Fractional Shares, Omnibus Custody and a Home-Grown Secondary Market
Shilingi Invest Ltd is a Nairobi startup with 8,000 retail users. It offers 'fractional shares' in US-listed ETFs from KES 500, pools orders, and holds assets through a US broker's omnibus nominee account. It also runs an in-app marketplace where users trade their fractional interests with each other, matching orders internally. Its marketing says 'CMA-approved' and 'capital guaranteed'. It holds client subscriptions in its operating account for up to five days before sending them offshore, and it shares user trading data with a partner lender. The CMA has received complaints. The founders argue they are only a technology platform, not a dealer or collective investment scheme.
1. Assess Shilingi's licensing perimeter. Is it a technology platform, a dealer, an investment adviser, a collective investment scheme, or a market operator?
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The 'technology platform' label does not decide the issue. Kenyan securities regulation looks at substance: what is offered, who controls it, and whether the public is investing money in a common enterprise.
- Securities: fractional interests in ETFs are likely securities or beneficial interests in securities. Offering them to Kenyan retail users is a capital-markets activity.
- Dealing and advice: pooling orders and executing for users may require a dealer's licence. If the app recommends or manages allocations, an investment adviser licence may also be needed.
- Collective investment scheme: pooling subscriptions and holding assets through an omnibus nominee can create a CIS if users' contributions are pooled and managed as a collective portfolio. A CIS needs CMA approval, an approved manager, a trustee/custodian and a disclosure document.
- Market operator: the in-app secondary marketplace matches users internally. Operating a trading venue or matching engine is itself a regulated market activity and requires CMA approval, with clearing and settlement arrangements.
- Cross-border offering: marketing to Kenyan retail investors triggers Kenyan perimeter rules even if the underlying ETFs are listed abroad.
The cumulative effect is that Shilingi is probably conducting several licensable activities without a clear licence. The CMA would likely issue a stop notice while requiring an application, remediation and client-asset reconciliation.
2. Evaluate the custody and client-money arrangements, including the omnibus nominee account and the five-day hold in the operating account.
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The custody model creates three risks: commingling, beneficial-ownership opacity and offshore dependency.
An omnibus nominee account can be legitimate, but only with robust sub-ledgers showing each Kenyan customer's beneficial interest, daily reconciliation, independent custody arrangements and clear insolvency remoteness. Customers need to know that their interests are held through a US broker and what happens if that broker fails or if the assets are frozen.
Holding subscriptions in the operating account for up to five days is not acceptable client-money handling. Client money should be segregated promptly in a designated client or trust account, reconciled daily, and not used for working capital. If the company becomes insolvent during the five-day period, customers rank as unsecured creditors. The five-day hold also creates a temptation to use new subscriptions to cover old redemptions.
The CMA will expect:
- a client-money policy and trust documentation;
- daily reconciliation and independent review;
- records of each client's fractional entitlement;
- a custody agreement with the offshore broker;
- disclosure of custody risk and any limits on compensation;
- a wind-down plan for returning assets.
Until these exist, the platform should stop accepting new subscriptions.
3. How should the CMA treat the marketing claims and the sharing of trading data with a lender?
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The claims 'CMA-approved' and 'capital guaranteed' are serious conduct issues. If the firm or product is not approved, the statement is misleading. If only one part of the business has a licence, the marketing must not imply that the whole platform is approved. A capital guarantee is a regulated promise; unless a licensed guarantor stands behind it with enforceable capital, the claim is false and may undermine trust in the market.
The CMA should require immediate correction, withdrawal of the materials, and a review of all customer communications. It may also consider enforcement action and redress for customers who invested on the strength of the claims.
On data, sharing trading data with a partner lender is a separate purpose from executing trades. Under the Data Protection Act 2019, the firm needs a lawful basis, specific transparency and, where consent is relied on, consent that is freely given and granular. The lender should not receive more data than necessary, and customers should be able to understand and challenge the sharing. The ODPC may need to be engaged if there is no valid basis.
The combined picture is a firm that has scaled a regulated business without the licensing, custody and disclosure infrastructure the market requires.