PRIVATE PLACEMENTS, INVESTMENT CONTRACTS AND THE REGISTRATION OF ALL SECURITIES(?)

It seems private placements and investment contracts may now require registration, due to new wording in the Investment and Securities Act 2025

SECURITIES LAW PROTECT THE PUBLIC

I have written previously that financial regulations are meant to protect you from cesspools like CBEX. The Investment and Securities Act (ISA) does this by restricting who can make “invitations to the public” to invest. Only those who meet strict requirements can invite the public to invest, making fraud less likely.

A key requirement is registering securities or investment schemes with the Securities and Exchange Commission (SEC). Here's a helpful rule of thumb: if an investment is not registered with the SEC, avoid it.

If someone doesn’t register their investment with the SEC, they cannot publicly promote it. However, they can still offer it privately to select investors, which is called “Private Placement,” where you “place” your investment opportunity on the desk of “private” investors.

Here is the previous requirement of Section 54 of the Investment and Securities Act 2007:

54. Compulsory registration of Securities and investments of public companies and collective investment schemes
(1) All Securities of a public company and all Securities or investments of a collective investment scheme shall be registered with the Commission under the terms and conditions herein contained and as may be supplemented by regulations prescribed by the Commission from time to time.

SECURITIES LAW NOW APPLY TO NON-PUBLIC OFFERS?

It seems private investments may now require registration due to new wording in the Investment and Securities Act 2025 (opens PDF).

Here is what the new law says in Section 86 of the Investment and Securities Act 2025:

86. Registration of Securities to be issued under this Act
(1) All Securities to be issued under this Act shall be registered with the Commission under the terms and conditions contained in this Act and the rules and regulations made under it.

Woah, woah, woah. This change raises questions. The law no longer limits registration to securities of public companies and collective investment schemes. Does this mean all securities must now be registered?

Additionally, the definition of securities has been expanded.

Here is the previous definition of Securities under Section 315 of the Investment and Securities Act 2007:

"Securities" means-
(a) debentures, stocks or bonds issued or proposed to be issued by a government;
(b) debentures, stocks, shares, bonds or notes issued or proposed to be issued by a body corporate;
(c) any right or option in respect of any such debentures, stocks, shares, bonds or notes; or
(d) commodities futures, contracts, options and other derivatives, and the term Securities in this Act includes those Securities in the category of the Securities listed in (a) - (d) above which may be transferred by means of any electronic mode approved by the Commission and which may be deposited, kept or stored with any licensed depository or custodian company as provided under this Act.

Now, the updated definition in Section 357 of the Investment and Securities Act 2025:

"Securities" means —
(a) debentures, stocks or bonds issued by a government;
(b) debentures, stocks, shares, bonds, notes issued by a body corporate, any right or option in respect of any such debentures, stocks, shares, bonds or notes;
(c) virtual and digital assets;
(d) Investment Contracts;
(e) commodities, futures, contracts, options and other derivatives; or
(f ) any other instrument deemed as Securities which may be transferred by means of any electronic mode or which may be deposited, kept or stored with any depository or custodian;

Notice some key things:

1. Debentures, stocks, shares, bonds, and notes seem considered securities whether issued by a government or a company, even if there is no public invitation

2. Virtual and digital assets are also classified as securities, regardless of who issues them or whether there is a public invitation.

3. Investment Contracts are now securities, even if issued privately, without requiring a public invitation.

WHAT ARE INVESTMENT CONTRACTS?

They are what they sound like: contracts where you invest money expecting a return. They are not new, but they were never regulated as Securities in Nigeria. However, in other countries like the US, Investment Contracts are established as Securities.

In the US, a Supreme Court case called the Howey Case explains what an Investment Contract must contain. The four requirements are:

1. investment of money (obviously)

2. expectation of profits (obviously)

3. common enterprise, which is defined differently, but courts have at least defined it to mean pooling money or assets together for a project

4. profits to come solely from the efforts of others, meaning your participation is not what determines if the project succeeds or fails

Section 6, Part II, Second Schedule of the Investment and Securities Act 2025 defines Investment Contract as:

6. Investment Contract
Establishing a contract or scheme for the placing of capital or laying out of money in a way intended to secure income or profit from its employment by the promoter.

This mirrors the US approach for the most part, except it does not require pooling of resources.

THE ISSUE

The ISA 2025 now classifies investment contracts as securities (Section 357 ISA 2025) and requires all securities to be registered (Section 86 ISA 2025). This is different from ISA 2007, which only required public company securities and investment schemes to be registered (Section 54 ISA 2007).

There are two key issues in s.86 ISA 2025:

1. All Securities

2. To be issued under this Act

ALL SECURITIES: PRIVATE PLACEMENTS, INVESTMENT CONTRACTS AND SAFEs ISSUED BY STARTUPS

Does the requirement for registration apply to private Investment Contracts? By private Investment Contracts, I mean ones offered by private companies or even individuals.

For example, real estate companies would sell flats to clients but manage them as rental properties under a leaseback arrangement. Under the ISA 2025, it is an Investment Contract because there is “placing of capital or laying out of money in a way intended to secure income or profit from its employment by the promoter”.

The restriction on invitation to the public without registration (s.95 ISA 2025) is a restriction on doing an act. It is quite separate from the requirement to register all Securities to be issued (s.86 ISA 2025) which is a mandate to do an act. So we can't say private Investment Contracts or Securities don't need to be registered. Or can we?

I raise another example. A Simple Agreement for Future Equity (SAFE) issued by startups. A disclaimer on a SAFE Agreement for a startup would say something like this: “this agreement is not issued under the purview of the Securities law and is not intended as Securities, therefore it has not been registered”. Would such a disclaimer be enough to sidestep under this new law?

