Collective Investment Schemes, Ponzi Schemes and “Return on Investment” Schemes in Nigeria – What You Need And What You Need To Know

It is obviously no secret that at no time in Nigeria have things been this bad economically, not even during the Civil war or the Covid-19 pandemic.

This has unfortunately triggered an increase in Nigerians seemingly throwing caution to the wind, sometimes out of desperation, and sometimes out of greed, by pooling together hard-earned (or hard-borrowed) sums of money into dubious Money-doubling ventures masquerading as Return-on-Investment companies offering amazing returns on the basis of simply nothing else but flashy marketing, hastily contrived business ventures with vague Business plans and no clear Regulatory or logical business computations, and the actual existence of people who have benefited from such Investment offers with said high profits, aided by the subtle nudging of very charismatic personalities that have become the ultimate celebrities of the Internet and Social Media, otherwise called online influencers, a majority of them seemingly carving a niche on the Facebook platform as their social network of preference.

This had led to recurring storylines with the same repetitive script with admittedly different actors at each point- taking a leaf from the plot of Umanah Umanah and his touted “Wonder Bank”, Nigerians have witnessed fascinating episodes with the likes of MMM, Benignant, IMG(this one really hurt!) to the rave of the moment, Chinmark.

While some of the individuals behind these schemes have either been arrested and facing prosecution or their assets currently frozen, it needs to be said to Nigerians who have fallen victim to such schemes that some of the culprits might never face the law and they might never get their money back. I recently saw an announcement on the News stating that the individual behind the Chinmark group of companies, Marksman Chinedu Ijiomah had vanished. Justice might become harder to obtain when a criminal suspect flees to another country that has no extradition agreement with Nigeria.

The good news is that if you’ve fallen victim to such a scheme before and you’re reading this, then you can only be fooled once (hopefully), and if you’re considering putting your money in any Investment company either alone or along with others, then this write-up in the form of a Frequently Asked Questions (FAQS) format will help you to know the core basics about :

• Which Investment offer is legitimate and which isn’t;

• The requirements for making your Investment legitimate;

• What to do if you might have fallen victim to a fraudulent or illegal scheme.

  

Let’s go!

Question :- I want to invest some extra cash i’ve saved up and i’ve been hearing about “Collective Investment Schemes” as a good option. What exactly are they?

Answer :- A Collective Investment Scheme (or ‘CIS’) is defined by the Investment and Securities Act of Nigeria as a scheme in any form, including an open-ended Investment company, in which members of the public are invited by way of advertisements to invest money or other assets in a portfolio (or Investment bloc) which is used for different investment objectives, and by virtue of which such investors are deemed to hold a participatory interest in the portfolio and its consequent proportional risks and benefits as determined in the Investment deed signed by the investor.

Q :- Okay, do different types of CIS exist in Nigeria? If they do, can you please name and explain them in the simplest terms?

A :- Sure! There are different types of CIS in Nigeria. They are :
i). Unit trust schemes :- Where small sums of money from Individual investors are collected to form a pool for the purpose of investing in stocks, shares & money market instruments handled by professional fund managers on behalf of the contributors who are called Unit holders or subscribers. So where, for example, the total fund value of a Unit trust scheme is divided into units of equal monetary value or 1 unit is worth 1Naira, a person investing a thousand Naira gets 1,000 units.

Also note that a Unit Trust scheme can be open-ended ( a fund that continuously issues & redeems units after the initial public offering ) or close-ended where there’s no additional issue of new units or redemption of units, with the fund usually being traded on the Nigerian Stock Exchange and its price determined by demand and supply. So redemption of units in this case would have to be through a stockbroker.

ii). Venture Capitalist Funds :- Venture Capital is early stage financing of start-up or new companies seeking quick growth and is a profit seeking vehicle by an entrepreneur whose objective is to profit by way of providing otherwise unavailable funding to start-ups for the purpose of LONG-TERM PROFIT (emphasis mine).

Venture Capitalist activity typically involves the stages of Fund raising,Investment, Monitoring/Value Enhancement and Exit.

Venture Capitalists funds are typically sourced from Institutional investors like a).Pension funds, Insurance companies, Charitable foundations/University endowment funds;
b). Companies set up to find new businesses;
c). Or Wealthy Individuals.

iii). Real Estate Investment Schemes (REIS) :- This is a CIS that directly invests by way of acquisition, holding and management, income generating real estate and related assets using pooled funds from subscriptions of its participant unit holders/subscribers/investors.

iv). Specialized funds :- Which are funds dedicated to specific industries or market segments, a good example being mutual funds (under which you have target date funds, stock funds, bond funds, and money market funds aimed at short-term tenors and low risk vulnerability)

Q :- Hmmmm, i think i’m interested in investing in a Unit Trust scheme. Is there any document that must be signed to legally symbolize my investment?

A :- Yes there is. To invest in a Collective Investment Scheme, there must be an agreement between the issuer of the scheme or fund called a Trust deed and another party called the Trustee which lays down the rights, responsibilities, Investment objectives, policies, and all other relevant information of the fund.

