REGULATORY UPDATE: OPERATION OF BANK NEUTRAL CASH HUBS IN NIGERIA

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By Aderonke Alex-Adedipe

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Introduction

The Central Bank of Nigeria (“CBN”) on 15th March, 2022, released an exposure draft on the Guidelines for Bank Neutral Cash Hubs Operations in Nigeria (the “Draft Guidelines”). The Draft Guidelines offer high volume cash transacting individuals and companies the prospect of withdrawing and depositing cash from and to various bank accounts within a one-stop physical facility, irrespective of their bankers.

Today’s article briefly highlights some key provisions of the Draft Guidelines and the implications for the business community.

What is the role of Bank Neutral Cash Hubs?

Bank Neutral Cash Hubs (“BNCH”) are essentially cash collection centres which enable eligible individuals and companies to make cash deposits and withdraw funds regardless of the bank in which their account is domiciled. According to the Draft Guidelines, BNCHs will be established in areas with a high volume of commercial activities and cash transactions, as the minimum transaction value for deposits and withdrawals at a BNCH is N500,000 (five hundred thousand naira ) for individuals and N1,000,000 (one million naira) for corporate entities.

Who is eligible to set up BNCHs?

The Draft Guidelines only permit licensed Deposit Money Banks (DMBs) and Currency Processing Companies (CPC) (“Eligible Promoters’) to establish BNCHs upon application and approval of the CBN.

What are the permissible and non-permissible activities of a BNCH?

BNCHs are permitted to receive and disburse cash from and to eligible customers on behalf of financial institutions and carry out other activities that may be permitted by the CBN.

Conversely, BNCHs are specifically prohibited from  carrying out lending activities; engaging in foreign currency transactions; or any other transactions not prescribed by the Draft Guidelines or activities prohibited by the CBN.

What are the approval requirements for operating a BNCH in Nigeria?

Eligible Promoters  intending to operate a BNCH in Nigeria are required to submit an application to the CBN in addition to the following supporting documents:

  1.  a valid DMB license or proof of CPC registration issued by the CBN;
  2. a board resolution approving the application;
  3. a detailed plan or feasibility report for BNCH operations;
  4. incorporation documents of the Eligible Promoter; and
  5. other required documents.

Upon submission of complete and satisfactory documents, the CBN will issue a no objection to the Eligible Promoter.

Prior to the grant of the CBN’s final approval, the Eligible Promoter will be required to provide evidence of the following:

  1. ability to meet technical requirements for operating a BNCH;
  2. insurance to cover the BNCH’s cash vault;
  3. collaboration with the Nigeria Police Force;
  4. connectivity with the Nigerian Interbank Settlement System (NIBSS) to ensure customers receive same-day value for their deposits;
  5. insurance of total deposits; and
  6. other requirements.

The CBN will also be required to conduct a pre-approval inspection of the office premises of the Eligible Promoter before its grants a final approval to it to operate a BNCH.

Conclusion

Whilst the introduction and standardization of cash hubs such as the BNCH may be a step backward for the country with respect to the CBN’s current promotion of a cash-less policy, the BNCH is a welcome development for the business community as it will allow for smooth withdrawal and disbursement of high-volume cash in Nigeria.

It is no news that a number of DMBs have established existing hubs in high volume cash transactions spots in the country. Nevertheless, the advantage of the BNCH in comparison to theses hubs is that clients are not required to open bank accounts with the DMB promoting the BNCH services.

STARTUP FUNDRAISING – UNDERSTANDING THE ANTI-DILUTION PROVISION IN INVESTMENT AGREEMENTS

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By Seun Timi-Koleolu and Karo Isiorho

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In our previous article, we identified the various stages commonly adopted by Startups in raising funds. Each funding round would typically involve the issuance of shares by the Startup to investors for an injection of funds into the business. The implication of issuing fresh shares at every investment round is a possible dilution of the value of shares held by the founders and existing investors in the business.

In this article, we have set out below the mechanism that can be adopted to protect against excessive dilution.

How are shares granted to investors under Nigerian law? Under Nigerian law, shares can be granted to investors after a funding round through any of the following routes: (i) where shares have been fully allotted, either by a transfer of a portion of the shares currently held by shareholders to the investors; or by increasing the share capital and issuing fresh shares to the investors; (ii) where the share capital has not been fully allotted, by allotting the available portion to the investors; or by subdividing the share capital, increasing the number of shares in issue and decreasing the nominal value of the shares.

