NIGERIA’S CROWDFUNDING REGULATIONS; IMPACT ON FUNDRAISING

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By Aderonke Alex-Adedipe and Praise Adetunmibi

 

Introduction

The size of the global crowdfunding market is steadily on a rapid increase as a large number of start-up businesses engage crowdfunding platforms for the purpose of raising capital. The value of the global crowdfunding market was reported[i] to be at 13.9 billion U.S dollars in 2019 and expected to triple by 2026. Start-ups in Nigeria also use crowdfunding platforms such as Kickstarter, GofundMe, Patreon amongst others, to raise capital. Crowdfunding in Nigeria however, remained unregulated until January 2021 when the Securities and Exchange Commission (SEC) issued the SEC Rules on Crowdfunding (the “Rules”).

In our previous article[2], we had provided an overview of the proposed Rules, prior to the final issuance by SEC. In today’s article, we examine some of the provisions of the Rules and their impact on businesses in Nigeria.

Meaning of crowdfunding

Crowdfunding involves the use of an online web-based platform to raise funds from a large number of individuals or organizations in order to fund a project or business. It is important to note that the SEC Rules are only applicable to investment-based crowdfunding. i.e. where funds are raised in exchange for ordinary shares, plain vanilla bonds or debenture and simple investment contracts or other instruments approved by SEC. Such investment instruments can only be issued through a crowdfunding portal operated by an entity registered with SEC as a crowdfunding intermediary.

Eligibility of a fundraiser

An entity seeking to raise funds through a crowdfunding portal must be a Micro, Small and Medium Enterprises (MSME) incorporated in Nigeria and must;
(i) have been in operation for at least 2 years or;
(ii) where the entity has been in operation for less than 2 years, it must have a strong technical partner that possesses a minimum of a 2 -year operating track record or have a core investor.

How to raise funds

Funds can only be raised by an eligible fundraiser through a registered crowdfunding portal i.e. one that has been registered by SEC.

In addition, it is important to note that a crowdfunding investment offer can only remain on the portal for a period of 60 days and can be extended for a further period of 30 days after which the offering is to be withdrawn.

Where an offer has been withdrawn, a new offering cannot be made by the same fundraiser until (i) after the expiration of 30 days after the withdrawal date and (ii) after the fundraiser has updated all financial information to the satisfaction of the crowdfunding intermediary.

 

[i] https://www.statista.com/statistics/1078273/global-crowdfunding-market-size/

[2] https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

The Central Bank Of Nigeria’s Regulatory Sandbox Operations Framework

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by Seun Timi-Koleolu and Olawale Atanda

 

In July 2020, the Central Bank of Nigeria (CBN)[1] released a draft Framework for Regulatory Sandbox Operations[2] aimed at establishing a controlled environment where disruptive technology in the financial services can be tested under the supervision of the CBN.

The CBN has now issued an approved Framework for Regulatory Sandbox Operations in Nigeria (the “Framework”). The CBN has now issued an approved Framework for Regulatory Sandbox Operations in Nigeria (the “Framework”). The Framework is expected to give eligible fintech innovators an opportunity to test their products, services, or solutions without the need to acquire a CBN license.

What is the scope of the Framework?

The Framework is targeted at innovations that can improve the Nigerian payments system. It applies to proposed products, services or solutions that are either not contemplated under the prevailing laws and regulations, or do not precisely align with existing regulations.

Eligibility of Sandbox Participants

The Framework allows for CBN licensees and local companies (including financial sector companies and telecom companies) to participate in the sandbox operations. Innovators whose proposed payment solution involves technologies that are currently not covered under existing CBN regulations are also welcome to participate.

Entities that apply to participate in the sandbox operations must show evidence that the product, service or solution is innovative, useful and functional; and associated risks have been identified. The entities should also have a business plan to show that the product, service or solution can be successfully deployed after they exit the sandbox.

Application Requirements and Approval Process

When the CBN is ready to receive applications, it will place an invitation on its website and local newspapers. Once the invitation is placed, applications are to be sent to the CBN’s official email address – sandbox@cbn.gov.ng.

Applications should be submitted with a cover letter signed by an authorized signatory of the applying entity and addressed to the Director, Payments System Management Department, Central Bank of Nigeria, Abuja. The applicants are to state the initial timeline (in months) for the proposed test of the product, service, or solution.

Applicants will be informed of the CBN’s approval to participate in the sandbox, 45 working days after the closure of the application window.

Sandbox Cohorts

The Sandbox will consist of Cohorts (which are groups of innovators that share the characteristic of having been allowed to enter the sandbox at the same time for the same period).

There will be one Cohort per year. Upon the completion of the sandbox test, the CBN will decide whether the product, service or solution should be introduced into the market.

Conclusion

The Framework is a plus for innovation in Nigeria. It signals that regulators are willing to better understand and develop more suitable regulations for innovations in the fintech space. The success of the sandbox can only be determined over time as implementation will be a key factor.

 

[1] Pavestones has written several articles on CBN regulations and licenses. You can view them at https://pavestoneslegal.com/tag/cbn/

[2] You can read our analysis of the draft framework here https://pavestoneslegal.com/fintech-regulatory-update-the-central-bank-of-nigeria-regulatory-sandbox/

Key Developments In The New Finance Act 2020

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By Aderonke Alex-Adedipe and Eustace Aroh

 

On December 31, 2020, the President of Nigeria signed the Finance Act 2020 (the “Act”) into law. The Act amended fourteen federal tax and finance legislations and came into effect on  January 1, 2021. The provisions of the Act are in line with the Government’s agenda to improve the ease of doing business in Nigeria, promote investments and develop key sectors of the economy.

The table below highlights some of the salient provisions of the Act.

