DIVERSIFICATION OF THE ECONOMY – 5 LEGAL STEPS TO SCALE YOUR BUSINESS

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The over reliance of the Nigerian economy on the oil sector for sustenance has proven to be a flawed model for economic development. With a population of over 200 million people and the recent decline in oil prices due to global price wars as well as the pandemic, it has become more urgent for the government to promote investment in other sectors of the economy, including the agriculture, manufacturing, solid minerals and technology sectors.

To improve the economy, it is now more likely that government would promote opportunities for businesses in these sectors to grow, either through more accessible loans and incentives or foreign/local investments.

It is therefore wise that businesses in these sectors are properly positioned for growth opportunities. if this applies to you, here are 5 legal steps to consider to be positioned to scale your business.

  1. Suitable Company Structure –If you currently operate with a business name, we advise that you convert to a limited liability company structure. This would position you for equity investments and loans, as investor prefer to work with structured companies.

 

  1. Suitable Contracts in Place– Ensure you have entered into contracts that govern your relationship with your stakeholders including Shareholder Agreements, Founders’ Agreement, Employee Contracts and Supply Contracts. Also, document the terms of all investments in your business including your own investment. Your investment could be structured as a convertible loan or an outright loan to your business which you can claim back once the business is profitable; or use to purchase equity in your business. It is important to have these terms agreed upon before third party investors or shareholders join as at such a stage it would be difficult to justify.

 

  1. Protect your Intellectual Property Rights (IPR)–There is value in your intellectual property (including your brand name, inventive steps and designs). Prior to growing your business ensure you protect your IPR as this is an asset which can improve your valuation. It also enables you protect your intellectual investment in your business and prevent imitators from using it. Note that if you intend to go global, you should register your IPR in other countries you wish to operate in.

 

  1. Be Due Diligence Ready – An investor interested in your business would carry out due diligence on your business to ascertain the risk in investing and determine the value of your business. Matters such as your compliance with State and Federal tax laws, Regulatory requirements, updating your records at the Corporate Affairs Commission would be checked. Ensure your business is compliant or take steps now to put your books in order to avoid issues at the Due Diligence stage.

 

  1. Have a Good Corporate Governance Culture –It is advisable that you adopt good corporate governance practices in your operations. This is because it gives a level of comfort to investors that the business is operated with integrity. You can adopt the principles in the Nigerian Code of Corporate Governance 2019. The Code sets out rules for good governance practices in your business including ensuring your board of directors is properly structured for accountability and transparency.

 

 

Regardless of whether the Nigerian government effectively takes the necessary steps to diversify the economy, the world is now a global village and investors are seeking good investment opportunities. By adopting the steps above, your business is better positioned for such opportunities.

 

 

Foreign Exchange Volatility in Nigeria; Effect on Contractual Obligations and Possible Solutions for Businesses

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Foreign Exchange and the Nigerian Economy

The endless requirement for international trade and investment across the world has continued to foster the exchange of foreign currency between trading partners. For import-dependent economies like Nigeria, there are continuous obligations to pay foreign counter-parties for imported goods using a globally acceptable foreign currency like the US Dollar. Thus, constant demand for foreign exchange by Nigerian importers.

Given the occurrence of other factors, such as the unprecedented effect of  COVID-19 on global economies, which has caused a decrease in demand for oil by major importers like China and  India; the price war initiated by Saudi Arabia against Russia which crashed oil prices by 64%, all occurring within a few weeks apart, the combined effect of these has been dwindling foreign exchange reserves and consequently, scarcity of foreign currency in the Nigerian market and a forced devaluation of the Naira, despite all attempts by the Central Bank to prevent devaluation. Thus, by the end of March, 2020, a currency which traded at N306 to 1 US Dollar at the official market, unexpectedly devalued to N360 to 1 US Dollar at the official market and N400-410 at the parallel market.

