RESEARCH PAPER 18

Private Placement of Corporate Securities in Nigerian Law:

Realigning the Perspective on Key Issues of Doctrine and Policy

George C. Nnona Associate Professor of Law

The final version of this paper can be found at 2007 J. BUS. L. 306

This paper can be downloaded free of charge from the Social Science Research Network: http://ssrn.com/abstract= 887748

PRIVATE PLACEMENT OF CORPORATE SECURITIES IN NIGERIAN LAW:

REALIGNING THE PERSPECTIVE ON KEY ISSUES OF DOCTRINE AND POLICY

By

George C. Nnona† I INTRODUCTION

There has been a visible increase in the last few years in the number of private

placements in Nigeria.1 This increase coincides with the arrival on the scene of venture capital

and private equity firms who are typically the major players in the private placement market.

Many of the private equity and venture capital firms are international institutions intent on

tapping the Nigerian capital market, in the wake of the liberalization of the country’s investment

regime that has been afoot since 1995.2 The need for efficient regulation of private placements

has in this context become heightened.

The aim of this article is to delineate the true meaning and requirements of private

placements under a proper interpretation of relevant statutory provisions and case law. In so

doing the article shows in particular that the Nigerian regulatory scheme is convoluted, largely † LLB (Ife) LLM (Lagos) SJD (Harvard); Associate Professor, Roger Williams University School of Law. I am grateful to Aikay Oduoza, Nduka Ikeyi and Aisha Belgore for their comments and to Professor Hal Scott for early insights on the subject matter of the paper. Any errors are however mine only. 1 This fillip to private placements is in large measure a function of the recently introduced requirement of a minimum capitalization of N25 billion (approximately ₤125 million) for Nigerian banks. To meet this threshold , many of them have had to turn to the capital market either by way of public offerings or private placements of their securities. Sources in the Banking Supervision Department of Central Bank of Nigeria indicate that between 2004 and 2005, there has been at least 20 private placements involving major Nigerian banks. For non-banking institutions, the estimate for the same period is between 60 and 80. 2 1995 witnessed the enactment of two statutes, namely, the Nigerian Investment Promotion Commission (NIPC) Act No. 16 of 1995 and the Foreign Exchange (Monitoring & Miscellaneous Provisions) Act No. 17 of 1995. These statutes repealed previous legislation that sought to fetter foreign investment and cross-border capital flows in Nigeria and positively removed the restrictions that had existed under various predecessor legislation.

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because it is an amalgam of two divergent approaches to the regulation of private placements –

the approach under the United States securities laws and that under traditional English company

law– and because it embodies additional measures grafted unto the basic framework, which

measures impede regulatory optimality. The article suggests adjustments to the regulatory

scheme to align it with the essence and policy underpinning of private placements.

II. THE REGULATORY FRAMEWORK

The basic framework can be found in The Investment and Securities Act, 1999

(hereinafter ‘ISA’) the Rules and Regulations made under the ISA (hereinafter ‘Rules’ or ‘Rules

and Regulations’) and the Companies and Allied Matters Act, 1990 (hereinafter ‘CAMA’).

Under the ISA, The Nigerian Securities and Exchange Commission (hereinafter ‘SEC’

or ‘Nigerian SEC’) is the agency authorized to regulate the securities industry.3

Notwithstanding the breadth of its powers and functions4, the primary focus of its regulatory

powers is the public offer and sale of securities. In relation to private placements, the approach

of the ISA is to take such public offer and sale of securities as the starting point from which the

principles governing private placements are to be appreciated. The ISA does not focus directly

on private placements. It however states in section 44 that:

‘No person shall make an invitation to the public- (a) to acquire or dispose of any securities of a body corporate; or (b) to deposit money with any body corporate for a fixed period or payable

at call, whether bearing or not bearing interest unless the body corporate concerned- (i) is a public company and the provisions of section 50-63 of this

Act are duly complied with…’

3 See the broad powers and functions of the SEC under section 8 of the ISA. 4 Indeed, section 8(c) states expressly that the SEC shall ‘register securities to be offered for subscription or sale to the public.’

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The provisions of section 50-63 focus on the delineation of the contours of a public

offering.

Of particular relevance is section 52(1) which prohibits the issue, circulation,

publication, dissemination or distribution of offers and invitations to buy securities or

documents that call attention to such offers and invitations or prospectuses related thereto.

Section 52(2) however exempts from the prohibition in Section 52(1), ‘a notice or circular

which relates to an offer or invitation not made or issued to the public.’