Q :- Wait a minute, you mentioned an issuer and then a trustee? How many people are actually involved in a Collective Investment Scheme and in my case, a Unit Trust scheme?

A :- Well, the most important parties that must be present in a Unit Trust scheme are:
– The Unit Holder/Subscriber :- That’s you buying units in an Investment portfolio issue;

• The Fund Manager :- That’s the company offering to the public Collective Investment Schemes or Investment portfolios in the form of Unit subscriptions;

• The Trustee :- This is a corporate body that’s dedicated to administering or managing on behalf of beneficiaries (Unit holders in this case), Corporate assets such as Investment portfolios offered by the Fund Manager by way of a transfer of Legal title to the trustee who will then be acting in the interest of the Unit holders to prevent mismanagement or misappropriation of the fund by the Fund Manager (e.g FBN Trustees, UTL, etc.);

• The Custodian :- A corporate entity designed for safe keeping corporate assets such as Investment portfolios;

• The Registrar :- This is a company dedicated to keeping records of all Unit Trust holdings of every subscriber in a Collective Investment Scheme fund.

Q :- Okay, are these parties also needed in a Venture Capitalist Fund?

A :- No, not really. The parties needed in a Venture Capitalist Fund are :

• Risk-takers with cash that are willing to invest and wait for long-term gains and not short term profits;

• A dedicated and licensed Venture Capitalist company to collect money from the Risk-takers and offer them shares in return along with a promise of high returns in the future;

• A viable business venture that’s a start-up or new business into which the Venture Capitalist fund can invest an amount of equity;

• And of course, there has to be an entrepreneur with a good business venture looking for expansion/exponential growth capital.

Q :- Are Collective Investment Schemes in Nigeria regulated? And if they are, by who?

A :- Yes, Collective Investment Schemes are in fact regulated in Nigeria by the Securities and Exchange Commission which is in charge of licensing all Capital Market Operators (Fund Managers included) and the prior approval of all Collective Investment Scheme offers.

Q :- Okay. Now, what exactly is a Ponzi scheme? I’ve been hearing about the term and i still don’t know what it means to be honest!

A :- You’re actually not alone in this. A Ponzi scheme is a form of fraud in which BELIEF (emphasis mine) in the success of a non-existent business enterprise is fostered by the payment of quick returns to the first people to invest in the false enterprise from money paid or invested by later investors.

The term is named after Charles Ponzi, an Italian swindler operating in the US and Canada who in the 1920s swindled investors out of more than $250 Million in 2022 US Dollar values based on bogus promises of 50% Profit returns on Investments within a 45-day tenor or 100% profit returns on investments within 90 days.

Q:- Wow, no be today o! So how can i tell when an Investment portfolio offer from a company or individual is either a Ponzi scheme or fraudulent? Are there signs to look out for or ways i can find out myself?

A :- Yes, there are ways to tell when an Investment Scheme is most likely fraudulent. Some of them are :

• Asking the company or individual making the offer if they’re fund managers licensed by the SEC;

• If the answer to the question in the last paragraph is “Yes” and not “No” or “We are currently processing registration with the SEC”, then ask if the Investment Scheme offer has been approved by the SEC;

• If the answer to this last question is also “Yes”, then ask the company for a prospectus approved by the SEC. Where this isn’t forthcoming, walk away.

• Alternatively, you can ask them if the offer for subscription or sale has a time frame. If the issuing company gives a time frame other than 28 working days, that’s a red flag.

• If the Investment offer fails to expressly mention in its prospectus and advertisement a Trustee, a Custodian, and a Registrar, run away.

• You can also check if the issuing company is a member of the Fund Managers Association of Nigeria (FMAN). If it isn’t, it’s best you walk away.

• Another giveaway sign is the nature of the advertisement for an Investment Scheme subscription offer. The Amended SEC rules on Collective Investment Schemes 2019 expressly bars Investment Scheme offer advertisements from using -a).Celebrities/ Influencers, whether offline or online; b). Ambiguous and high sounding words or terminologies like “brighter life”, “ogbonge offer!”, “sleep and let your money work for you” or “invest and haul in the future”; c). Extensive Legal or technical terminologies that might distract or bamboozle an investor; d). Brand names or slogans.

• All advertisements of a CIS offer MUST also carry this warning footnote “Please read the prospectus and where in doubt, consult your stockbroker, professional fund manager, solicitor, accountant, banker or any other professional adviser for guidance before subscribing”

• Finally, all investment monetary sums for subscription shall be paid by subscribers and investors to the scheme’s Custodian who will be responsible for the safe holding of same pending investment by the Fund Manager. Where a company making an investment offer is telling you to make payment to them directly, run away if you don’t want your money to be used for “balling” and online giveaways!

Q : – Wow, thanks a lot! Now what about Crowdfunding? How does that work and is it also regulated by the SEC?

A :- You’re welcome. Crowdfunding is the practice of funding a project or venture by raising money from a large number of people through the internet. And yes, Crowdfunding is regulated by the SEC via the SEC rules on Crowdfunding 2021. Consequently, all persons or entities operating an investment Crowdfunding portal or digital commodities Investment platform are to be registered with the SEC otherwise they will be categorized as illegal and vulnerable to regulatory sanctions under the rules.