 

Applicable Section Legislation Affected Implications
Section 25 Personal Income Tax Act Profits from trades or businesses of non-resident “individuals” providing technical, management and consultancy services to Nigerians shall be deemed to be derived from Nigeria and subject to personal income tax provided they have significant economic presence as declared by the Minister of Finance.
Section 30 Personal Income Tax Act Individuals who earn the national minimum wage or lower, are exempt from paying personal income tax on the wages earned.
Section 23 Industrial Development (Income Tax Relief) Act Small or medium-sized companies with annual gross turnover of between 25 Million to 100 Million Naira, engaged in primary agricultural production such as raw or semi-processed goods, live animals and their direct produce, all kinds of fish and forestry products, may apply for tax exemption for a period of 4 years and an additional 2 years.
Section 60 Companies and Allied Matters Act 2020 (CAMA) The law requires that dividends that are unclaimed by shareholders of private companies, after a period of 12 years should be shared among the shareholders as profit. In the case of public companies quoted on the Nigerian Stock Exchange, unclaimed dividends shall be transferred to the Unclaimed Funds Trust Fund after a period of 6 years and shall be a debt owed by the federal government which can be claimed by the shareholder subsequently.
Section 48 Stamp Duties Act The introduction of the Electronic Money Transfer Levy of N50 (Fifty Naira), imposed on electronic transactions exceeding the sum of N10,000 in any financial institution.
Section 34 Tertiary Education Trust Fund Act Small companies (as defined in CAMA) are exempted from payment of the tertiary education tax.
Section 43 Value Added Tax Act (VATA) Non-residents individuals are obligated to register under the VATA where they make a taxable supply of goods or service in Nigeria and obtain a Tax Identification Number.
Section 45 Commercial aircrafts, engines and spare parts; air transportation with registered airlines; and lease of agricultural equipment are goods and services which are now exempt from VAT.
Section 13 Companies Income Tax (“CIT”) Act The minimum CIT for companies which have recorded a loss or no profit between the period of 1st January 2020 and 31st December 2021 has been reduced to 0.25% of the annual gross turnover of the company as opposed to the otherwise applicable 0.5%.

This relief was created to support businesses affected by the COVID 19 pandemic.
Section 16 All non-resident companies deriving profit from Nigeria are now required to submit audited financial statements identifying their Nigeran operations to the tax authorities.
Section 38 Customs and Excise Tariff (Consolidation) Act Import duties for the following goods have been reduced as follows:

(i) Tractors, from 35% to 5%

(ii) Cars and motor vehicles for transport of persons, from  30% to 5%

(iii) Vehicles for transportation of above 10 people or goods, 35% to 10%.

Procedure For Registration Of A Limited Liability Partnership In Nigeria

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By Seun Timi-Koleolu and Praise Adetunmibi 

 

Introduction
In our article on the Companies and Allied Matters Act (CAMA) 2020 (the “Act”), we had highlighted some of the key developments introduced by the Act. A significant development was the introduction of a Limited Liability Partnership (LLP) as an entity that can be set up in all states in Nigeria. At the time the Act was signed into law, the procedure to be adopted by the Corporate Affairs Commission (CAC) for the implementation of the changes introduced by the Act (including the LLP) was yet to be provided.

The Nigerian Ministry of Industry, Trade and Investment has now published the Companies Regulation 2021 (the “Regulation”) which provides details and clarity on the implementation of the changes introduced by the Act.

In view of the substantial requests we have received, with respect to how an LLP can be incorporated in Nigeria, we are pleased to set out below, the process for the incorporation of an LLP as detailed in the Regulation.

 

The LLP Structure
An LLP is a body corporate with perpetual succession and a separate legal personality from its partners. It is a structure that combines the benefits enjoyed by the business name structure and the limited liability status enjoyed by companies limited by liability.

By Sections 747 and 748 of the Act, every LLP is to have at least 2 partners who may be an individual or body corporate, provided such person has not been found by a court in Nigeria or elsewhere to be of unsound mind and is not an undischarged bankrupt.

 

Procedure for registration of an LLP

  1. A name availability check should be conducted at the CAC and when the proposed name is available, the name is to be reserved.
  2. A Form CAC/LLP 01 is to be completed with the following information:
  1. the approved name of the LLP;
  2. the proposed business of the LLP;
  3. the proposed registered address of the LLP;
  4. the full name and particulars of each partner and their contribution;
  5. the full name and particulars of each person who is to be a designated partner (a designated partner is a partner that will be responsible for compliance with the provisions of the Act and will be liable for all penalties imposed as a result of a contravention of the law). There must be at least 2 (two) designated partners who are individuals and at least one of them must be resident in Nigeria;
  6. details of any partner in the LLP that will have significant control (i.e. an individual, company or other entity that directly or indirectly holds at least 5% of the interest or voting rights or holds the right to appoint or remove a majority of the partners or has the right to exercise significant control or influence over the LLP); and
  7. any other information as may be prescribed by the CAC from time to time.

 

3. The required fee for registration is to be paid to the CAC.

4. Where the above requirements have been complied with, the CAC shall within 14 days of the submission of the application register the LLP and issue a certificate of incorporation stating the name, date, and registration number of the LLP.

Conclusion
In addition to the foregoing, it is useful to note that a foreign LLP may apply to the Minister of Industry, Trade and Investment for exemption from incorporation in Nigeria where the LLP is: (i) invited by the Federal Government to execute a specified individual project; (ii) in Nigeria to execute a specific individual loan project on behalf of a donor country or international organisation; (iii) owned by a foreign government and engages solely in export promotion activities; or (iv) an engineering and technical expert engaged by any government of the federation or its agencies to carry out any individual specialist project.