Recently, one notable development in the financial sector has been the emergence of Collective Investment Schemes (CIS). This open-ended investment scheme takes various forms and enables investors to pool their resources for investment in selected securities. That way, they can aim to enhance returns while mitigating risk.
Participants in a Collective Investment Scheme can include individuals, corporations, governments, pension plans, and other entities. The primary objective of these schemes is to offer investors access to a profit-oriented, diversified portfolio of investments, helping them achieve financial returns, save for retirement, or meet other financial goals.
In Nigeria, the regulation and operation of the Collective Investment Scheme are overseen by the Securities and Exchange Commission (SEC) to ensure transparency and protect investors. Now, below is a comprehensive guide to establishing and operating a Collective Investment Scheme in Nigeria.
Understanding of Collective Investment Scheme (CIS)
Section 153 of the Investments and Securities Act (ISA) No. 29 of 2007 defines a Collective Investment Scheme as any arrangement, regardless of its form, including open-ended investment companies, that invites or allows members of the public to invest money or other assets into a portfolio.
Under this scheme, two or more investors contribute money or other assets and hold participatory interests. Also, investors share the risks and benefits of the investments in proportion to their participatory interests in the portfolio, or as otherwise specified in the scheme’s deed.
These assets can include different types of investments, like shares, real estate, and more. The trust managers decide how and where to invest the money, and it doesn’t have to go into just one type of investment.
The scheme offers several benefits that contribute to economic growth and financial inclusion in Nigeria. They deepen the capital market by increasing participation and bringing capital market activities closer to grassroots investors. By pooling funds from various investors, CIS enables individuals, especially those with limited capital, to access diversified investment opportunities.
This is particularly beneficial for small private enterprises, as it provides them with access to long-term funds necessary for business expansion, which ultimately boosts economic growth. Additionally, CIS offers investors the potential for profit, income, and capital appreciation, while also providing retail investors with the advantage of professional fund management to optimize their returns.
To set up a CIS, you must engage experienced professionals who are registered and licensed by the SEC. These parties include; Fund Managers responsible for managing the investment; Trustees overseeing the fund’s operation to protect investors; and Custodians holding the fund’s assets securely.
What Are the Types of Collective Investment Schemes in Nigeria?
In Nigeria, the Investment and Securities Act defines several types of Collective Investment Schemes (CIS). Below are five main classifications:
1. Unit Trust Scheme
Investors pool funds, which are managed and invested on their behalf in diverse portfolios. The profits are distributed based on the number of units held. Trust Deeds govern the scheme, ensuring fund managers act in the investors’ interests. Unit trust schemes can be:
- Open-ended: Units are issued and redeemed continuously, with values determined by the fund’s net asset value.
- Close-ended: Units are traded on the stock market, and prices depend on market demand.
Overall, unit trust schemes provide an accessible and professionally managed avenue for investors to participate in the financial markets, diversify their portfolios, and achieve their investment objectives.
2. Venture Capital Funds
These funds invest in startups and growing businesses, targeting long-term profits rather than immediate returns. Investors, or venture capitalists, provide capital in exchange for equity and actively monitor the business to protect their interests.
3. Open-Ended Investment Companies
Managed by companies rather than trust managers, these schemes allow investors to buy and sell shares daily based on the net asset value. Investments are tailored to individual risk preferences.
4. Real Estate Investment Schemes
Funds are pooled to invest in real estate properties. Returns are distributed periodically after necessary fees are deducted, offering an opportunity to profit from real estate without direct ownership.
5. Specialized Funds
Resources are invested in a specific industry, making this type of fund high-risk and subject to market fluctuations. It can yield significant profits or substantial losses, depending on the sector’s performance. These schemes cater to different investor preferences and risk appetites and offer diverse options for financial growth.
Licensing for Collective Investment Scheme in Nigeria
To operate an investment scheme, you must have a licensed fund manager. This means the fund manager needs to get their license first, and then the investment scheme can be registered with the SEC.
To obtain the license, a formal application must be made to the Securities and Exchange Commission. A Trust Deed will be prepared between the fund manager and trustee detailing the scheme’s operation alongside an offer document that provides detailed information about the scheme to potential investors, including objectives, fees, risks, and benefits. The formal application is submitted with the following documents:
- The trust deed and offer document
- Proof of registration of the fund manager, trustee, and custodian.
- A feasibility report and business plan for the CIS. SEC will review these documents to ensure compliance with regulations.
If the application meets all requirements, SEC will approve and register the Collective Investment Scheme and issue a Certificate of Registration. Having a licensed fund manager is important because only they are allowed to offer units as Initial Public Offers (IPOs). However, before these units can be sold to the public, they must be registered with the SEC.
Once registered, you can launch the CIS by offering units or shares to the public. This can be done through banks, brokers, or other authorized agents. Additionally, after launching, you must:
- Regularly disclose the fund’s performance to investors.
- Submit periodic reports to SEC and,
- Comply with all operational guidelines, including transparency in fund management and proper accounting.
According to Section 161 of the Investment and Securities Act 2007, it is illegal for anyone to buy or sell units or securities of a scheme unless those units or securities are properly registered with the SEC. This rule ensures that all investment activities are transparent, trustworthy, and comply with the law.
The Securities and Exchange Commission (SEC) also requires that Collective Investment Schemes have their financial records audited. This means the scheme’s manager must keep proper records and prepare annual accounts that accurately show the scheme’s financial activities for the year. These accounts must then be audited by an auditor chosen by the manager with the approval of the scheme’s trustee or custodian.
Conclusion
Before starting a Collective Investment Scheme, it is important to familiarize yourself with the rules governing how CIS operates, the roles of fund managers, trustees, and custodians, and the rights of investors. Failure to meet regulatory requirements attracts fines and penalties. As already mentioned, the SEC has the authority to investigate a scheme’s activities.
They can look into the business of anyone involved in managing or promoting a Collective Investment Scheme, whether they are registered or not, to ensure compliance with the law. Therefore, it is best to engage a lawyer for advice or guidance on this procedure. For more information or inquiries on collective scheme arrangement, please contact Resolution Law Firm at info@resolutionlawng.com.