By restricting itself to invitations to the public, the provisions of Section 44 implicitly

exclude from its ambit corporate securities5 sold by way of private placement. This implicit

exclusion is echoed in the express exemption in Section 52(2) of notices or circulars pertaining

to offers or invitations not made or issued to the public. Such notices or circulars pertain to

private placements.6

Basic aspects of the regulatory framework can also be found in key provisions of the

CAMA concerning private companies, especially section 22(3) of the CAMA which will be

examined in part III of this article. Suffice it to note for now that section 264 of ISA defines

‘prospectus’ to have the meaning assigned to it in the CAMA. Section 650 of CAMA then

defines ‘prospectus’ thus: ‘ ... “prospectus” means any prospectus, notice, circular,

advertisement, or other invitation, offering to the public for subscription or purchase any shares

or debentures of a company and includes any document which save to the extent that it offers

securities for a consideration other than cash, is prospectus…’ The effect of this definition is to 5 There is the interesting fact of section 44 being restricted to securities of a body corporate, and its relationship to the broad powers of the SEC over securities in S.8(c) of the ISA. Is there a potential loophole for securities of unincorporated bodies? This is however beyond the ambit of the present paper. 6 The broad thrust of section 52 is to ban generally in sub-section (1) offers and invitations to the public, while making in subsection (2) the necessary exemptions one of which is the exemption in 52(2)(a) for private placements and another of which is the exemption in 52(2)(b) for registered prospectuses. In essence, the effect of the provision is to disallow offers and invitations if they do not pertain to a private placement or to a prospectus duly registered for a public offering.

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make the references to invitations and offers in sections 44 and 52 of ISA effectively references

to ‘prospectus’. The provisions of sections 44 and 52 are therefore no more than prohibitions

against the issue of prospectuses that do not meet the parameters specified in Part VIII of the

ISA, especially the parameters in sections 50-63 thereof. Chief of these parameters is perhaps

the requirement of section 57 of ISA which prohibits the issue of a prospectus by or on behalf

of a company unless prior to its publication, the prospectus has been filed with the SEC for

registration. The net result of all the foregoing is that there can be no offer or sale of securities

to the public except by means of a duly filed and registered prospectus. Any circular, notice or

other document or broadcast making an invitation of any type to the public qualifies prima facie

as a prospectus even if not formally packaged as such, and therefore amounts to a violation of

section 57 unless it has first been registered by the SEC which will satisfy itself that such

circular, notice or other document meets the statutory parameters for prospectuses.

Amplifying the foregoing are the provisions of the Rules and Regulations. Rule 8(1)(iv)

of the Rules and Regulations provides that subject to the provisions of Regulation BI of the

Rules,7 the provisions of the Act and Rules requiring registration shall not apply to

‘…transactions by an issuer not involving a public offering.’ This restriction of the registration

requirements to public offerings clearly indicates that the registration requirements of the ISA

and the Rules do not apply to private placements. Regulation B3 of the Rules contains detailed

provisions pertaining to private placements, starting with Rule 89(1) which defines private

placement for purposes of the Act and the Rules to ‘…mean the issue of securities not involving

public offering.’

7 Regulation BI of the Rules embodies Rules 50-78 which provide details on the regulation of public offers of securities.

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From the combined review of the applicable statutory provisions and Rules

above, it is clear that the issue of securities can involve only two generic types of offerings,

public offering or private placements, private placements being defined in residual terms to be

any offering not qualifying as a public offering: If a securities offering is not a public offering

then it is a private offering, i.e. private placement. Public offering itself is defined by reference

to the capacity of those involved to make invitations to the public through circulars, broadcasts

and other forms of public communication all of which legally qualify as prospectuses and

should therefore be registered with the SEC before being published.

III. INVITATIONS OR OFFERS TO THE PUBLIC From the foregoing analysis, a private placement can only be defined by reference to a

public offering, and a public offering can only be ascertained by reference to its cardinal feature

namely, invitations to the public to subscribe or otherwise take a position in relation to

securities. It is the capacity to make such invitations to the public that distinguishes a public

offering from a private placement.

A.) ADVERTISEMENT OF OFFERS

The capacity to make invitations to the public being the distinguishing factor between

private placements and public offerings, the definition of ‘invitation to the public’, as used in

section 44 of ISA and reflected in other provisions of the ISA, is key to ascertaining the true

meaning of a private placement and its requirements. In this wise, Section 46 of the ISA is

cardinal. It provides in pertinent part thus:

‘46.-(1) For the purposes of this Act an invitation shall be deemed to be made to the public if an offer or invitation to make an offer is-

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(a) published, advertised or disseminated by newspaper, broadcasting or any other means whatsoever;

(b) made to or circulated among any persons whether selected as members or

as debenture holders of the company concerned or as clients of the person making or circulating the invitation or in any other manner;

(c) made to any one or more persons upon the terms that the person or persons

to whom it is made may renounce or assign the benefit of the offer or invitation or any of the securities to be obtained under it in favour of any other person of persons;

(d) made to any one or more persons to acquire any securities dealt in by a

Securities Exchange or Capital Trade Point or in respect of which the invitation states that the application has been or shall be made for permission to deal in those securities on a Securities Exchange or Capital Trade Point.

… (3) An invitation made by or on behalf of a private company exclusively to its existing shareholders (not being greater in number than is prescribed by subsection (3) of section 22 of the Companies and Allied Matters Act 1990 and its existing employees shall not be deemed to be an invitation to the public unless the invitation is of the type referred to in paragraph (c) or (d) of subsection (1) of this section. ….’

Several issues arise from this provision. In relation to Section 46(1)(a), what is the

meaning and scope of each of the words ‘publish’, ‘advertise’ and ‘disseminate’ in relation to

offers? Are the words interchangeable or is each imbued with a distinct meaning and function?

