Investors Beware: Billions Lost In Nigeria Private Placement Scam

Ngozi Okonjo-Iweala

Between 2007 and 2009, several companies deceived unsuspecting investors   to take equity interest in their firms through private placements .  Many were successful in their bids and sourced over N700 billion . Although Section 125 of  CAMA law   provides that companies shall submit signed  undertaking to submit    the  allotment details to the Corporate Affairs Commission  within 48 days,  they never did. These companies  lured investors with promise that their shares will be listed on the floor of the stock exchange after a period of time. Three years down the line, they have defaulted.

Perhaps to demonstrate their seriousness, these private issuers indicated in their prospectuses, the purposes  for the capital issues and projections of returns to investors, with nothing to show investors for parting with their money. There are strong indications that a large portion of the money was diverted into other investment outlets outside   the objectives declared in the prospectuses.

One of the issuers, investigation has shown diverted the money pooled  through  private placement into Slok  Airline owned by Orji Uzor Kalu  former Governor of Abia State.
The result of the fraud , according to investment analysts is that the money wasted through such private placement could not be recovered, making it impossible for the investors to  access other outlets including the  quoted companies. Kasimu Garba Kurfi , managing director, APT Securities  and Funds Limited said this helped to create liquidity problem for the equities market and further depress of the market.

Complicating the problems of investors that subscribed to the issues was the position of the regulatory agencies like the Securities and Exchange Commission which has distanced its self from the private placement offers. Both SEC and the Nigerian Stock Exchange believed it was a private affair which did not call for regulatory role.

SEC   has however warned the investing public not to buy into private placements that are not registered with it. This is because SEC rules and regulations also mandate all companies coming to the market for private placement to raise fund more than N25 million to register such with it. SEC said investors who are lured because of the high return of investments and buy into private placement that are not registered with SEC do that at their own risk.

Agents of private placement deception

They took advantage of investors, broke the hearts of many and contributed largely to the slump in the equities market. The companies involved in the private placement sleaze include IGI Insurance Plc; Lead Insurance Plc; Aquitane Oil and Gas; Credit Registry; Arm Properties Plc; Negris; Batun Oil and Gas; Bua Group; Acorn Petroleum ; Geo Fluids, and Personal Trust Savings and Loans. Reports have shown that about 40 percent of the plunge in the Nigerian equity market was due to investment in private placements which has denied millions of Nigerians who bought shares in these companies the opportunity to sell their shares and explore other asset classes.

Industrial & General Insurance (IGI) Plc

The private placement memorandum of IGI plc dated as far back as July 31, 2006  and shows that it raised N2.9billion through private placement of ordinary shares of 50 kobo each at N2.00 per share Payable in full on Application. The issuing houses are Stanbic IBTC and Vetiva Capital Management Limited. Industrial And General Insurance Company Plc (IGI) which was incorporated as a limited liability company on 31st October, 1991 and commenced operation in January 1992, operates in 45 branches spread across Nigeria and has subsidiaries in other African countries, notably Uganda, Rwanda, Ghana and The Gambia, with representative offices in London and Washington, DC. Insurance remains the flagship of the IGI Group, which has shareholders’ funds in excess of N31 billion and assets base in excess of N45 billion, with subsidiaries and strategic investments in other diverse sectors, notably: Real Estate, Banking, Telecommunications, Mining, Construction, Waste Management and Engineering.

Negris Holdings Limited

Negris Holdings Limited, one of the subsidiaries of Energy Company Nigeria Limited (ENCON) floated  a Private Placement specifically to raise the sum of N60billion by offering 3.3 billion shares of 50 kobo each to individual and institutional investors at N18.00 per share. Meristem Securities acted as the lead agent to the placement. Energy Company Nigeria Limited, the parent company of Negris Holdings Limited is an independent power producer established as a direct result of the deregulation of electricity supply industry in Nigeria. Benefiting from the track record and technical pedigree of the parent company, Negris Group, in the area of power production, ENCON became one of the first companies to secure a licence from the Federal Government to operate as an independent power producer (IPP).

