Boom-"Chaka"-Laka!

Regulator vs Disruptor: The SEC-Chaka Tussle, As It Stands

By  |  February 2, 2021

To this day, it remains unclear why Chaka was the singular target of a recent shove by Nigeria’s capital markets regulator, the Securities and Exchange Commission (SEC).

The situation is a little bit baffling because there are a bunch of other wealthtech startups in Nigeria that basically operate in the same way as Chaka. Yet, somehow, the SEC deemed it okay to wield the big stick on Chaka, while others seem to have a free pass.

Or could it be that the SEC is, in fact, just using Chaka as a point of contact for setting up new, stricter rules that will govern the entirety of the investment-tech sub-sector that is blossoming in Nigeria?

For context, here’s a bit of the backstory: The SEC sort of threw the book at a young Nigerian fintech startup, Chaka Technologies, towards the end of last year. In its statement dated December 17, the SEC effectively barred the startup from offering its core services in Nigeria.

A few days ago, it was crowdfunding platforms that got the SEC’s unsettling brand of attention. But before that, it was Chaka (and perhaps others like it) that got the cold treatment.

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Boom-“Chaka”-Laka!

Chaka came to life in January 2019 and quickly became one of the flag bearers of a new crop of Nigerian fintech startups that better fit the wealth-tech or investment-tech profile. Its mission? “To enable global investing for Africans.”

Founded by Tosin Osibodu (CEO) and Olaolu Ajose (CTO), Chaka is one of a growing number of startups that enables Nigerians to invest in local and foreign stock markets.

Wealth-tech startups like Chaka are democratizing investments that hitherto seemed like the prerogative of only a select class featuring big institutional buyers (corporations), high-net-worth individuals, and foreign investors. 

But these days, with Chaka’s new tech-backed approach, for instance, anyone with as little USD 2.00 and a smartphone can access and avail themselves of shares of over 4,000 companies publicly listed on the Nigerian Stock Exchange (NSE) and stock exchanges in the U.S.

Bamboo, Rise, Trove, and Overwood, among others, are some of the other Nigerian startups that basically do the same thing, albeit to varying degrees and with different structural arrangements. All of these platforms earn by charging specific transaction fees.

Things have worked out quite well for these startups over the 20 or so months since these types of wealthtech startups began to proliferate in Nigeria.

The reception from the investing public has been very encouraging. The likes of Chaka, Rise, and Bamboo have each seen their apps amass more than 50,000 downloads on Play Store. It was smooth-sailing, up until the SEC decided to stop Chaka in its tracks.

What’s the SEC’s problem?

Well, the SEC has restrained Chaka from “advertising or offering for sale shares, stock or other securities of companies or other entities on the grounds that they have been carrying out such activities outside the regulatory purview of the Commission and without requisite registration, as stipulated by the Investment and Securities Act 2007.”

The statement specifically mentioned that Chaka engaged in investment activities, “including providing a platform for purchasing shares in foreign companies such as Google, Amazon, and Alibaba, outside the Commission’s regulatory purview and without requisite registration.”

In much fewer words, the SEC has chosen to stop Chaka from doing business because Chaka allegedly stepped out of line.

This, the SEC says, is aimed at protecting the investing public from the “activities of unscrupulous actors who would try to exploit the growing popularity of fintech investment options.”

Indeed, Part II of Nigeria’s Investment and Securities Act (ISA) 2007 gives the SEC power to “register and regulate securities exchanges, capital trade points, and any other recognised investment exchange, and to act in the public interest with regard to the protection of investors.”

As earlier stated, it’s still unclear why the SEC singled out Chaka given that its business model is very much identical to that of a few other fintechs operating in the same space.

To cut a long story short, Chaka’s CEO, Osibodu, who says the SEC’s statement caught the company by surprise just like everyone else, maintains that Chaka is doing everything by the book and never stepped out of line to the best of their knowledge.

In just the right amount of words, Osibodu argued that Chaka is fully compliant with the SEC’s regulations, adding that it merely provides technology that enables people to access stocks rather than advertise, solicit, or offer stocks for sale.

Grey areas and blurred lines

Chaka, just like other Nigerian investment-tech platforms, has an online platform that facilitates financial investment transactions. All these startups provide users with investment opportunities by partnering with brokerage firms licensed and recognised by the Securities and Exchange Commission (SEC).

Chaka says it has such an arrangement with Citi Investments Capital, Ltd, which is based in Lagos, and Drivewealth Capital in the U.S. Both are licensed and regulated institutions.

These partnerships can be thought to be the element that enable Chaka to facilitate investments in Nigerian and U.S. stocks. Both Bamboo and Trove boast similar partnerships, as does Rise.

Essentially, users who sign up on these wealth-tech platforms to buy and sell stocks deposit their funds directly to these brokerage firms which are duly regulated and licensed by the SEC.

In fact, a draft document published by the Nigerian Stock Exchange (NSE) in 2020, which addresses fintech-broker relations, places the major responsibility on the broker to ensure such partnerships work in the best interest of users.  

But apparently, these fintech platforms seem to also be treading grey areas and blurred lines while simply “acting as a technology medium that enables investments in stock markets.”

It seems the SEC is concerned that Chaka and others like it may also be advertently or inadvertently influencing investment behaviour. One may argue while the wealth-techs satisfy the license requirement by virtue of their collaboration with licensed brokers, the issue of promoting and advertising securities is what the SEC wants to address.

While it can’t be said that the likes of Chaka, Trove, Rise, and Bamboo overtly solicit, advertise, and offer stocks for sale, it will be a tad disingenuous to dispute that the fundamental nature of their business, even as technology providers, make them active players in influencing user behaviour in capital markets.

And that last bit is probably the factor that drove the SEC into putting Chaka on the spot.

As it stands

In the final paragraph of the statement issued last December, the SEC mentioned that further proceedings between the regulator and Chaka before the Investments and Securities Tribunal (IST) was adjourned to January 15, 2021.

That day came and went without any official further updates from the SEC or Chaka, and mum’s been the word since.

WeeTracker reached out to the SEC for new information around the ongoing matter and a representative of the commission gave the sense that it might be a while before a definite conclusion is reached.

“Further to our conversation on this, please be informed that the matter is still at the IST and the interim order granted on the 17th of  December 2020  still subsists. The matter has been adjourned to 9th February 2021, for the hearing of the motion for interlocutory injunction.” That’s all the info that was volunteered by the SEC representative.

Similarly, Ima Ekpo, Brand Manager at Chaka Technologies, didn’t let out much when WeeTracker reached out.

“Please be informed that our legal and operations team are still working with authorized personnel at SEC to come to a resolution. We will share updates soon,” she said.

At the moment, it appears Chaka has continued to operate as normal but it can be expected that, whatever be the outcome of the matter at the IST, the implications will resonate beyond Chaka and rock the entire investment-tech/wealth-tech space in Nigeria.

Featured Image Courtesy: YourStory

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