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Nigeria: OTC market

The market for trading securities of unlisted public companies in Nigeria has witnessed a string of recent developments

Bisola Olusoga

The market for trading securities of unlisted public companies in Nigeria has witnessed a string of recent developments. These developments originated from the granting of a licence to NASD Plc in 2013 to operate as an over-the-counter (OTC) market for trading in securities of unlisted public companies. More recently, the market was given a boost, as the Securities and Exchange Commission (SEC) introduced new Rules for Trading in Unlisted Securities (Rules). The Rules prescribe that securities of unlisted public companies can only be bought, sold or transferred through the platform of a registered securities exchange established for the purpose of facilitating OTC trading of securities.

The establishment of a formal OTC market has the potential to drive economic activity by unlocking otherwise inaccessible capital and providing capital market access to SMEs and indeed some large size companies. For many of these companies, raising funds through the Nigerian Stock Exchange (NSE) may prove daunting due to size, listing requirements, capital raising fees and cost of maintaining a listing. NASDAQ in the US, JASDAQ in Japan and AIM in the UK are examples of how OTC securities markets have been able to transform economies. NASDAQ for instance was initially established to enhance the efficiency of the OTC market for stocks, however in over 40 years of its existence, NASDAQ has become a serious competitive alternative to the dominant equity exchange in the US, the NYSE. Building fast on its vision to become the hub of first call for capital formation in West Africa, the NASD OTC platform boasts active trading in securities of no less than 79 public companies.

The Rules and Regulations of the NASD OTC market include a variety of provisions to address investor protection concerns. These include the requirement for the issuer to publish information which may be required for investor protection or proper operation of the market. They also include the prohibition of market participants from conducting any transaction on the market, without being licensed by NASD and SEC, thus effectively excluding illegal operators from the OTC market.

Ultimately, the goal is to develop a viable OTC market that promotes a fair, transparent and liquid platform for trading in securities of unlisted companies. The developments discussed above portend large gains for different classes of market participants: for issuers, it means increased corporate visibility and wider access to capital; and for investors, it creates an efficient liquidity window with reduced counterparty risk.

Bisola Olusoga

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