Ponzi schemes and other related retail investment products catch on like wildfire in Nigeria whenever they are introduced but suddenly halt operations, with billions of Naira belonging to investors trapped in such schemes, leaving many investors bereft of their savings. Till today, promoters of Ponzi schemes continue to defraud millions of investors, promising unrealistic returns to many ambitious investors in Nigeria and beyond, resulting in increased suicide rates and other adverse mental and psychological consequences.
Undoubtedly, investing is a smart way to beat inflation, build wealth and meet other financial goals. However, due to ignorance, negligence and greed, many investors expose themselves to financial fraud by investing in Ponzi schemes with the promise of mind-boggling returns on their investments. In recent months, several investment schemes have crashed with their promoters disappearing into thin air after inducing influencers to promote their products. Some of these scams are so apparent on face value but the lack of basic knowledge, due diligence, economic hardships and greed induce desperate retail investors to ignore the warning signs even from the regulators.
2. Definition of Investment
Investment means the dedication of money or capital in order to gain profitable returns, as interest, income, or appreciation in value.1 An individual may invest in bonds, stocks, foreign currencies, real estate property, business, or any other medium or mechanism capable of generating future income.
Investment may be carried out through the following means:
- Ownership: relates to the acquisition of stocks and other traded securities, real properties, business ownership, collecting gemstones and valuable items to resell them for profit.
- Fixed income securities: refers to investment in debt securities like bonds, treasury bills and other Naira or foreign currency denominated investments, including mutual funds.
- Cash: funds in bank accounts, high-interest savings accounts, and term deposits etc.
3. Laws regulating Online Investment in Nigeria
Some of the laws governing online investment in Nigeria are:
- Companies and Allied Matters Act (CAMA) 20202
- Investment and Securities Act 20073
- Nigerian Investment Promotion Commission Act 4
- Foreign Exchange (Monitoring & Miscellaneous Provisions) Act 5
- Personal Income Tax Act 6
- Securities and Exchange Commission (SEC) Rules 2013
- SEC-NG Crowdfunding Rules for Exposure 2020
4. What are Online Investment Platforms?
Online investment platforms are online or app-based services that allow consumers to invest their monies in a range of funds, shares, bonds, and other investments and earn some form of interest. Many of the platforms let investors choose a ready-made portfolio that matches their risk appetite. To invest, investors simply download the platform's mobile application on their mobile devices or use the web application option. Many investment platforms also provide news updates, interactive tools, and forums for investor education.
5. Basic Principles of Safe Investments
- Basic Investment Awareness
There are investment options with varying degrees of risk available to investors. Investors interested in participating in the financial markets must have considerable knowledge of the market, the different market instruments and a clear understanding of the associated risks. For stocks, the investors must learn how to carry out stock analysis; for foreign exchange (forex) investment, the investor must learn the basics and strategies of forex trading; for real estate investment, the investor must learn and understand the principles of pricing, valuation and appreciation.
- Understanding your Risk Profile
Every investor must determine his/her risk tolerance, i.e., quantifying your disposable cash vis-a-viz the risk of loss. An investor must also determine her risk appetite which is the amount of risk that she is willing to take in order to achieve their financial goal. To determine the risk of an investment, investors must consider some factors such as term of investment, usual income and savings, future income, adequate emergency fund, low or high ROI etc.
- Set Realistic Returns on Investment
Everyone wants the highest possible return on investment (ROI) with the lowest possible risk. Unfortunately, this is usually an indication that an investor may fall into the trap of fraudsters and should be considered as a red flag. It is important to set reasonable ROI thresholds and timelines whilst considering the most suitable investment opportunity or platform. This is because with minimal risk comes minimal rewards and vice versa. For beginners, it is better to consider a safe investment rather than one with a high ROI.
- Choose a Reputable Investment Company or Online
Investors deliver their financial resources to companies where there is assurance that they will get a good measure of returns on their investment. For prospective investors, choosing a reputable investment company is the first precautionary measure. A core factor that determines the actualisation of online investment goals is selecting an investment scheme and platform that is regulated and in compliance with extant laws. To protect their interest, potential investors should have a rudimentary understanding of the legislations and regulatory bodies that guide retail investment in Nigeria. This guarantee helps with security of investment and regulation of the operation of the businesses of such a company or platform.
- Investor Due Diligence
There is a high incidence in recent times of people falling victim to fraudulent pyramid schemes recommended by certain celebrities and paid brand influencers. Rather than rely on the assurances given by paid advertisers, potential investors should carry out a preliminary investigation by reviewing necessary licenses and registration documents issued by relevant regulatory bodies, financial records, past company performance, confirmation of the platform's registered office and any information deemed material, to confirm their understanding of the investment opportunity and ascertain the credibility of the scheme or business. Failure to conduct due diligence places an investor at risk of losing his principal and interest. For example, if you are investing in stocks, make sure you only use Nigeria Stock Exchange licensed brokers to trade, and if you wish to invest in foreign currency denominated products, ensure your investment company is registered under all appropriate regulatory bodies (particularly the SEC).