While there is a presumption against treating statutory language as superfluous, a look at the

ordinary, literal meaning of each term indicates that these terms are to a significant degree

coterminous, though retaining differences in shades of meaning.8 The word ‘advertise’ would

therefore be used herein to encompass the other two terms.

8 The entry for the word ‘publish’ in the Merriam-Webster’s Unabridged Dictionary lists ‘disseminate’ and ‘advertise’ as meanings of the word ‘publish’. . The literal rule of interpretation indicates that as a first step in interpreting a statute, its words should be given their ordinary, natural meaning. ‘…[O]ne is to apply statutory words and phrases according to their natural and ordinary meaning without addition or subtraction, unless that meaning produces injustice, absurdity, anomaly or contradiction, in which case one may modify the natural or ordinary meaning so as to obviate such injustice etc but no further.’ See the House of Lords

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In relation to section 46(1)(a) does an issuer of securities advertise an offer if all the

issuer does, for instance, is send out e-mail to its employees encouraging them to subscribe the

securities; or is it necessary that the advertisement take a form similar or related to one of the

specific media mentioned in section 46(1)(a), namely newspaper, broadcasting, cinematograph

or any other means whatsoever. If section 46(1)(a) is construed ejusdem generis, one may be

inclined to conclude that indeed an offer or invitation is advertised only if the advertisement is

published by newspaper, broadcasting, cinematograph or other similar or related media. These

being media of the widest public coverage, the result of reading the provision ejusdem generis

would then be that only invitations published by the widest media such as an internet website

would qualify as advertisement. Advertisement by more modest media such as e-mail to

employees of the issuer would not. Such an approach to interpreting section 46(1)(a) is however

opposed by several factors. First is the use of the word ‘whatsoever’ in section 46(1)(a), a word

which in the context of section 46(1)(a) and the mischief sought to be checked by restricting the

type of invitations in question, seems to cry out against a restricted interpretation by way of the

ejusdem generis rule. Second are the provisions of section 46(1)(b). These clearly indicate that

an invitation to a select group of persons, whether existing members of the issuer or existing

clients of the issuer is an invitation to the public. The logic of section 46(1)(b) extends to our

example of advertisements targeted only at an issuer’s employees, whether by e-mail or

otherwise: They are all invitations to the public. To interpret section 46(1)(a) ejusdem generis

would then be to give that subsection a meaning that contradicts the clear meaning of a

neighbouring provision (section 46(1)(b)) which neighbouring provision constitutes part of the

decision in Stock v Frank Jones (Tipton) Ltd [1978] All England Reports, 948 at 952, per Lord Simon of Glaisdale.

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context of section 46(1)(a) itself. Such an approach goes against the grain of good

interpretation.

B.) QUALITATIVE CRITERION FOR PRIVATE PLACEMENTS

If advertisements directed only at a discrete group such as existing members of a

company or a company’s employees constitute invitations to the public, where then do we draw

the line between advertisements to the public (the essence of a public invitation and hence a

public offering) on the one hand, and the sales communications necessary to effect a private

placement on the other hand? How small does the group have to be for an advertisement

directed at them not to qualify as an invitation to the public? After all, a private placement

cannot be effected without some form of communication between the issuer of the securities

and their prospective subscribers. This issue is at the very centre of the public offering/private

placement distinction and the uncertainties that surround it.

A response to this question is that the distinction between advertisements that qualify as

invitations to the public and those that do not so qualify is properly not a function of the number

of persons involved. The distinction is qualitative rather than quantitative. An advertisement is

effectively an invitation to the public if it is targeted at any person who requires the protection

of the disclosure requirements of the securities law. Thus even an advertisement targeted at only

one person can qualify as an invitation to the public and hence a step in a public offering,

depending on the nature and circumstances of the person so targeted. A private placement is

then an offering of securities targeted exclusively at persons who do not need the protection of

the disclosure requirements of the securities law. This set of definitions invites further

commentary, especially in connection with what would be some readers’ intuitive response that

every investor requires the protection of the securities laws.

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While every investor requires the protection of the securities laws including its

disclosure requirements, this is only a presumption; a prima facie position liable to exceptions.

Regarding the issue of securities, the protection of investors is basically by way of the

disclosure requirements associated with the registration statement and prospectus filed with the

SEC.9 The SEC reviews these documents for accuracy10 and clears them if they contain the

required disclosures as to the nature of the business, associated risks, etc. The expectation is

then that the average investor would be able to ascertain the nature of the investment from the

cleared prospectus and judge whether he should make an investment in the offered securities or

not. Experience has however shown that not everybody needs the kind of protection inherent in

the SEC review of the prospectus and related documents. Some persons by reason of their

business sophistication and enhanced access to business information are able, without the

assistance of an SEC-reviewed prospectus, to assess the quality of securities offered by an

issuer. Advertisements targeted at only persons like these who do not need the protection of the

disclosure requirements are not invitations to the public. Such advertisements are therefore the

province of private placements and the persons at whom they are targeted are the proper

candidates for private offerings. Such persons are the persons in respect of whom an

advertisement would not qualify as an invitation to the public and hence a public offering.

