Regulated Vs Unregulated Products: Which Way Should You Go?

By Cytonn Investments / Published June 28, 2021 | 9:28 am




KEY POINTS

Regulated markets often referred to as public markets are controlled by a regulatory body whose key mandate is to protect the public interest.


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Following ongoing discussions around regulated and unregulated offers, a member of parliament recently requested the Chairperson of the Department Committee on Finance and Planning to issue a statement on unregulated/private offers.

Therefore, we seek to educate the general public about these two types of markets/investment categories, which are complementary and important to well-functioning financial markets.

Regulated markets often referred to as public markets are controlled by a regulatory body whose key mandate is to protect the public interest.

The products in the public markets tend to be standardized and easily accessible to the public. Common examples of regulated products include shares purchased at the securities exchange, Fixed Deposits offered by Banks, Collective Investment Schemes such as Money Market Funds.

Unregulated markets are governed by the prevailing contracts between the participating parties and therefore they are not regulated by a specific regulator; however, the process of offering is usually regulated so that it follows a set of defined rules and guidelines.

The manner of offering is usually private; hence they are also loosely referred to as private products or private offers. Since they are an alternative to public markets products, they are also referred to as alternative market products.

For one to issue a private offer in Kenya, they must adhere to Section 21 of the Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulation, 2002 which gives a set of 9 conditions that should be met prior to a private offer issuance.

We have clarified with CMA that meeting any one of those conditions is sufficient to meet the private offers threshold. Examples of unregulated products in the Kenyan Market include Real Estate, Private Equity, Structured products, and Commercial papers.

Read More: Kenyan Company To Link Investors To The U.S Stock Exchange

Therefore we seek to specifically clarify that:

(i) There has always been a myth that regulated products are safer and investors will not lose money in regulated products, even though we have seen investors lose more than Kshs 181.1 bn through regulated entities having isolated cases of lapses in corporate governance.

(ii) Unregulated products are not necessarily riskier, especially when they are sourced through a competent research and investment team, and one that has experience in managing illiquid and alternative assets.

(iii) Unregulated products are often viewed as unlawful and with a lot of suspicions, mainly because they do not require regulatory approval.

We believe that in order to catalyze the growth of our capital markets, there needs to be a synergy between the regulated and the unregulated markets as this will lead to a more inclusive capital market.

Read More: Cytonn CEO Tells CMA To Stop Destabilizing Markets

Consequently, we believe this will lead to the growth of the economy as businesses will have access to cheaper forms of funding in the capital markets.

The recent parliamentary inquiry on private offers together with the recent petition should help shape the future of private offers in Kenya.

It is important to have continuous education for current and potential investors to understand the products and the return prospects, as well as, how they fit into the investors’ portfolio.

It is also important for investors to understand that not every financial instrument needs to be regulated as this will kill innovation.

For investors, they need to first understand their investment objective, risk appetite, then understand the investment products available to them before they make an investment decision towards or away from unregulated products.

For more information, please see our Regulated Vs Unregulated Products topical.







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