For a proper understanding of what this topic is about, you need to understand the secondary market in companies’ securities. We have pointed out earlier that there is a primary market and a secondary market. The primary market is the issuers’ market, that is, when companies’ issue shares and sell directly to members of the public. We have discussed the famous marriage proposal in the first semester work.

Going public is about the primary market in securities. It concerns how companies can issue shares and offer them to members of the public for subscription. We already know that by the provision of S. 22 CAMA, private companies can’t issue shares directly to the public instead they can issue shares (raise capital) by private placement. This provision in S. 22 is also contained in S. 67 ISA to the effect that it is only public companies that can make an offer to the public for subscription to the capital of the public company. What is the modality by which a public company can do this? First we must draw our attention to the provision of S. 69 ISA. This section tells us when an offer is made to the public. It provides the various means of communicating an offer that would qualify as an invitation to the public. If one’s invitation for subscription for shares is published on the pages of a newspaper or it is broadcasted on the radio, television, or at a film show either indoors or outdoors or otherwise what is called a road show or it is contained in banners and billboards positioned in strategic places in the public, all of these qualify as invitation to the public. The key element of an invitation made to the public is that it is made so generally that the issuer (the company itself) does not know who is the likely recipient. In other words, there is this uncertainty about who exactly will read this placement on the medium used. The nature is therefore that it is made generally to the public. It would therefore be inconsiderable for the company to determine the certainty who will read it and who will respond to it. On the other hand, where an application is made to a particular person and says “Dear X, we are issuing two million ordinary shares paid at two naira each full payment and subscription are addressed to you”. This is not a public offer; it is a private offer otherwise called private placement since the individual is being solicited directly. A private offer is a ‘one on one’ (direct) solicitation. You would find this in the decision of the case of Re Government Stocks and other Securities Ltd v Christopher. It is a case that analyses the English equivalent of S. 69 and draws the distinction between and when an offer is made to the public and when an offer is made privately.
The next thing we need to know is the provision of S. 71 ISA. This section simply tells us that that invitation to the public which seeks to solicit for members of the public to subscribe to the company, it is unlawful to make that open invitation unless the invitation is accompanied by a prospectus. By S. 315 ISA, a prospectus is any form of invitation offering to the public for subscription or purchase any recognized securities of a company and other issues or scheme. This definition appears loose because it means a prospectus could be any piece of paper. But S. 71 says a prospectus must be in compliance with the provisions of S. 79. Even though S. 315 ISA defines a prospectus the way it has, S. 71 ISA provides that it must contain certain matters which are contained in the first part of the third schedule to the ISA and it must contain certain reports which are contained in Part 2 of the same third schedule. A prospectus within the meaning of the third schedule is a marketing document and the provisions of S. 71 and S. 79 have been so designed to ensure that whenever a company solicits a person to part with their money for its shares, that that individual is well informed. If you don’t save, you can’t have money to invest and that the money a person uses to buy shares is an investment thus the product of the individuals sweat and it is a manifestation of the individual’s discipline not to spend all their money but to save something. Hence, it must be protected. This is why he must put it in a place that is safe. When someone comes to part with the savings, he must be fully informed. We liken this to a marriage proposal. The easiest way to remember what the third schedule requires in a prospectus is just to relate it to a marriage proposal.
The marriage proposal is one for life. A company soliciting an individual’s capital for its business is also of that serious nature. The first part of schedule three requires the name of the company, when the company was registered, the nature of the company’s business, the directors and shareholders of the company, how many branches the company has, the performance of the company in the last five years or thereabout, the statement of its account, what it intends to do with the money it wants to collect from to individual. Therefore, the matters to be stated in part 1 are matters that are designed to inform the individual about the company, its present state, its present structure and the present state of its capital. This is what a groom does when he comes to plead to the love of his life. You see a fine beautiful girl and say ‘My darling, I like you’ and sometimes some would even begin by saying ‘I’m in love with you just looking at your personality. My name is Joe. My dad is the VC of Unilag……..’. All this information is about the groom’s personality and his worth. He is selling to the lady his personality and his worth. The first set of matters stated by a company is also about the company and its worth. After the introduction and revelation of his worth, he then goes on to tell the lady what he wants from her, her love. But in the case of a company, what it wants is the individual’s money. The company wants to do something with the money. In the case of the groom, what does he want to do with the love, to make her his better half for life. After a company has told the individual what it wants to do with the individual’s money, that is whether it is for expansion or to computerize their manual system to increase efficiency so that they can make more profits, it then discloses material contracts. The company is supposed to disclose in its prospectus the material contracts the company has already signed concerning its objectives. In the analogy, the guy having introduced himself and told the lady what he wants to do with her love, he is also going to tell her material interests: Do you know for the past ten years I haven’t dated anybody? I have no encumbrances (relationship). In essence, he tells her whether there is any conflicting interest. When he has all this, he has stated all the matters required to be stated in Part 1. We now move to part 2.