Provided an advertisement is targeted only at this class of persons it would ordinarily not be a

public invitation, irrespective of the number of persons advertised to. This interpretation of the

9 Protection also takes the form of rights of action for fraud committed in the course of issuing securities as well as criminal prosecution for such fraud, but these are not basic since they kick in only ex post facto when the basic protection –disclosure– has not proved effective. 10 The SEC review is presumably not for the quality of the investment, but rather for the accuracy of the statements therein. Were the former to be the case, the SEC would be engaging in merit regulation rather than disclosure regulation. There is no indication however in the scheme of the ISA that the SEC is interested in more than disclosure regulation.

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provisions is informed by the decision of the United States Supreme Court in Securities and

Exchange Commission v. Ralston Purina Co.11

This case involved an action by the United States Securities and Exchange Commission

(hereinafter ‘United States SEC’) seeking to enjoin Ralston Purina’s offer of unregistered stock

to about 500 of its employees. Ralston Purina claimed that the offering fell within the private

placement provisions in section 4(2)12 of the United States Securities Act of 1933 and therefore

did not violate section 5 of same Act which prohibited the offer or sale of unregistered

securities in inter-state commerce. Rejecting the company’s contention, the court ruled that to

be public an offer need not be open to the whole world. As such, invitations or offers targeted

solely at self-selected or interested employees can be a public offering. The court indicated that

the private placement exemption from registration, like other such exemptions, pertains to

transactions regarding which there is no need for the Securities Act’s application. The

applicability of the exemption turns on whether the particular class of persons affected needs

the protection of the Securities Act. An offering to persons who are shown not to need that

protection in the sense that they are able to fend for themselves, is a transaction not involving a

public offering. Given the apparent influence of American legislation and regulatory structures

on Nigerian securities laws, especially the Rules and Regulations, this decision is highly

persuasive authority.

In the light of the foregoing explanations, and contrary to the lore in segments of the

Nigerian business community, the proper approach to implementing a private placement is for

the issuer to take steps to ensure ab initio that those who receive the necessary invitations are

11 346 U.S. 119 (1953) 12 The Nigerian provisions on private placements are very similar to section 4(2) of the United States’ Securities Act of 1933. The latter exempts from the registration requirements ‘transactions by an issuer not involving any public offering’; language echoed in section 52(2) of ISA and Rule 8(1)(iv) of the Rules and Regulations.

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exclusively persons who have the sophistication and access to information necessary to fend for

themselves in the sale and purchase of securities. This standard is not met by the current

practice whereby some issuers engaged in private placements advertise to motley audiences at

various issuer-organized fora, albeit fora not open to the whole public. Unless all members of

such audiences have been assessed for sophistication and access to information and thus pre-

qualified before being allowed into the fora where they receive the advertisement, such

advertisements are impermissible invitations to the public rather than private discussions

forming part of a private placement.

Some issuers seem to believe that the focus of private placement regulation should not

be on invitations to the public but rather on the actual purchasers. In essence, they argue that the

approach should be to allow an issuer making a private placement the widest latitude in its

advertisements, while obliging it only to ensure that of all those advertised to, only those that

meet the necessary guidelines are allowed to purchase the securities. A focus on advertising,

rather than simply on the persons who actually purchase the securities, is however the proper

approach. This is not just because doctrinally, sections 44, 46, 52 and other relevant provisions

of the ISA expressly focus on offers and invitations to the public rather than actual purchases,

but also because as a policy matter such a focus is justified: It acts as a prophylactic that

proactively shields the vulnerable public from the risks associated with securities offerings not

registered by the SEC. To allow an issuer intent on making a private placement the indulgence

of advertising to the whole world and checking for investor suitability only at the point when an

unsophisticated investor is about to subscribe the securities is to court disaster. This is because

unqualified investors whose interests have become thus elicited, even if prevented by the issuer

from subscribing the securities, could circumvent the issuer’s efforts through various artifices.

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This is quite apart from the heightened temptation which the availability of such interested but

unqualified investors presents to the issuer involved, who may not easily be able to resist the

temptation of accepting the ready funds offered by such investors and issuing them the

securities in return. The best approach is therefore to prohibit the solicitation of such investors’

interests in the offering from the very beginning, and this is achieved by restricting the

invitation ab initio to sophisticated investors. Beyond pre-qualifying the recipients of

invitations, the issuer should also ensure that those who ultimately purchase the securities are

exclusively buyers who fall within the class of sophisticated persons having access to

information, and that there are contractual restrictions to prevent this class of purchasers from

hurriedly reselling the securities to persons outside the class before the securities have come to

rest.

The Rules & Regulations, properly construed, reflect and amplify the provisions of the

ISA considered above, though as will be apparent from the discussions below, they also detract

from those provisions of the ISA in some respects. Rule 91 reiterates the basic ban on the offer

or sale of securities in the course of private placements by means of any form of public

invitation. Rules 93 and 94 effectively embody the sophistication and access to information

requirements already explained. Rule 93(1)(ii) in addition incorporates the requirement that the

investor has to be able to bear the economic risk in the securities offered.13 This requirement in

relation to the advertisement and offer of securities is treated by Rule 93(1)(ii) as an alternative

criterion to the requirement of sophistication.14 Its justification is that a person who is able to

13 This means in essence that the investor has to be an accredited investor as defined in Rule 89(3). Curiously however, Rule 89(3) defines ‘accredited’ investor in a manner which arguably combines the financial capacity to bear risk with the capacity to understand risk. The capacity to bear risk underlies the accredited investor standard, while capacity to understand and manage risk underlies the sophistication standard. 14 In relation to the actual sale of securities, as distinct from the advertisement stage, the requirement is presented by Rule 93(2) as being additional to the requirement of sophistication.