ARM Properties Plc

ARM Properties Plc (ARM Properties) a subsidiary of Asset & Resource Management Company Limited (ARM), raised N5.6 billion by way of Private Placement.  The company offered 1,360,927,815 ordinary shares of 50 Kobo each at N4.17 per share to a target group of investors which amounts to N5.6 billion. ARM Properties was expected to list its share by way of introduction on the floors of the NSE as at the end of fourth quarter (Q4) of year 2008. Financial Adviser & Lead Issuing House to the Placement is Vetiva Capital Management Limited.

ARM Properties Plc was incorporated in Nigeria on 6th February 2006 with the primary objective of making focused investments in the Nigerian real estate sector. The company  began operation  as a Real Estate Fund promoted by Asset & Resource Management Company Ltd to leverage ARM’s advisory experience in real estate. It took  advantage of the improving operating environment and capitalized on emerging opportunities in the fast growing Nigerian real estate market. The company has completed its second year of operation since the private placement exercise in August 2008. Its first completed development is Oluwole Urban Market – Phase 1, and an active pipeline of projects.

Aquitane Oil & Gas
Aquitane Oil & Gas raised N15 billion through a Private Placement. The company, operating in the downstream petroleum products marketing sector of the Nigerian economy offered by way of Placement 1.5 billion Ordinary Shares of N1.00 each at N10.00 per share. Joint Issuing houses to the Private Placement included BGL Limited, Futureview Financial Services Limited and Diamond Bank Plc. Aquitane Oil and Gas Limited is an indigenous energy provider company incorporated in April 2005. The company said it is driven by passion and goal to become the leading energy service company in the whole West Africa and the Sub-Sahara region.

Batun Oil & Gas
Batun Oil & Gas raised N500million through a private placement exercise and intended to list its shares on the floor of the Nigerian Stock Exchange. Batun Oil & Gas Limited markets refined petroleum products.

Geo-Fluids Limited
Geo-Fluids Limited, a company operating in the Oil and Gas Services sub-sector of the Nigerian economy on May 21, 2008 sought to raise N12 billion when it opened a Private Placement (PP). Oceanic Bank International Plc (Oceanic) was Issuing House to the Placement; which closed June 20 2008. In raising the N12 billion, Geo-Fluids offered to investors by way of Placement 2.4 billion Ordinary Shares of 50 Kobo each at N5.00 per share.
Geo-Fluids Limited is a wholly indigenous drilling mud, work-over, completion and production chemical supply, engineering and marketing company incorporated in Nigeria in 1994. It offers hi-tech specialized services to the Nigeria Oil and Gas Industry like local processing of drilling mud materials of API standards, such as Barites, Bentonite, Calcium Carbonate etc. for the preparation of drilling mud and related slurry materials; mud engineering using seasoned personnel to carry out the following operations, amongst others for the oil companies involved in the exploration and development of hydrocarbon reserves in Nigeria; Completion Fluid Engineering and Services; and  Sales and supplies of various drilling, completion, work-over and production chemicals.

Acorn Petroleum
Acorn Oil offered for subscription by way of private placement 100,000,000 Ordinary Shares of N1.00 each at N2.80 per share. Issuing House was Intercontinental Capital Markets.   Acorn petroleum commenced business in 1981 as a registered marketer of refined petroleum products and lubricants.
The company currently has retail outlets in the various geo political zones of the country with an extensive customer base. The company has also commenced business activities in the upstream segment of the industry. Acorn Petroleum presently enjoys commercial and technical partnership with a number of global companies strategic to its growth plans.