Q :- Oh wow, okay. Now here’s the thing. I put money into what i thought was a legitimate Investment company i first knew about through posts from XYZ , a very popular influencer i follow on Facebook. I’ve been on the neck of the owner of the company to collect my principal investment sum and its returns, but the owner, Mr. Sharp Sharp, just announced that everyone that invested in his company is actually a partner, not an investor because he simply said in his advertisement that putting in money in his company is a “partnership on the path to wealth”, not an investment in wealth. Therefore as partners, me and the other investors, all 400 of us, are to share the risks and benefits equally. He hasn’t been reachable for days now. Please be honest with me, have i been scammed?

A :- Sadly, yes. You have most likely been scammed and here’s why. Partnerships are governed in Nigeria by the Companies And Allied Matters Act(CAMA) 2020 and the Partnership laws of various states of Nigeria.

Under Section 19 of this act, a partnership can’t have more than 20 partners.

So this negates whatever Mr.Sharp Sharp tells you. Besides, there is yet to be any proof of a partnership deliberately entered into between you and Mr.Sharp Sharp’s company because from what i can see, none of you that invested was listed as a Share or Equity holder in the company which is a different legal entity compared to a partnership and he knows this, hence his very probable flight.

The truth is that all 400 of you have been, what’s the popular phrase again – served breakfast!

Q :- Wow! This is a hard blow for me because 10 million Naira is what i put in and that’s no loose change. To add insult to injury, we accosted XYZ on his Facebook about his part in this mess and to our shock, XYZ and his online followers started mocking us and telling us to go find Mr.Sharp Sharp. This hurts more because XYZ was obviously paid for the abnormally high level of obviously sponsored advertisements, assurances and even personal indemnities given if anything happened to our Collective Investment. Please are there any options and Legal remedies available to us? Has there been any case of the law catching up with the culprits in cases like this?

A :- As a matter of fact, there are a number of options available to you and your co-investors, though there’s no 100% assurance that you’ll get back everything you lost or that the culprits will be caught as most career swindlers tend to think 10 steps ahead of their victims. Here’s what you and your co-investors should do ASAP :-

• Get a lawyer to file a complaint to the SEC and then criminal report to the Economic and Financial Crimes Commission (EFCC), the Nigerian Financial Intelligence Unit (NFIU), the Nigerian Police Force, and then the Nigerian Immigration Service seeking the commencement of an arrest and/or investigation and the seizure of the international passports of any of the principal officers of Mr. Sharp Sharp’s company, Mr. Sharp Sharp himself, and XYZ as a highly likely accomplice;

• Get your lawyer to simultaneously file an action in court for a freezing order(called an injunction) on all traceable assets of Mr.Sharp Sharp, his company, principal officers of his company, and XYZ which can be Real Estate assets, Cash in Bank accounts, shares, Treasury bills or moveable assets like cars and jewelry pending the conclusion and determination of criminal proceedings against them AS WELL AS a Winding-up Court petition seeking the dissolution of Mr. Sharp Sharp’s company on the grounds of fraud and because it is equitable and just to do so and then a third Court action seeking a “lifting the veil” order aimed at stripping down the corporate personality shroud afforded by Sharp Sharp’s company in order for the law to fully go against the natural legal personality of Sharp Sharp himself and his directors and co-shareholders. This can then be followed up on by asking your lawyer to write a petition to the Corporate Affairs Commission asking for a Regulatory Winding-up of Sharp Sharp’s company.

• If Sharp Sharp has fled from Nigeria, ask your lawyer to determine if the country he fled to has an extradition treaty with Nigeria, or if it will be more time and cost-efficient to commence Criminal proceedings in Sharp Sharp’s country of refuge through a locally qualified lawyer over there monitored by your lawyer while criminal proceedings continue here.

And yes, there have also been real life cases of progress made against culprits in such cases of Ponzi fraud schemes, a very good example being the obtaining by lawyers of aggrieved investors of a freezing order placed by the High Court of Lagos State on bank accounts and other assets belonging to the alleged Ponzi scheme Imagine Global Holding Company Limited and its subsidiaries(belonging to Bamise and Elizabeth Ajetunmobi), the Bank accounts alone said to be containing more than 11 Billion Naira .

These are some of the most efficient remedial options available to you in the event of falling victim to Investment fraud or Ponzi schemes.

In conclusion, it is hoped that by the going through the first part of this write-up, a layman or corporate investor or serial entrepreneur would have developed an ability to make a well-informed Investment decision in the future. In the second part of this write-up, the focus will be on the requirements and what must be known in the creation of and registration of Collective Investment Schemes, the licensing process for Fund Managers, Venture Capitalists and Crowdfunding ventures aimed at serial entrepreneurs, private investors looking to go into professional fund management and venture capitalist start-ups , and techpreneurs looking at digits Crowdfunding and Funds Management as the next big thing. See you then!