For many Nigerians, this situation is a vivid reminder of how the Naira lost over 70% of its value in 2015, thereby causing prices to generally skyrocket due to increased cost of purchasing foreign exchange and continuous international trade. Apart from its overall impact which gives rise to inflation, this unpredictable situation also impacts contractual obligations as discussed below.

Impact of Foreign Exchange Volatility on Contractual Obligations

For the most part, purchasers of imported commodities are obviously in a weaker position when they have made prior commitments at a fixed price. Take for instance, the real estate industry and the current era of turnkey construction projects. In transactions of such nature, the buyer and seller have agreed a fixed price, with the  seller calculating value of construction materials that may need to be imported on previous foreign exchange rate. 3 weeks after closing a deal and the developer is ready to start importing, the value of the Naira has suddenly dropped and purchasing power becomes lower. Therefore, the developer suddenly has a higher financial obligation which was unprecedented at the time of selling the undeveloped property. Unfortunately, this same scenario occurs across many industries, including the oil and gas sector. The question of whether these unforeseen events can be mitigated becomes relevant.

Some contractual strategies are discussed below:

 

Fixed Price Hedging is particularly common in the oil and gas industry, due to the volatile nature of oil prices. Here, parties agree to fix the buying and selling price of oil over a specified period of time, notwithstanding the increase or decrease in market value of the commodities being sold. It is also commonly used in the agricultural sector to fix prices of commodities which are subject to fluctuation.

Foreign currency swap contracts are also often executed by parties who have foreign exchange obligations to third parties. From a vanilla transaction standpoint, currency swaps can be used by parties in foreign countries who exchange their financial obligations at a contractually agreed rate, without having to obtain foreign exchange from an expensive market. For example, Mr A, a Nigerian national, owes the Bank of England $100,000 while Mr B, an English National, owes a Nigerian trader, N20Million. Mr A and Mr B can agree to swap each other’s obligation at an exchange rate which is favourable to both parties and which is less expensive than purchasing from the local foreign exchange market.

In conclusion, whilst foreign exchange volatility can be unpredictable and uncontrollable, businesses may also deploy contractual methods of hedging against future economic risks.

 

 

 

The Nation Newspaper features Pavestones’ Panel Session for Social Media Week 2020

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On the 26th of February, 2020, Pavestones hosted a panel session during the Social Media Week 2020 where seasoned speakers discussed Data driven marketing within Legal and Regulatory regimes. The panel session was moderated by Seun Timi-Koleolu and featured a line up of speakers including; Aderonke Alex-Adedipe, Riaan Abdoll, Abiodun Osoba and Falilat Jimoh.

Doing Business Simplified: Building Trust in the Real Estate Sector in Lagos – Regulation of Agents

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In today’s times, companies are having to re-strategize and think of ways to reach consumers remotely by leveraging on technology and innovation. One sector in Nigeria where remote services has been a struggle is the real estate sector. This is largely due to practical challenges such as the need for buyers/tenants to view properties physically, on the one hand; and a lack of trust due to unscrupulous practices by agents, on the other hand.

Startups like PropTech Zone and Zillow have shown that the need to visit properties can be tackled with technology that allow for virtual viewing of properties.

With respect to the issue of trusting agents, the government has tried to bridge the trust gap in Lagos State, by creating the Lagos State Real Estate Transaction Department (the “Department”). The role of the Department in protecting buyers against fraudulent activities is, however, not widely known and therefore yet to be effectively adopted.

In view of the foregoing, we have set out below useful information about the Department to guide dealings with agents in property transactions in Lagos State and build trust.

  1. What law regulates property agents in Lagos State? – The Lagos State Real Estate Transactions Law, established the Lagos State Real Estate Transaction Department, which is tasked with securing the protection of property buyers/seekers from fraudulent real estate agents in Lagos state.

 

  1. How are agents regulated? The Department conducts due diligence on agents and maintains a register of suitable agents. Intending buyers of properties and prospective tenants are advised to only transact with agents who are registered with the Department.

