The Investment and Securities Act 1999 provides that companies intending to raise funds made available a prospectus for prospective investors.
The Act provides only limited protection from fraudsters. But under the law any company that wants to sell its shares to the public must issue a prospectus, a document that is supposed to provide you with extensive information about your prospective investment, including its financial health, its risks, and what it intends to do with your money.
Scamsters can lie in a prospectus, but a careful examination of this public face of the company may help you detect the danger signs.
On every prospectus it is clearly stated that, “you are advised to read and understand the content of this prospectus. If you are in doubt, please consult your stockbroker, solicitor, banker or an independent investment adviser.”
But how many investors really take time to look at or even ask for a prospectusbefore writing a cheque for an investment.
This I think is largely due to low investors’ education on the part of the Nigerian Stock Exchange (NSE) and its dealing members who are only interested in what goes into their pocket.
Potential investors are often misled by scamsters who establish and register a company in terms of the Companies and Allied Matters Act (CAMA) to provide a patina of respectability. In an effort to protect investors, the Companies Act places all sorts of obligations on people who are registering their companies, particularly when they want to sell shares to other people to raise money as working capital for the company.
But even though the Companies Act protects you as an investor, that does not mean you will not be subject to a scam by someone using a registered company as a front for illegal activities.
Many of the big scams have been perpetrated under the “protection” of the Companies Act. The case of coral properties is still very fresh in our memories. Coral Properties Plc came to the market to raise money and was unable to reach the percentage for an offer to be said as successful, as you read this article; investors’ monies are yet to be returned.
National Coordinator, Independent Shareholders Association of Nigeria (ISAN), Sir Sunny Nwosu, in a chat said the main reason is that the Issuing Houses and Registrar of Companies do not proactively investigate whether a scam is underway. Most scams involving companies are often revealed only when the company goes belly up. And then you will have lost all or part of your money.
”After a collapse, a company will be subject to liquidation, and possibly, the crooks who mismanaged the company will go to prison. There are different types of companies. For example, a “private” company may not sell shares to the general public. If a company wishes to sell shares to the public to raise capital, it must register as a “public” company. The identification tag for a public company is the appellation “Limited” or “Ltd”, which will follow the name of the company. Public companies can sell shares either directly to the public or by listing the company on a stock exchange. A company that is not listed on a stock exchange is called a “non-listed company” and this is where most of the scams take place,” he said.
He added that, “A company is not limited to selling shares to raise money. It can also raise money by selling debentures, which, in effect, are loans made by the investing public to the company. Under the Companies Act, the same rules apply for the issuing of debentures as apply to the sale of shares. The reason why unlisted companies are the chosen vehicle of casters is that far more scrutiny is given to a company that is listed on a stock exchange. Among other things, a listed company has to have more of a track record and it is going to be scrutinised by a lot more people, many of whom are well trained at spotting a confidence trick.”
”This does not mean that horrific frauds do not take place through listed companies. They do. You need look no further than the Cadbury issue that happened recently. But far less stringent checks are applied to unlisted companies. The other problem with unlisted companies is that once you have bought the shares it becomes difficult to trade those shares and most of them do not keep to their time table for listing, “he explained.