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bear the economic risk of investing in unregistered securities (i.e. somebody whose income or

wealth is sufficiently large to make him or her able to withstand any losses that might result

from investment in such securities) is also someone who does not need the protection of the

disclosure provisions of the securities laws –at least not to the same degree as the ordinary

members of the public. This thinking, though persuasive, is not as robust as the thinking behind

the basic sophistication and access to information requirements. (The sophistication requirement

when mentioned henceforth in this paper should be taken as referring to the basic sophistication

requirement as well as the risk tolerance requirement either of which suffices to qualify a person

as an investor able to fend for himself in the securities market.)

Rule 95 obliges the issuer to ensure that the purchasers of the securities are not and do

not become underwriters of the securities. This simply means that the issuer should ensure that

the purchasers are not persons purchasing with the intention of reselling the securities to third

parties just as underwriters would and that, irrespective of their intention ab initio, such

purchasers actually do not end up reselling the securities hurriedly.

C.) QUANTITATIVE CRITERION FOR PRIVATE PLACEMENTS

Although it was mentioned above that the number of persons receiving an invitation is

not the essential distinction between a private placement and a public offering, but rather the

quality or nature of the offerees, the SEC and the drafters of the ISA have chosen to incorporate

a quantitative element into the definition of private placements. In so doing, they pay homage to

earlier thinking in this area as reflected in the provisions of the CAMA on private companies –

provisions incorporated into the scheme for private placements in the ISA and the Rules,

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especially via section 46(3) of the ISA and Rule 91.15 In this wise Rule 91(3) as amended,16

though very inelegantly drafted, provides clearly that there shall be no more than 50 purchasers

of securities offered in a private placement and that the total number of members in a private

company shall not exceed 50 members after a private placement. The net result is that in

Nigeria, while securities sold by way of private placements can be offered to an unlimited

number of investors who have been pre-qualified for sophistication, such securities cannot

actually be sold to an unlimited number of persons notwithstanding their being pre-qualified. A

quantitative limitation exists on the number of purchasers, even though there is only a

qualitative limitation on the persons at whom advertisements of an offer of such securities can

be targeted. In the United States, this is a result approximated somewhat de facto by means of

the safe-harbour provisions of the applicable rules and regulations. These safe-harbour

provisions are designed by the United States SEC to provide an issuer with very specific

parameters which, if adhered to, would assure the issuer that the offering is a private placement;

unamenable to ex post facto impeachment by the regulator. While issuers are not obliged to

follow such safe-harbour rules, most issuers being wary of the dangers of an intended private

placement that is subsequently adjudged to have been a public offering, prefer to use the safe

harbour. In so doing they are then constrained to maintain the quantitative limits in those safe

15 There is something psychologically appealing or intuitive in the notion that private placements are offerings to a limited number of people constituting a private group and that indeed the circumscribed membership of a private company is such a private group. It is therefore not surprising that early response to private placements involved its definition in terms of the number of persons involved. See for instance the opinion of the general counsel of the United States SEC given in 1935 regarding the circumstances under which a private placement exemption would be available to an issuer; published by the United States SEC as Securities Release No.285, I Fed. Sec. L. Rep. (CCH) paragraph 2741-2744 (January 24, 1935). This document regarded the number of offerees involved as a critical inquiry for purposes of determining whether an offering is a private offering: A substantial number of offerees would render the offering a public offering. This opinion has since been overtaken by the US supreme court decision in the Ralston Purina case (supra note 11) though its vestiges are still apparent in the doctrine and rules as can be seen in the 35-person limit for offerings under the private placement safe harbour in Rule 506 of the rules and regulations made under the 1933 Securities Act of the United States. 16 The SEC Rules and Regulations (Amendment) 2002 amended several of the Rules pertaining to private placements.

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harbour rules. An example of such a safe harbour rule is Rule 506 under Regulation D of the

United States SEC Rules17, which prescribes, inter alia, a maximum of 35 purchasers for a

private offering seeking the protections of its safe harbour. Unlike the United States regulator,

the Nigerian SEC has imposed a peremptory limit on the number of persons allowed to

purchase securities in all private placements, tying that limit to the maximum number of

members allowed a private company under the CAMA.18 By tying the limit in this way to the

maximum number of members allowed a private company under section 22(3) of CAMA, the

SEC suggests that private placements are forbidden to public companies, a suggestion disputed

below in Part IV(C) of this paper.