 

  1. How can buyers or tenants confirm that an agent is registered with the Department? The list of registered agents can be accessed via the Department’s website. Buyers or tenants are advised to carry out a search on the Department’s website to confirm that an agent who offers a property for sale or rent is duly registered.

 

  1. What happens if a registered agent acts fraudulently? Where a registered agent transacts fraudulently, the affected party can report the matter to the Department who is empowered to investigate the matter and step in to recover lost funds.

 

  1. How does this affect a PropTech company? PropTech businesses that offer properties for sale or lease on a platform (similar to an agent), are advised to register with the Department. This should give buyers and tenants comfort that the platform can be trusted.

 

  1. What fee are Agents and Lawyers entitled to under the law? The Law clearly states the fee range payable to Agents and Lawyers on property transactions. Agency fees under the law are fixed at 10% of the total rent collected for a property. Where the transaction is a sale or lease, the fixed agency fee is 15% of the total proceeds of the transaction. Legal fees are not fixed, however, the fees should not exceed 12.5% of the value of the transaction. The Law goes a step further by prohibiting estate agents from preparing legal documents and vests such preparation exclusively in the hands of legal practitioners.
  1. Is there penalty for not registering as an agent with the Department? An agent who fails to apply to the Department for registration would be liable to conviction and monetary fines.

Conclusion

The establishment of the Department is a step in the right direction to resolve the issue of trust in the Real Estate sector. Proptech companies and agents should take advantage of this law to give potential buyers comfort and attract investors.

 

REVIEW OF THE CROWDFUNDING RULES PROPOSED BY SEC, NIGERIA

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The Fintech industry in Nigeria has witnessed considerable growth over the last couple of years as Start-ups continue to discover innovative ways of raising funds as conventional methods like venture capital and loans from commercial banks are perceived as unattractive due to prohibitive conditions like loss of control and high interest rates.

One of such innovations is seeking investment through crowdfunding where investors fund a venture through an online platform and enjoy a certain percentage of interest over a specified period. The Crowdfunding sector in Nigeria which has been unregulated since its commencement, has witnessed exponential growth. According to a report, in 2015 alone, the sum of $7-8 million dollars was raised through crowdfunding in Nigeria.

Uncertainty about whether the rules of the Securities and Exchange Commission (“SEC”), which apply to companies seeking investment from the general public has however deterred many from participating in this venture.

Potentially putting an end to this conundrum, the SEC has released the proposed Crowdfunding Rules (the “Rules”) to regulate crowdfunding activities in Nigeria.

While the Rules are currently in draft form, below is a summary of what the Rules are about.

Who can raise funds?

To raise funds, issuers must register and operate in Nigeria for a period of two years.

What is the fundraising Limit?

The aggregate amount of securities or investment instruments that can be offered within a period of 12 months are:

  • N 100 million for medium enterprises
  • N 70 million for small enterprises
  • N 50 million for micro enterprises

These limits do not apply to Digital Commodities Investment Platforms (“DCIPs”) like Farmcrowdy or Thrive Agric which the Rules describe as platforms that connect investors to specific agricultural or commodities project in exchange for returns.

What is maximum investment limit?

Retail investors who are neither High Net worth nor Sophisticated Investors shall not invest more than 10% of their annual income.

How can funds be raised?

Funds may only be raised through Crowdfunding Portals, which can only be operated by platforms registered by the SEC and having a minimum paid-up share capital of N100 Million.

CONCLUSION

The draft in its current form raises a number of concerns which include:

  1. the minimum share capital of N100million which is considered too high for start-ups,
  2. the limitation of sums which  can be raised  over a period of 12 months may not be realistic and finally,
  3. the unclear distinction between Crowdfunding Platforms and DCIPs who may be allowed to obtain a No-Objection from SEC to continue to operate their existing Crowdfunding Platforms,  provided they do not have any interest in projects listed on their own platforms.

Whilst the Rules will protect investors’ interests, the Rules must not be seen as unsupportive of MSMEs who may either be forced to invent ways of circumventing the Rules  or  be dissuaded from investing in the market altogether.