The Capital Markets Authority (CMA) is tightening rules for raising funds privately to protect unsophisticated investors and seal gaps that firms such as Cytonn used to raise billions of shillings without regulatory scrutiny.
Firms seeking to raise money through private offers will now have to generate a list of potential investors before tapping the market for the funds and the registry must be provided to the regulator.
Companies raising money privately will not be allowed to advertise, market or use agents to inform the public about the capital raising.
The regulator has also scrapped rules that allowed firms to protect themselves from regulatory scrutiny if they raised more than Sh100,000 per investor, where securities are not traded or where the investors are assumed to have knowledge of the risks.
The proposed changes come at a time when the regulator has been under the spotlight over private offers in the market that have run into liquidity headwinds and failed to honour payments to investors.
“All offers covered under this Regulation shall be made only to such persons whose names are recorded by the offeror prior to the invitation to subscribe, and that such persons shall receive the offer by name, and that a complete record of such offerees shall be kept by the company produced to the Authority in demanded,” the draft Capital Markets (Public Offers and Listing of Securities) Regulations 2022 state.
“The securities are offered to not more than one hundred persons who are specifically identified and such offer shall not remain open for a continuous period of more than 12 months, and such offer is not repeated with wholly or partially different persons by the same entities or related parties, or ultimately for a common purpose, within a period of 24 months from the date of the first offer.”
The draft follows fights between the CMA and investment and real estate firm Cytonn over two funds that are not under the watch of the capital markets regulator and had investments worth Sh13.5 billion.
The two funds have failed to pay investors upon maturity of their investments in properties developed by Cytonn.
The company marketed the funds as private placements, a closed shop of a few sophisticated investors, which do not fall under the ambit of the CMA.
But filings in court show that Cytonn had raised money from 3,000 investors in breach of regulations that demand funds raised through private placements involve less than 100 people.
Cytonn in defence said it had complied with the CMA’s conditions for private offers.
The CMA further wants entities engaging in private offers barred from advertisement and publicity efforts.
“No company offering securities under this regulation shall release any public advertisements or utilise any media, marketing or distribution channels or agents to inform the public, or capable of informing the public, at large about such an offer,” the draft regulations say.
The private offers will also be restricted to members of a club with common interests or a restricted circle of people with sufficient knowledge and understanding of the risks linked to the fund raising plan.
“The securities are offered to the members of a club or association and the members can reasonably be regarded as having a common interest with each other and with the club or association in its affairs and in what is to be done with the proceeds of the offer,” the draft regulations say.
The draft regulations will be subjected to public participation before being forwarded to the National Assembly.
Last year, the CMA said Kenyans lost Sh1 billion buying into unregulated investment products marketed by entities promising high returns.
The regulator said about 500 investors had complained of loss of funds through online forex frauds, illegally pooled funds, cryptocurrency, real estate and ponzi schemes.
The schemes lure unsuspecting investors across the country promising huge returns of up to 20 percent, the CMA said.
Most unregulated schemes are operated in obscurity and deal in products that resemble securities or capital market instruments.
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