As already stated, Rule 91(3) limits the number of purchasers in a private placement to

fifty persons, reflecting the maximum number of members allowed a private company under

section 22(3) of the CAMA which provides thus: ‘The total number of members of a private

company shall not exceed 50, not including persons who are bona fide in the employment of the

company, or were while in that employment and have continued after the determination of that

employment to be, members of the company.’ The correlation between Rule 91(3) and section

22(3) of the CAMA is however less than perfect. Section 22(3) of the CAMA contemplates

only shares, while Rule 91(3) contemplates securities generally, not just shares. In essence, the

fifty-person limit in section 22(3) would, without more, enable the issuer to advertise as well as

sell securities to more than 50 pre-qualified persons, where such securities are not shares. Rule

91(3) on the other hand makes this impossible, since the rule provides that ‘[t]here shall be no

17 i.e. the Rules and Regulations Under the Securities Act of 1933, Code of Federal Regulations §. 230.– 18 Curiously though, it should be noted that Rule 92(1)(v) excludes accredited investors for the purpose of calculating this limit. Presumably then, in addition to the employees of a private company excluded in calculating the fifty-person maximum for private companies under section 22(3) of CAMA and 46(3) of the ISA, accredited investors would also be excluded, thus considerably widening the scope of persons who may participate in a private placement.

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more than fifty purchasers of securities offered pursuant to this Regulation.’ Consequently,

while an invitation or offer for a private placement may be extended to more than fifty pre-

qualified purchasers, no private placement of securities –be the securities shares, debt securities

or derivatives– can involve more than fifty purchasers if it is to remain compliant with Rule

91(3). Another point of departure between Rule 91(3) and section 22(3)of the CAMA is that,

the former seems to literally require an absolute maximum of 50 purchasers while the latter

flexibly excludes from that maximum, shareholders who are current or past employees of the

private company.19 Section 22(3) of the CAMA thus contemplates that the number of

shareholders may be more than fifty, if the excess is made up of current or past employees of

the company.20 This understanding of section 22(3) of the CAMA is apparent in the provisions

of section 46(3) of the ISA reproduced above in Part III(A) of this article. Under section 46(3)

of the ISA an invitation by a private company targeted exclusively at its existing shareholders

(including those who were previously employees as contemplated by section 22(3) of the

CAMA) and its current employees shall, with a few exceptions, not be deemed to be an

invitation to the public.

19 It would seem however that the Rules, via Rule 92, afford similar, if not greater, flexibility given the manner in which the number of purchasers making up the 50-person maximum is calculated thereunder: In calculating the maximum, several types of purchasers are expressly excluded under Rule 92(1) such as relatives having the same principal residence and accredited investors. See supra footnote18. 20 The absolute maximum contemplated by Rule 91(3) could, in the context of repeat private offerings of non-equity securities, ultimately be exceeded. This is because Rule 91(3) reasonably pertains only to each discrete private placement of securities, unlike section 22(3) of the CAMA which provides an all-time limit in respect of the shareholding of private companies. If we imagine however a scenario involving private offerings of shares and non-equity securities by two private companies as part of their start-up process, the effect would be that the rigid limit of 50 persons will have to be maintained for the company engaged in the non-equity issue, while the company issuing equity can flexibly exceed the limit if the excess involves employees. Note however the possibility that, if the language of section 46(3) of the ISA is factored in, the non-equity issue can also be advertised and sold by the private company to its employees, thus equalizing both companies’ positions. This is because section 46(3) of the ISA does not speak of invitations to purchase shares but rather of invitations generally. So the private company issuing non-equity securities can presumably extend the necessary invitations to its employees generally.

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It is not difficult to perceive that the result of section 46(3) of the ISA and section 22(3)

of the CAMA is to weaken and breach the scheme of private placement contemplated by the

designers of the SEC Rules and Regulation. In particular, it smashes to smithereens the

understanding that an offering targeted at a company’s employees is not necessarily by virtue of

its circumscribed nature, a private offering; for such an offering in the language of section 46(3)

ISA would indeed be a private offering, irrespective of the capacity of the targeted employees to

fend for themselves in the securities market. Of course it is possible to view the employee-

related provisions of section 46(3) of the ISA and the related provisions in section 22(3) of the

CAMA as merely a specific exception to the broader rule restricting the offerees in a private

placement to pre-qualified persons meeting the sophistication standards. While this would

indeed be a persuasive perspective, it does not diminish one’s concerns about the degree of

protection available under the ISA and CAMA to the employees of a private company who

decide to purchase shares in a private placement. Only by superimposing on sections 46(3) of

the ISA and 22(3) of the CAMA, the Rules and Regulations as they pertain to private

placements and reading them jointly, is it possible to restrict the employees receiving offers to

those who have the requisite sophistication and access to information.

D.) CONFLICTING APPROACHES TO PRIVATE PLACEMENT REGULATION

The scheme of private placement contemplated by the designers of the SEC Rules and

Regulations, with its clearly United States flavour, reflects the lore of the United States SEC

and the jurisprudence of the United States courts as revealed in the Ralston Purina decision.

