CORPORATE LAW PRACTICE WEEK 16; COMPANY SECURITIES 2: (FLOATATION OF SECURITIES AND COLLECTIVE INVESTMENT SCHEMES).
- TOPIC: COMPANY SECURITIES 2: (FLOATATION OF SECURITIES AND COLLECTIVE INVESTMENT SCHEMES).
Regulatory bodies here include; SEC, CBN, FHC, CAC, NSE.
Regulatory laws include: CAMA, ISA, FHCAct, SEC Rules.
Administration is largely vested in the SEC.
:: PUBLIC OFFER AND SALE OF SECURITIES (SHARES, DEBENTURE, GDR AND BONDS).
Only a public company can offer its securities to the public (i.e. invite public to deposit… in compliance with the regulatory laws).
Further, only quoted public companies and Government issuing bonds can be listed at the Stock Exchange. These securities should be registered with SEC.
All securities proposed to be offered to the public must be registered with the SEC-Section 54, 70 ISA.
All issues of securities must be accompanied with prospectus which should be signed, dated and with experts’ statements and their endorsement thereon-Section 69, 73, 77, 79 ISA.
The Prospectus should contain certain key features as contained in the Part I and II of the Third Schedule ISA.
The prospectus may be abridged (summarised and containing key requirement of a prospectus) or Deemed i.e. a document containing the basic requirements of a prospectus (notwithstanding that it is not titled “prospectus”) or a statement in lieu of prospectus (which must be delivered at least 3 days before first allotment of shares and is capable of serving the same purpose of a prospectus. See general 4th Schedule.
Bonds may be classified into government and corporate bonds issued by the government and a public company respectively.
A government bond is safer and more reliable for the following reasons; – it is less likely for government to be insolvent – the bonds are paid from the consolidated fund of the federation – the funds are encumbered by a sinking fund indemnity.
Government bond is classified into Sovereign (by FG), Revenue (by State, Gov. Agency and LGs) and Municipal bonds (issued by cities within a L.G.).
:: METHODS OF PUBLIC OFFER AND SALE OF SECURITIES-DIRECT OFFER, OFFER FOR SALE & PLACEMENT.
– Direct Offer: by the company to the public by means of a prospectus. Here the company bears risk but could underwrite it.
– Offer for sale: the company sells to an issuing house which in turn invites the public to buy from it (at a higher price).
Here the issuing house bears risk.
– Placement: the company sells its shares to an issuing house which invites selected clients (like insurance companies) to buy. The company pays brokerage to the issuing house.
Section 55 ISA now provides for electronic mode of offer and transfer of securities provided the investor is entitled to have a physical Share Certificate at his request.
The Central Securities Clearing System (CSCS) provides an electronic platform in this regard.
:: COLLECTIVE INVESTMENT SCHEME; TYPES, CREATION, ORGANS AND MANAGEMENT.
From section 152-162 ISA, it is a scheme wherein members of the public are invited to invest in a portfolio and share the risk and benefit in proportion to their participatory interest.
CIS must be registered with (and authorised by) SEC-Section 160 ISA 2007.
– Unit Trust Scheme: people pool resources for the purpose of investment and returns are shared according to rate of investment. An investor is regarded as a Holder. Then Legal title/interest in the pool/property is vested in the trustee(s) (which must be a body corporate with minimum paid up capital of 25 or 15 billion Naira if bank or insurance co respectively). Then the power of management is vested in a manager(s) (which must be an incorporated company registered with SEC as a fund or portfolio manager). Then a trust deed under seal is drawn up to regulate the scheme.
Finally, the UTS should be registered (Form SEC 6A) with SEC who would accept if it is satisfied that; -the scheme (holders, trustees, managers and set-up) is competent, -its trust deed complies with the provisions of the ISA and the name of the scheme is not undesirable.
A holder of a unit may redeem them by requesting the Manager to buy them within the time specified by the SEC. Upon revocation of the scheme, the manager must buy all the units.
– Real Estate Investment Scheme: investment in real estate or property development. Similar discussion as earlier.
– Investment Trust Scheme: just like UTS, just that here the holders can define in advance the types of securities their money would be invested in.
– Community Savings Scheme: the oldest form of CIS. Popular amongst market women (esusu) and low level workers and voluntary organizations. To be registered at the LG where they are to operate and shall have a register of all members. Rule 41 SEC Rules.
Trust, Honesty, Fairness, diligence and protection of interest of investors should be guiding principles in Collective Investment Schemes.
Custodians/ persons would be liable for loss/prejudice occasioned from indolence, non-compliance with the scheme/laws/rules or fraud, unlawful alienation of assets of the scheme.
The custodian should be independent from the scheme’s fund manager and trustee
:: DISTINCTION BETWEEN INVESTING IN SHARES AND CIS.
:: CAPITAL MARKET PRACTICE AND PROCEDURE.
The capital market is where securities are bought and sold. Securities constitute the bundle of intangible rights and obligations in form of chose in action viz shares, debentures, bonds, CIS, mortgage-backed securities etc.
Capital Market is divided into;
-Primary Market; for raising fresh funds. Payments go the company.
– Secondary Market: dealing in existing securities. Payments go to the sellers/investors.
USEFULNESS OF THE CAPITAL MARKET; The Capital Market facilitates borrowing, raising of funds, international business, privatization, efficiency, employment opportunities, public participation in corporate sector, employment, distribution of financial resources, level playing field and transparency, etc. which results in productivity and economic development.
CAPITAL MARKET OPERATORS; Those that deal in the capital market include; issuing houses, Security dealers, Stockbrokers, Trustees, Portfolio Managers, Underwriters, Custodians…
CAPITAL MARKET CONSULTANTS; Solicitors, Accountants, Investment Advisers, Valuers, Rating Agencies, Engineers, Financial Advisers, Investment Banks, Should register with SEC pursuant to Section 38 ISA. Section 13 ISA empowers SEC to regulate Capital Market.
:: ROLES OF SOLICITORS IN CAPITAL MARKET TRANSACTION.
It may be solicitor to the Company, to the Issuer, to the Trustees, or solicitor in a merger transaction.
He should examine the MEMOART, documents, correspondence to ascertain powers and capacity of the Company or any encumbrance therein; Ensure compliance with laws and procedures (due resolution passed through properly called meetings, filed at CAC, prospectus, requisite stamping, etc..), Due Diligence and corporate searches and filing, disclose and elicit disclosures, negotiations, certify compliance by company and the issuer of all statutory requirements, give due advice in all.
:: ETHICAL ISSUES IN FLOATATION.
 The others should use private placement. Public co offering by way of private placement should have prior approval of SEC and should convince SEC that private placement is the only viable option to achieving its objectives for obtaining funds it direly needs and the securities should not be offerefd to more than 50 subscribers. Special Resolution in GM authorising same published in two national dailies and the amount should not exceed 30 percent of its existing issued and paid up capital prior to the offer (if higher, needs approval of the commission). Offer shall be for not exceeding 10 days.
 Usually done for over the counter (OTC) transactions.
 Some contents of the trust deed may include; -definition of terms, -constitution of the trust, -Issue of Units, -Distribution, -remuneration of Trustee and Manager, Termination of the trust, Notices, Transfer and Transmission, Accounts, Retirement and Removal, Meeting of Holders, Restructuring and Amalgamation, etc.