May 23, 2024/CSL Research

The Securities and Exchange Commission (SEC), in its ongoing efforts to regulate debt issuances by private companies, has recently published a draft of new rules for public comment. These proposed rules aim to create a legal framework that allows private companies to raise capital publicly without converting to public company status.

According to the draft, private companies must register both their existing and new fixed income securities, including bonds, debentures, and alternative assets such as Sukuk, with the SEC.

This requirement applies whether the securities are issued through a public offering or private placement. Non-compliance with these regulations will result in a penalty of N10 million initially, with an additional N100,000 for each day the violation continues.

Furthermore, private companies are limited to raising a maximum of N15 billion within a one-year period, must have been operational for at least three years, and can only sell these securities to qualified investors.

In our view, the SEC’s move to regulate private debt issuances aims to enhance transparency and investor protection, however, private companies may face some unintended consequences like increased costs and public disclosure of otherwise private information.

Should the new regulations be implemented, private corporations will need to provide the SEC with quarterly reports on the use of raised funds, quarterly unaudited financial accounts, and annual audited financial statements. Complying with these regulations may result in higher administrative and legal costs for companies issuing debt.

These additional expenses could include registration fees payable to the SEC, accounting fees for preparing financial statements and reports, legal fees for drafting necessary documents, and other costs associated with fulfilling reporting requirements, such as audits and investor updates.

We believe it is lawful and beneficial to investors for the Securities and Exchange Commission (SEC) to regulate debt issuances by private companies, provided that such regulation is within the authority granted to the SEC by relevant legislation. In this case, the SEC cites Section 43(1)(b) of the Business Facilitation Act as the legal basis for its decision to mandate the
registration of debt securities issued by private companies. This section allows the SEC to prescribe regulations for the issuance of securities by private companies through any lawful means.

By setting regulations on the issuance of debt securities, the SEC aims to enhance transparency, ensure proper use of raised funds, and protect investors, which aligns with its broader mandate to oversee and regulate securities markets. If the SEC acts within the framework of the law, its regulatory actions are considered lawful