The scheme of the ISA, on the other hand reveals a more traditional approach reflecting the

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English roots of Nigerian company law and the associated rules on company shares, with its

embedded distinction between private companies and public companies.21 Under the traditional

approach, the distinction between a private placement and a public offering is that a private

placement is an offering done by a private company whose membership is by definition small

and whose operations (and by extension employees) is by nature relatively small as well. All

offerings done by a public company on the other hand would be public offerings –offerings

unrestricted in size and reach.22 The focus of the distinction between private placements and

public offerings is here quantitative not qualitative. The drafters of the ISA were apparently

influenced by the structure of securities regulation in the United States, and such influence has

been the case at least since the now-repealed Securities and Exchange Act of 1988 and the

Rules and Regulations made thereunder with their overt American character. In the area of

securities offerings however the drafters did not reflect American securities law in the statute,

leaving largely intact the antecedent provisions of the erstwhile Part XVII of the CAMA with its

English flavour. The American rules were however incorporated by way of subsidiary

legislation via the Rules. The Rules however lack internal coherence in this regard, seemingly

torn between fidelity to the American approach and fidelity to the traditional approach. Thus

Rule 91(3) seems to solidly reflect the traditional approach, given its seemingly-rigid 50-person

limit for private placements. Other Rules such as Rules 92-95 solidly reflect American

regulatory structures and can in significant measure be traced to Regulation D made by the

United States SEC pursuant to the United States Securities Act of 1933. There is a need to 21 It should be remembered in this regard that part VIII (sections 44-73) of the ISA embodying the provisions on the offer and sale of securities was largely lifted from part XVII of the CAMA, which part was excised from the CAMA by the provisions of section 263(1)(d) of the ISA which repealed it. 22 In this scenario, some offerings by public companies would still qualify as private placements, this being the case where transactions involving such offerings are exempt from the reach of the registration requirements of the securities laws. A good example of this would be short term commercial paper issued by banks which are implicitly excluded from the definition of securities for purposes of the ISA. See in this wise paragraph (g) of the definition of securities in section 264 of the ISA.

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adjust the Nigerian regulatory framework to redress this anomaly. Without such an adjustment

there will effectively be two concurrent standards for judging whether an offering is a private

placement or a public offering. It is necessary to iron out the crease here so that issuers and

other interested parties can more readily discern the applicable standards by reading the law.

Of course it may well be that the SEC intends that both standards apply concurrently so

that a private placement has to meet both the tradition-oriented 50-person limit as well as the

qualitative sophistication standard. This is doctrinally feasible and may indeed be the ultimate

doctrinal solution to the existence of the two different standards. Yet as a matter of policy this

does not seem to recommend itself, not just because the resultant structure is inelegant and

difficult to understand but also because it is suboptimal in other respects. The sophistication and

access to information standard places on the issuer the burden of proactively protecting the

public from the potentially-hazardous unregistered securities offered by way of private

placement. With this burden squarely on the issuer’s shoulders, the issuer is allowed, at least

notionally, to offer and sell securities to as many pre-qualified investors as necessary. The result

of this arrangement is to leave the vulnerable public better protected from unregistered

securities while at the same time leaving issuers with the leeway to raise as much capital as they

are able to do from as many qualified investors as are available. The 50-person restriction

encumbers the opportunity of issuers to raise capital, without offering significantly more

protection to the public. Indeed it does not offer as much protection as the sophistication

standard, to the extent that the fifty persons to whom the unregistered securities are sold by way

of private placement may all be old, illiterate and poor, without the law being thereby violated.

The fifty-person rule does not meaningfully advance the policy of investor protection that

informs securities regulation and is thus more of an encumbrance reflecting by-gone notions of

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investor protection. If it does anything, it is to merely limit the spread of the harm from

unregistered securities to not more than 50 persons per offering, which is small comfort given

the immense impediment it presents to raising capital via private placements.

IV A MISCELLANY OF ISSUES Besides the problems already discussed above in the context of invitations to the public,

other discrete problems are implicated in relation to private placements. These are discussed in

this section.

A.) REQUIREMENT OF PRIOR APPROVAL FOR PRIVATE PLACEMENTS

The Rules embody a requirement of prior approval (exemption) by the SEC for private

placements. Specifically, Rule 90 mandates that all private placements receive the exemption of

the SEC prior to offering of the securities.23 Rule 96 reinforces this by requiring that certain

information be filed with the SEC both before and after the private placement.

These requirements are essentially quasi-registration requirements. As such they go

against the standard policy underpinning of private placements. The very idea behind private

placements is that they are by definition exempt from registration. This exemption from the

registration requirements ordinarily reduces the costs and delays involved in raising capital for

those using private placements. To require that private placements be approved by the SEC

prior to being effected –regardless of whether the approval is called as such or termed an

exemption– is to go against the grain of regulation in this area and detract significantly from the

23 Prior to 2002, Rule 90 caught only private placements with a minimum aggregate offer value of 25 million Naira. In 2002 Rule 90 was amended to remove this minimum so that for all private placements it is now required to obtain the prior exemption of the SEC. Besides removing the 25 million naira minimum, the 2002 amendment changed the language of the provision, especially by substituting the word ‘exemption’ for ‘ written approval’ so that what is required to be obtained is the prior exemption of the SEC rather than the prior written approval of the SEC.

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benefits derivable from its use. Such prior approval or prior exemption is antithetical to its very

nature and purpose.