Perhaps we should broaden our focus beyond “Investment Contracts”—we could substitute any other type of Securities and the issue would remain. The fundamental question is: why is the registration requirement no longer tied to public invitation?

The broad definition could create issues for private placements, where there is no public invitation. Many private transactions, not intended for public involvement, risk being caught under the new law.

TO BE ISSUED UNDER THIS ACT

What exactly does “issued under this Act” mean? As written, it seems to cover all securities, public or private. While the SEC can issue exemptions, no such rules have been made yet.

The broad definition could create issues for private placements, where there is no public invitation. Many private transactions, not intended for public involvement, risk being caught under the new law.

I struggle to see why the law would have such an intention.

Section 3 of the Investment and Securities Act 2025 lists the functions and powers of the SEC, and this part stands out:

3. Objectives, functions and powers of the Commission:
   …
   (3) The Commission shall —
   …

(c) register Securities of public companies;
(d) register and regulate all Securities offered to the public as defined in this Act;

The current state of the ISA requiring all Securities to be register seems to be contrary to the aim of the law.

POSSIBLE EXPLANATIONS

1. The legislative drafters likely intended to capture new categories of Securities, especially virtual assets, but failed to properly limit the scope for Investment Contracts. This explanation seems dubious, however, since the existing rule against public invitation would have been sufficient to achieve this goal.

2. The drafters may have intended to create a complete registry of all securities, including private ones, although the benefits of this approach are unclear. Moreover, the objectives clearly state an intention for public companies and offers to the public.

3. The drafters may have expected the SEC to issue regulations to exclude irrelevant securities, which would align with common drafting practices.

AN EXCLUSION ORDER IS URGENTLY REQUIRED

There is a need to clearly exclude private dealings from the ambit of the ISA.

EXCLUSION IN THE UK

Let us take a look at other jurisdictions to see how they handle exclusions of private matters from Securities law. I particularly like the approach in the UK.

Section 22 of The Financial Services and Markets Act 2000 introduces the idea of “regulated activities” but leaves it up to the regulator to specify these activities. It doesn’t restrict any activity directly in the law**.** See what it says:

22. Regulated activities

(1) An activity is a regulated activity for the purposes of this Act if it is an activity of a specified kind which is carried on by way of business and—

(a) relates to an investment of a specified kind; or

(b) in the case of an activity of a kind which is also specified for the purposes of this paragraph, is carried on in relation to property of any kind.

We call this an “enabling provision”. This gives the regulator the power to define which activities fall under the law.

The Treasury (the regulator in the UK) then made The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001.

Look at what it says:

The Treasury, in exercise of the powers conferred on them by sections 22(1) … of … the Financial Services and Markets Act 2000, hereby make the following Order:

The (Regulated Activities) Order then make a list of Specified Activities and Exclusions. Very neat.

As it related to the Specified Activity of Dealing in Investments as a Principal. Here is Section 14 of (Regulated Activities) Order 2001:

14. Dealing in investments as principal
    (1) Buying, selling, subscribing for or underwriting securities or contractually based investments (other than investments of the kind specified by article 87, or article 89 so far as relevant to that article) as principal is a specified kind of activity.
    (2) Paragraph (1) does not apply to a kind of activity to which article 25D or 25DA applies.

Then comes a list of exclusions:

15. Exclusions: Absence of holding out —
    (1) Subject to paragraph (3), a person (“A") does not carry on an activity of the kind specified by article 14 by entering into a transaction which relates to a security … , unless—
    …
    (d) A regularly solicits members of the public with the purpose of inducing them … to enter into transactions constituting activities of the kind specified by article 14, and the transaction is entered into as a result ...
    
    (2) In paragraph (1)(d), “members of the public" means any persons other than—

    (a) authorised persons or persons who are exempt persons …;

    (b) members of the same group as A;

    (c) persons who are or who propose to become participators with A in a joint enterprise;

    …

16. Exclusions: Acceptance of instruments creating or acknowledging indebtedness
    (1) A person does not carry on an activity of the kind specified by article 14 by accepting an instrument creating or acknowledging indebtedness in respect of any loan, credit, guarantee or other similar financial accommodation or assurance which he has made, granted or provided.

17. Exclusions: Issue by a company of its own shares etc.
    (1) There is excluded from article 14 the issue by a company of its own shares or share warrants, and the issue by any person of his own debentures or debenture warrants.

18. Other exclusions:
    Article 14 is also subject to the exclusions in articles 66 (trustees etc.), 68 (sale of goods and supply of services), 69 (groups and joint enterprises), 70 (sale of body corporate), 71 (employee share schemes), 72 (overseas persons) (managers of [UK UCITS and AIFs) and 72H (insolvency practitioners).

This continues throughout the (Regulated Activities) Order 2001. Here are other Specified Activities and the Exclusions:

1. Dealing in Investments as Principal is a regulated activity, but Issue by a company of its own shares etc. is not.

2. Arranging Deals in Investments is a regulated activity, but Enabling parties to communicate is not.

SEC NEEDS TO EXCLUDE PRIVATE DEALINGS

It is unlikely that the enabling law would be amended. There is really no need for it to be amended anyway (unless we want to get pedantic about the hierarchy of laws).

The ISA 2025 makes an allowance for the SEC to make rules and regulations.

Section 355 of the Investment and Securities Act 2025:

(1) The Commission shall make rules and regulations for the purpose of giving effect to the provisions of this Act and shall in particular and without prejudice to the provisions, make rules and regulations which may include the under-listed and other incidental matters —

…

(u) providing for anything requiring to be prescribed under this Act; and
(v) for carrying out the principles and objectives of this Act

The Securities and Exchange Commission need to exercise its power to exclude:

1. private transactions

2. by private bodies

3. to which the public is not invited.