered brokers in the US and Nigeria to trade.

Position of the Law

It is important to first note that the existing capital market regulations are inadequate in providing clarity as to the status and compliance requirements of wealthtechs. Nevertheless, the major regulatory framework for capital market activities in Nigeria is the Investments and Securities Act 2007 (ISA). As the enabling legislation of the SEC, it empowers the body to regulate investments and securities business in Nigeria (S.13(a) ISA). It is also charged with the registration of investment exchanges and other capital market operators (S.13(b) ISA). Ergo, once an individual or a company seeks to participate as a capital market operator or offer certain kinds of investment services, the law requires such individual or company to register with SEC. 

Now, do the activities of Chaka require it to register with the SEC? If yes, what kind of registration/license must be obtained? Let’s consider some registrable options similar to Chaka’s services.

Stockbroking/Brokerage: A broker is an individual or company that is acts as an agent, trading company securities on behalf of its clients. Chaka does not broker trades on behalf of its users but provides an avenue for registered stockbrokers to offer company securities. The company’s business model therefore suggests its clients are not only the investors but mainly the licensed brokerage firms. It’s one thing to facilitate trade, and it’s another to be a “middleman” between investors and issuers of securities, which Chaka clearly isn’t.

Securities Exchange and Capital Trade Point: According to section 315 of the ISA, a securities exchange is simply an approved trading facility. A capital trade point, on the other hand, is a mini exchange that provides a marketplace or facilities for bringing together purchasers and sellers of securities. Section 28 of the ISA requires securities exchanges and capital trade points to register with the SEC before starting operation. Although the company has denied SEC’s allegations that it offers securities to the public, there is no denying the fact that it provides a facility that brings together purchasers and sellers of securities. However, this might not be enough to rope the wealthtech startup into registration as the provisions of the ISA do not envisage digital trading platforms and their intricacies.

Key Lessons

The SEC: In its statement, the Commission counter-intuitively stated that the matter brought before the IST is to “encourage innovation within the market space.” Chaka revealed that it only learnt about the SEC’s position after the interim orders were made. This suggests that there were no interactions between the SEC and Chaka prior to the proceedings at the IST. It is insidious moves like this by the SEC that stifles innovation and leaves other startups in limbo about their future. More so, this particular news created major panic among users of the platform, which has probably affected investor confidence in similar trading platforms.

As much as there aren’t enough background facts, dialogue should have been first adopted by the SEC, especially since there is little clarity as to the regulatory obligations of wealthtechs engaging in the securities business. Lawsuits only create hostilities and belligerence.

With the growing number of wealthtechs offering investment and capital market services, the SEC will need to clarify its position as to their treatment, registration and restrictions. It must interact with these startups to better understand their technologies and avoid over-regulating them. It must also reduce the red tape and costs involved in obtaining the requisite licenses if truly it seeks to encourage innovation in the Nigerian investment scene.

Wealthtechs: Even with the current stalemate between the SEC and Chaka, the latter seems to have had its house in order in terms of partnerships and compliance (to a reasonable extent). The company has assured its users of the safety of investments since they are facilitated through their SEC-compliant partners. It also added that users will continue to be able to invest and access their local and global investments. The point here is that with the dearth of proper regulation, startups must still build from scratch to be regulatory compliant. It will go a long way in mitigating risks when the chips are down. 

These startups must also begin to instigate interactions with regulators, even when there is no cause for alarm. This particularly goes for companies with similar business models as Chaka. The instant case is a signal that the SEC could take more frantic steps to bring all market activities within its regulatory purview. Once again, the need for proper dialogue can not be overemphasized.

Conclusion

While it is the role of the SEC to protect the investing public by regulating market activities, the Commission must do so without discouraging wealthtech entrants and derailing their innovative flow. It must begin to embrace direct dialogue and clarify its position on wealthtechs offering securities services, through circulars and guidelines rather than an escapade of suits. It is my humble opinion that the SEC should be able to license Chaka since the company deals with the investing public.

As for the tribunal matter between the SEC and Chaka, proceedings have been adjourned to January 15th, 2021. With the state of affairs, it seems both parties could remain at loggerheads as the company’s CEO still insists that it is a wealthtech, not a broker, and isn’t required by law to obtain a license or register with the SEC. He however hinted that the company’s legal and operations teams are currently working on a resolution with SEC. We can only wait and watch how events unfold.