Part 2 tells us of the report that must be contained in the prospectus. When a guy has made such a proposal to a lady, what would usually be the lady’s reply? I will think about it. She will try to suppress every enthusiasm before the dude. But one she leaves his presence, she goes to her best friends to reveal the offer. Her friends ask her, who is the guy? Once the guy’s identity is revealed, the cross-checking and reporting is set to be done by her pals. There will be a financial accounting report (a financial appraisal) of the gentleman whether he is from a rich family. In the same way, one of the reports required in the prospectus is an audited accounting report. The same way the gentleman would be financially appraised, the company would also be audited. Apart from the audit report, there will be the directors’ report. For the groom, this is the point where friends will report whether he is a lone Casanova; it may be positive or negative. This is what is known as the directors’ report with regard to the company. At this point, she is still thinking about the proposal while investigations are still ongoing. Part of the investigation is that those who know about the guy’s family would also submit their report.
We now turn to the third part of the report in the prospectus which is known as expert’s report. If the business of the company involves experts, the prospectus is required to contain expert’s report on the company. In the case of the groom, this is the most crucial stage in the report. She is going to consult experts. These experts include pastors, babalawo, alfa etc. as regards what the future holds for the two of them should she say YES. These reports are usually unimpeachable. These are the things that must be contained in the prospectus. So, the young bride now analyzes all the pieces of information and the next time the guy asks, she is able to come up with an answer; Yes or No. It is important you remember this love story as it hasn’t been said for fun. You must be able to liken it to the prospectus. S. 79 provides that a prospectus must contain the matters specified in part 1 third schedule and contain the reports specified in part 2…which you can compartmentalize into the two main stages in marriage proposal.
S. 85 ISL deals with civil liability for misstatements in prospectus. S. 86 ISL deals with criminal liability for misstatements in prospectus. By the combined provision of these sections, it is evident that the prospectus is not expected to contain untrue statements. A detailed explanation as to what constitutes falsehood you would find in Chapter 9 of Professor Abugu’s textbook. But it is important you note that there are consequences for misstatements. A contract for the sale of those shares may be voided or rescinded on account of misrepresentation or falsehood contained in the prospectus. When also there is an expert report, if the expert’s report was not consented to by the experts or the report was withdrawn shortly before the statement was published, then reasonable statement must be made to communicate the fact that the expert no longer holds that opinion or has withdrawn the opinion. All of this you will find in sections 79 to 86 ISL. There are civil law cases expounded by the courts on this liability, you’ll also find them in the book. Also we must point out to you that the prospectus is registrable with the securities and exchange commission. For purposes of ensuring that the provision of S. 79 has been complied with, the relevant matters and information have been stated, the prospectus will be registered with the SEC.
From what we have seen with respect to public offer, the law seeks to protect investors from devising deceptions that may be perpetuated by issuing companies and their directors. Hence the provision of S. 71 that for you to make information available to the body, you need to make statements about the process of the company and it must have editors and experts certifying……
Let us go to the secondary market. This is usually constituted around a stock exchange and in it we are talking about the shares of public companies. The stock exchange is a market where sellers of shares meet with buyers of shares. The price at which shares are traded on the market are determined basically the forces of demand and supply. The fool’s theory. Everybody who trades in the securities market is a fool. This is the way it works. Every investor will only invest in a security that gives him most efficient returns. What influences an individual’s choice whether to buy the shares of XYZ or ABC is what would be best for his returns. Thus, one of the primary things that will drive their choice of investment is the identification of the company that will give them the most efficient or best returns on their money. It may occur to an individual that the shares of ABC would be better for him than that of XYZ the principal consideration being their return. We call this a system of allocating efficiency. Where the choice of investment is allocated by reference to efficient returns on the investment. If A has one million shares in ABC and they have a cash problem, one option open to him would be to sell the shares they have in ABC. But for them to sell the shares in ABC, they must consider their other investments and see whether they give them as higher a return as ABC. If after check, they discover they have other investments that do not give them an annual return as high as that of ABC. The investment choice would be to sell those other investments and retain the investment in ABC. However, if they decide to sell the shares in ABC, that is because they have some other investments that they have determined are paying them higher than that in ABC. In other words, considering the return from ABC, they’d rather do away with it than to touch the other investments. Apparently, this is a prudent decision. Consequently, if the shares in ABC are offered for sale, the person who would then use the money to buy it instead of using that same money to buy any of the ones the owners treasure and won’t sell, that person must be a fool. The prospective buyer however is thinking differently. They are looking for investment that would give him the highest return the way the seller was once thinking. They have looked at the range of companies to invest in including the one the seller is treasuring. The buyer is of the view that investment in ABC would yield more than the other investments the seller is treasuring. So in his view, the seller must be a fool for wanting to sell his shares in ABC. Thus, in the stock market everybody is a fool. This is known as the Fool’s Theory because each person thinks he has better information and the other person is a fool. What then drives this theory? Why does each person think the other person is a fool? This is driven by three set of information. First is the historical information. What does each person know about the story of ABC. Secondly, we have present information; is there any news. It may be that either of them is aware of the government’s policy isn’t favoring ABC and therefore it won’t do well this year. The third set is speculative information. This is an embodiment of each person’s projection or analysis of the the past, present and what the future holds for the company it is also an embodiment of any rumor that each person has. It is also an embodiment of emotions and love for ABC. Because these three set of information are unevenly distributed as between buyers and sellers, it results into something else noticeable in stock market called the doctrine of random world. Random world simply means that the prices of shares move randomly; they rise and fall as between individuals trading in the market. Between A and B, depending on the three sets of information, A may be ready to pay 2.80 naira for the same shares whereas between Mabel and Angela, because of the information available to them, Mabel is only willing to offer 2.60 naira. When we move to another segment, we have James and John. Because of the information they possess, John is only willing to buy the same shares for 3.00 naira. By the time you put all of them together, you’d notice what we refer to as a random world. But this is where we are going.