The proper approach should be to allow those effecting a private placement to engage in

the process in accordance with the law, without the burden of ex ante inspection or review,

while leaving it open for the regulator to come in ex post facto and examine the procedure

followed by the issuers for compliance with the applicable rules. This is key, more so when it is

noted that a multiplicity of workaday transactions by corporations, and even groups of

individuals, can result in documents or obligations that potentially qualify as securities, thus

making the originators of such transactions or obligations issuers engaged in private

placements. A rice retailers’ cooperative in a local market probably issues securities several

times a year, when they write promissory notes to cover their obligations to suppliers. They

should not have to obtain the prior approval of the SEC or risk legal sanctions. The law should

not be designed in such a way that, by default, these multiplicity of workaday transactions

would contradict rather then be in line with it. It is axiomatic that exemption from the

registration requirements, of which the private placement constitutes but one instance, is not

tantamount to exemption from the anti-fraud or other provisions of the securities laws that form

part of the infrastructure of public protection. As such the SEC would still retain broad powers

over private placements even absent the registration requirement.

B.) RESTRICTION ON NUMBER OF PRIVATE PLACEMENTS Rule 97 as amended in 2002 provides that ‘…no issuer shall make more than one private

offering within any year’. Given that any offering that is not a public offering is automatically a

private placement and given the range of transactions that can qualify as issues of security, this

provision presents a daunting problem for all companies. A company that issues a note or

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commercial paper with a maturity of 10 months would for instance be issuing a security, given

that paragraph (b) and (f) of the definition of ‘securities’ in section 264 of the ISA encompass

‘notes issued or proposed to be issued by a body corporate’ as well as ‘bills of exchange’.24

Such an issue clearly would be a private offering. The provision of Rule 97 simply means that it

is against the law to issue two or more notes in any year if they have a maturity of more than

nine months. Besides this is the perhaps more incapacitating consequence that, a company

intent on making formal private placements cannot raise capital through that avenue more than

once a year. This is a limitation that serves very little purpose while impeding capital formation.

It is likely that it was inserted into the Rules to guard against the use of repeat private offerings

successively targeted at different groups, as a means of effecting or approximating a public

offering. This restriction on number of private placements is however not necessary, given a

proper interpretation and enforcement of the scheme of private placements under the ISA and

the Rules, i.e. interpretation and enforcement that shows fidelity to the sophistication standard.

Indeed the restriction seems even less necessary if we assume the 50 person limitation under the

ISA and the Rules as the dominant standard: How many private offerings limited to 50 new

persons (i.e. 50 persons excluding the issuer’s employees) can an issuer effect in a year and

what proportion of the public can it reach in that way? Even if there is a need for a quantitative

restriction of the sort in Rule 97, it would seem that a limit of one private placement per year is

unduly restrictive of capital formation. There should be greater flexibility through permitting a

specified plurality of private offerings.

C.) PRIVATE PLACEMENTS BY PUBLIC COMPANIES

24 Rule 8(1)(i) however exempts from the provision of the ISA, notes arising out of or the proceeds of which are to be used for current transactions and which has a maturity of 9 months or less.

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Rule 40 states that the types of registrable securities include ‘private placement by

public companies’. This means that when public companies make private placements such

placements have to be registered. This implicates problems. First, it would simply mean that

there is really no opportunity for private placement of securities by public companies, thus

emptying Rule 40 of any meaning, since its very terms would then negate the essence of private

placements by public companies: A registered private placement is simply a public offering

even if it is de facto restricted to a few pre-qualified investors. Second, a blanket insistence on

the registration of private placements by public companies is overbroad and thus suboptimal.

The approach should be more nuanced. It makes sense to demand registration of securities

intended for private placement by public companies, when the securities sought to be offered

thereby are of a nature or class similar to those already sold in a public offering by that public

company. The idea here is that because of the similarity between the already publicly-sold

securities and the ones sought to be issued via private placement, there exists a significant risk

that the privately placed securities would flow back into the public market and come into the

hands of unqualified purchasers thereby imperilling them. This is possible because the market is

already accustomed to such securities from the public company and is therefore primed to

absorb them, making no distinction between them and those previously issued to the public.25 It

is a different matter when a public company seeks to issue securities of a class completely

different from those which it has already sold in the public markets as, for instance, when a

public company that has never issued debt securities seeks to sell bonds by way of private

placements. Here, there is little to be gained by requiring registration of such securities, given

that such registration virtually eliminates the basic benefits of private placements in the

25 It should be apparent from this that a public company cannot offer via private placement, securities that it has already offered by way of public offering. All subsequent issues of same securities ought to be registered.

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circumstance. Of course it is still possible to for the issuer to gain some benefit in terms of

advertising costs saved in targeting the bonds after registration at small or discrete audiences.

But this benefit is minor, incidental and contingent.

V. CONCLUSION The regime for private placements in Nigeria is at present convoluted, in significant part

because of the confluence of approaches represented by the superimposition of American

concepts on the existing substratum of English-flavoured rules. The interaction of these two

approaches ought to be streamlined. In other respects there exist discrete requirements that

amount to unnecessary impositions on investors and issuers. These should also be reviewed. An

arrangement that would, for instance, impose quasi-registration obligations (SEC approval or

exemption) on a two-man private company striking out to raise capital if they issue long-term

notes to suppliers, is to be avoided. The same is to be said for a set-up that would effectively

compel full registration of securities by public companies whenever they seek to raise capital

via private placement, irrespective of the character of the securities they seek to offer.

Requirements such as these stem from an imperfect appreciation of the essence of a private

placement, and consequent overreaching in pursuit of a regulatory vision that does not serve

that essence.

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