- Create a Diversified Portfolio
Investments are highly affected by market volatility and fluctuation. To guard against this risk, investors are advised to have a diversified portfolio. Investors can diversify their portfolio either by spreading their investments across multiple types of assets or by spreading their investment across many investments within a certain type of asset in order to limit risk or loss. The primary goal of diversification is to spread out risk such that the performance of one investment does not affect the entire portfolio.
- Seek Expert Opinion and Guidance
Investors should endeavour to seek opinions and advice from professionals that are conversant with the relevant market before venturing into any investment. Expert opinions can help the investor better understand their risk tolerance, develop a strategy for personal financial goals and protect investors' savings against the scourge of inflation. Investors are also encouraged to seek legal advice to determine the extent of compliance and legality of the investment.
- Protect Mobile Devices and Online
Accounts from Hacking Attacks and Malware
Online investment is susceptible to cyber threats and attacks like hacking, thus cybersecurity and data protection are important factors to consider in any online investment. It is the duty of the investor to ensure protection against such attacks and investors may protect themselves by building firewalls, installing anti-virus software, etc.
- Conduct Regular Audits on the
Investors should conduct monthly and quarterly routine checks to evaluate their investment and returns. Investors should therefore compare their initial goals with the proceeds, identify the progress or deviations if any. In the event of deviation, investors should re-strategise and devise a new plan and target.
- Setting up an Emergency
An emergency fund, also known as contingency fund, is a fund set aside as a financial safety fund for future unexpected expenses or mishaps. An emergency fund helps investors in weathering loss of income. In essence, having some funds earmarked for unexpected bills can reduce the need and the costs associated with high-interest loan apps or personal loans from friends.
6. Identifying a Ponzi Scheme
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new investors. Ponzi scheme organisers often promise to invest investors' money and generate high returns with little or no risk. With countless warnings from the Securities and Exchange Commission (SEC) against investing in the activities of unlicensed market operators, many of the unyielding investing public seem to continue to fall prey to these schemes.7 The following are the factors peculiar to ponzi schemes:
- High Returns with Little or no Risk: Investors should beware in situations where the investment scheme looks too good to be true as it is often used as scam by fraudsters who try to attract investors by offering unrealistic returns.
- Overly Consistent Returns: Usually, investments tend to fluctuate over time. Investors should be skeptical about investments that generate returns regardless of the current market conditions.
- Unregistered Investments/Platforms: Ponzi schemes typically involve investments that are not registered with the SEC or with the appropriate regulatory bodies. Section 54 of the Investment and Securities Act (ISA)8 provides that all securities of public companies or investments of collective investment schemes shall be registered with SEC and failure to register as stipulated amounts to contravention of the Act. Registration is important because it provides SEC and investors with access to information about the company's management, products, services, and finances. Online investment platforms, firms and professionals in Nigeria are required by SEC to be licensed or registered to trade or conduct business in Nigeria. However, most Ponzi schemes involve unlicensed individuals or unregistered firms.
- Secretive and Complex Strategies: Ponzi schemes are investments that are difficult to understand and opaque on detailed operational information.
- Discrepancies in Documentation: Account statement errors may be a sign that funds are not being invested as promised.
- Difficulty Receiving ROI: Investors should be suspicious where it is difficult to receive their return on investment as promoters of pyramid schemes often prevent investors from cashing out by offering higher returns for staying put.
- Requirement of Referrals: Companies that engage in a Ponzi scheme are particular about attracting new clients to make investments. They thus instigate the current investors to make referrals for a higher ROI.
The impact of making bad investments can be overwhelming and uncontrollable, thus investors are encouraged to properly consider the above factors and constantly educate themselves before taking on any investment and consult professionals to conduct due diligence on the viability of such investment products in the market. Placing reliance on the mere promise of a high return on investment or the persuasion of influencers and celebrities as the bases for making retail investments are counterproductive.
1. https://www.collinsdictionary.com/dictionary/english/investment) accessed 16th June 2022.
2. No. 3 Laws of the Federation of Nigeria, Acts & Statutory Instruments 2020.
3. Cap I24, Laws of the Federation of Nigeria, 2010.
4. Cap N117, Laws of the Federation of Nigeria, 2010.
5. Cap F34, Laws of the Federation of Nigeria, 2010.
6. Cap P8, Laws of the Federation of Nigeria, 2010.
7. This warning was issued by SEC through a Circular on Proliferation of Unregistered Online Investment and Trading Platforms Facilitating Access to Trading in Securities Listed in Foreign Markets dated 8th April 2021. https://sec.gov.ng/proliferation-of-unregistered-online-investment-and-trading-platforms-facilitating-access-to-trading-in-securities-listed-in-foreign-markets/) accessed 9th June 2022.
8. 2007, Cap I24, Laws of the Federation of Nigeria, 2010.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.