Personal Trust Savings
Personal Trust Savings and Loans (mortgage bankers) did a private placement of N1.38billion ordinary shares of N1 each at N1.20 per share. The application was meant to open in August 4, 2008 and closed August 25, 2008. The issuing houses are Cashcraft Asset Management Limited and Access Bank plc.   Personal Trust Savings which is licensed primary mortgage banking institution incorporated as a private limited liability company in August, 1993. The Bank commenced business from its present head office location in Surulere in January, 1994 and presently has four (4) branch outlets strategically located on Ogunlana Drive, Surulere; Tejuosho Street/Market, Surulere; Ifako-Bariga in the Lagos Mainland and on Lewis Street/Sandgrouse Market in the heart of Lagos Island.

Operators’ stand on the scam

Recently at the public hearing on the causes of near collapse of the Nigerian Capital Market, Albert Okumagba, group managing director, BGL plc told the house committee on capital market that “companies seeking listing on the Exchange successfully floated Initial Public Offerings (IPO), which were oversubscribed though the entire process was flawed by lack of transparency and thin disclosure levels to the investing public.”
“In the aftermath of the global financial crisis, the subject of how much regulation is required is greatly debated. Modern free market’s school of thought argued that too much regulatory oversight was a socialist inclination,” Okumagba said.
But  Kurfi  said as the apex regulatory institution of the capital vested with the responsibility of  ensuring market transparency,  SEC should charge these privates companies to Investment Tribunal to recover investors’ money especially as the issuing companies  flouted their promise to get listed on the stock exchange. If  all or part of the money is recovered it could be invested in the equities market and help boost market transactions,  he stated.
There are also suggestions that investors can personally drag the privates companies to court to get redress and recover their especially as directors of the issuing companies who spear headed the privates placement scam are still walking the streets as free men. .
In addition to regulatory authorities, some of the details of private placement question the role of both the companies and their issuing houses.

Financing by Private Placement

The one constant in the life of  small business will be the need for a cash infusion to jump start sales, expand into new markets, or continue to sustain growth. While there are a multitude of financing sources of funding available to small business owners, each source has its limitations and requirements.
For instance, commercial bank loans are often intended for businesses that have been around and have shown a steady stream of profitability. Private placements are an attractive alternative for growing companies.

What is Private Placement?

Private placement or private investment capital, is money invested in your company usually from private investors in the form of stocks and sometimes bonds. In the United States, private placement often does not need to be registered with the Securities Exchange Commission. Regulation D is the most popular form of non-public private placement.
According to Thompson Financial, over 416 billion was issued in the private placement market for 2002. As good as it sounds, the majority of those dollars came from pension funds, investment pools, banks and insurance companies amounting to just over 2,000 deals. However, private placement does exist for the small business owner and is often less expensive and easier than taking your company public.

Benefits of Private Placement

• High degree of flexibility in amount of financing ranging from 100 thousand to 10-20 million with combinations of debt, equity, or debt and equity capital.
• Investors are more patient than venture capitalists, often seeking 10 to 20% return on investments over a longer term of 5 to 10 years.
• Much lower costs than approaching venture capitalists or selling the stock to the public as an IPO (Initial Public Offering).
• Quicker form of raising money than usual venture capital markets.

Who is a Candidate for Private Stock Offerings?

The ideal small business candidate is a company in the third stage of finance and is looking for growth or expansion funding. Small business owners might think private placement applies to start-ups when your company has completed product development, conducted a market-feasibility study and business planning but start-up funding often comes from angel investors.

Where to Find Private Placements?

The money from private placements will come from accredited investors defined by the SEC Rule 501 under Regulation D as:
•  an individual earning 200k per year.
•  a household with income of $300K per year or having a net worth over $1M.
• or venture funds, some banks and other institutions.
Connect with bankers, attorneys, and accountants who can network your small business with a private investor.

What is Required for Private Placements?

•  A sound business plan
•  A private placement memorandum (PPM) disclosing the full facts of the investment and business
• A law firm or lawyer experienced in private placements.
With the limited infusion of capital into the stock market, the private investor market is an attractive alternative for investors and small businesses. Private placement offers a viable form of business financing without the constraints of taking a company public and conceding control.

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