Whilst transactions in the secondary markets are regulated or may be determined by historical information, present information and speculations as to the future, there is the need to have an even play ground where one’s analysis of the past, present and the future would be the individual’s making. In other words, trading in the shares of existing companies, a predominant feature is uneven distribution of information. This is why each person would call the other a fool in the same transaction. The information available to both of us are usually unevenly weighted and even when the said information is made available to all, they would probably analyze the same information differently and come out with different value judgements. So A would be demanding for a higher price while B would be demanding for a lower price. And when you move the same securities to a different set of persons, another random valuation happens. So the stock market is actually based upon the unevenly distribution of information. What the law seeks to achieve therefore is that this uneven distribution of information should be on a level playing ground. That the floor must be fair and even for all players. This is addressed in a number of provisions in the ISA moving from the provision of S. 109 to S. 111 ISA. These provisions are designed to ensure that the stock market (the secondary market) presents a level playing ground for all parties (buyers and sellers) to operate based on available historical, present and whatever speculative information the parties may have. S. 109 prohibits manipulative tendencies; the forces of demand and supply must not be manipulated. Do not do market rigging. What is market rigging? Company A isn’t doing too well and because it is not doing too well, it is not paying dividends so a large number of its shareholders want to sell their shares. There is therefore a glut in the supply. A lot of people don’t want to buy since it is not offering the best efficient return on their investment. Thus, we have a case of high supply but low demand. This would make the price of the stock fall. This is an even playing ground based on available information concerning company A available to both existing holders of its shares and prospective buyers. The information determines whether people want to buy and whether they want to sell. But can this be manipulated? Probably! Because a lot of people are not buying, if A is interested and they are a major shareholder or a director of the company and they have lots of its shares they want to dispose but they do not want to sell at a low price that presently obtains because of the circumstance of the company. They may decide to rig the market and rig the price. How would they do this? He may appoint a number of stock brokers and give them money to go to the market and pretend to buy and while you are buying you are selling. They have therefore created a fictitious demand and supply. With this, the value of the shares begins to rise. When it gets to a certain price, the director may now decide to sell. The unwary public unaware of this dealing would now buy thinking the seller a fool for selling when the shares have started ‘growing’. The seller collects the money for the price agreed and the buyer later on discovers that the shares aren’t what he thought it would be. Such manipulations are possible and so S. 109 ISA prohibits transactions of this type.
S. 109 ISA proscribes the dissemination of any statement or illegal information to the effect that that the price of any securities of a body corporate will or is likely to rise or fall or be maintained. S. 110 ISA prohibits fraudulent means. See also S. 111 ISA which proscribes insiders from dealing in securities. Because directors occupy this center privilege information source, the law prohibits them from dealing in the stock of the company when they have price sensitive information otherwise they would have the influence of supply and demand which would otherwise affect the price of the shares of the company in the secondary market. In short they are precluded from dealing because it is said that what they have is insider information. They are precluded from using this insider information in buying and selling shares. The prohibition of insiders dealing in S. 111 ISA extends not only to primary insiders but also secondary insiders. The secondary insiders are persons who were not privileged to direct insider information but are connected to persons who have such direct insider information. The Americans call them Tippees. They are also prohibited from dealing in the shares of the company.
S. 107 ISA prohibits the making of false or misleading statements whether knowingly, recklessly or negligently. S. 108 ISA prohibits persons from fraudulently inducing other persons to deal in securities.
There is a very high probability that you would have a problem question on secondary market dealings in the examination. When you see the case study, after reading it, it may look like insider dealing in which case your mind would probably say all you need is S. 111 ISA or you may look at it and come to the conclusion that it is simply a case of dissemination of illegal or misleading information or you may look at it and simply see a case of official using insider information. Please do not make the mistake of just zeroing on one section. The truth is that at any particular point in time, two or three of the sections would be relevant. You would not see any problem question in this regard where only one section would solve the problem. Market rigging would be a feature of insider dealing. The use of any device to influence the price of stock on the market would also be one of the factors in an insider dealing transaction. So do not compartmentalize them. In fact, if you take your time to study them, you would see how they overlap. The provision is this way to prevent an insider from escaping liability so that the integrity of the securities’ market assuring that there is a level playing ground for both buyers and sellers of securities is ensured. This is a follow up to S. 13 ISA which charges the SEC with that power and function to regulate insider dealing and ensure the integrity of the capital market, the principles of fairness for all participants is assured.


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