The Information Memorandum That Said 'SEC Approved'
PayNest Technologies Ltd, a private fintech company with 18 shareholders, wanted to raise ₦4.5 billion to expand its lending platform. In January 2025 it circulated a 14-page 'Information Memorandum' to 42 high-net-worth individuals and one venture capital fund, inviting subscriptions of at least ₦25 million each. The document projected 40% annual growth, stated that PayNest had 'obtained all regulatory approvals, including SEC approval', and omitted a pending ₦300 million tax assessment and a Central Bank of Nigeria warning letter about its lending practices. The SEC had not approved the document. Twenty-eight investors subscribed ₦2.1 billion. By September, growth was 8%, the tax liability was published, and the CBN directive restricted the platform. Investors want their money back. PayNest argues the offer was a private placement, not a public offer, so no prospectus was required.
1. Was the Information Memorandum a prospectus or an exempt private placement? Explain the tests.
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Substance, not the label, determines whether a document is a prospectus. A prospectus is any notice, circular, or other document that invites the public to subscribe for or purchase a company's securities. If the offer is made to the public, CAMA 2020 and the Investments and Securities Act require a prospectus registered with the SEC. A private placement can avoid a full prospectus only if it fits an exemption: a limited number of sophisticated investors, no general solicitation, and compliance with SEC private-placement rules.
Here PayNest sent the document to 42 individuals and one fund, with a minimum subscription of ₦25 million. That is not automatically a public offer, but it is still a securities offering. The document invited subscriptions and made investment claims. The fact that it was called an 'Information Memorandum' does not save it. The board should have checked whether the exemption applied, filed the required notices, and ensured the document was accurate. The false 'SEC approved' statement is independently serious and undermines any exemption argument.
2. What civil and criminal consequences may follow from the false 'SEC approved' statement and the omitted liabilities?
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Investors who subscribed on the strength of the document may sue for misrepresentation. They can seek rescission of their subscription agreements and recovery of their money, or damages at common law for negligent misstatement. Under CAMA 2020, directors, promoters, and possibly advisers who authorised the issue of a prospectus containing untrue statements may be liable to compensate subscribers, subject to defences such as reasonable belief or withdrawal of consent.
The omission of the ₦300 million tax assessment and the CBN warning letter is a material omission because a reasonable investor would regard it as important. The false claim of SEC approval is also a misstatement. Criminal liability may follow for knowingly issuing a false prospectus, and the SEC can impose administrative sanctions, suspend the offering, or refer the matter for prosecution. PayNest cannot rely on the private-placement label to escape liability for fraudulent or negligent statements. The investors should preserve the document, subscription records, and correspondence.
3. What should the board and advisers have done before circulating the document?
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Before circulation, the board should have conducted documented due diligence on the company's tax, regulatory, and financial position. It should have verified every statement about approvals with the SEC and CBN, and removed the 'SEC approved' claim unless a written approval existed. Material liabilities, including the tax assessment and CBN warning, should have been disclosed in a balanced risk section.
The company should have obtained legal and compliance advice on whether the offer was an exempt private placement or required a registered prospectus, and filed any required notices. The information memorandum should have been approved by the board and, where applicable, the audit committee. Advisers should have kept a verification record. This is also an ethics issue: professional advisers must not sign off on unverified regulatory claims.