How does dilution occur? When shares are issued to new investors, the percentage of an existing investor or founder’s stake/shareholding in the Startup may decrease and in such an instance, a dilution of shares would be said to have occurred.

A practical example is as follows: Assuming an investor (“Investor A”) owns 100,000 shares in a Startup having 1,000,000 shares outstanding (i.e., shares held by existing shareholders) at $2 price per share, meaning Investor A has a $200,000 stake in the Startup valued at $2,000,000. He would therefore own 10% of the Startup. Where the Startup subsequently engages in a financing round and issues an additional 1,000,000 shares bringing the total outstanding shares to 2,000,000, at the same $2 value per share, Investor A would then hold a $200,000 stake in a $4,000,000 Startup and therefore his shareholding in the Startup would have been diluted to 5%.

Does Dilution reduce the value of shares held? A reduction in the percentage of shares held by an investor or founder in a Startup does not necessarily mean a reduction in the monetary value of the shares held by that investor. As a fresh injection of capital in the business may result in an increase in the valuation of the business and, therefore, an increase in the value of each share held in the business (e.g., 1 share previously worth $1 might be worth $5).

It is, however, possible for the business to be valued for less in new investment rounds so that new investors get more shares for less (“Down Round”), thereby diluting the value of shares held by existing investors.

How does dilution affect voting rights? An issue with dilution of shares is the effect it has on voting rights and controlling interests in the business (particularly for the founders). Under Nigerian company law, certain decisions require a special resolution, such as change of name, an alteration of the memorandum and articles of association, etc. must be by a special resolution passed by not less than 75% votes. Whilst decisions such as the removal of directors and appointment of auditors require at least 51% votes to be passed. Founders would typically want to maintain a sufficient number of shares in the business to enable them make key decisions for the business.

Are there provisions under Nigerian law to prevent involuntary dilution of shares? Under Nigerian company law, there are provisions that require founders to first offer their shares in the Startup to existing shareholders prior to offering such shares to new investors (this is, however subject to the Articles of Association and shareholders’ agreement). This ensures that the existing shareholders are made aware of subsequent funding rounds and can opt to invest in the business to protect their interests.

How can investors or founders contractually protect against dilution? Anti-dilution provisions are clauses included in an investment agreement or a financing document to protect founders and investors from the effect of dilution, particularly if shares are sold at a lower price during subsequent funding rounds. These provisions are capable of mitigating the effect of dilution on an existing investor or shareholder.

What are the types of Anti-dilution provisions?

There are various types of anti-dilution provisions typically included in investment agreements, some of which are discussed below.

A. Full Ratchet Provision

A full ratchet provision allows an existing investor to adjust the value of his shares purchased to the share price being offered to new investors at subsequent Down Rounds. Consequently, the existing investor may become entitled to additional shares and retain his ownership percentage in the Startup at no cost.

Using our example above, in the subsequent round of investment, let’s assume the shares being offered to new investors were offered at a lower price of $1 per share, (“Conversion Price”), where a full ratchet provision was included in Investor A’s investment agreement, his percentage holding in the Startup will not be diluted in the new round and rather than holding 100,000 shares, he would hold 200,000 shares in the Startup.

B. Weighted Average Provision

A weighted average provision allows an existing investor to adjust the value of his shares based on a formula stated in the agreement. A narrow based weighted average formula or a broad based weighted average formula may be adopted.  The broad based formula takes into account all shares previously issued by the Startup whilst the narrow based formula is limited to preferred or common shares issued.

When a weighted average formula is adopted, the existing investor would not be entitled to retain 100% of his ownership percentage in the Startup like the Full Ratchet provision above, rather the investor would be entitled to adjust his percentage holding in the Startup upwards to a percentage considered fair for both existing and new investors.

This anti-dilution provision is more common in practice because it is the compromise provision for all parties involved.

CONCLUSION:

Founders and investors should, however, be mindful of anti-dilution provisions as such provisions can give investors controlling rights in the Startup for a long period of time. Such long-term controlling rights may be a hurdle to future funding rounds and may also not align with the growth plan of the business. A way to mitigate the effect of an anti-dilution provision is by limiting its operation to a particular period or funding round. In addition, Startups should always ensure that they engage experts before signing investment agreements so as not to create future problems for the company.

 

[1] Dollar examples are only for explanatory purposes.

STAGES IN STARTUP FINANCING; LEGAL CONSIDERATIONS

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Aderonke Alex-Adedipe and Adedolapo Arisoyin

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Availability of funding is critical to the growth and success of startups. As founders are not always capable of providing capital for their business through its life cycle, it is crucial that they are knowledgeable about the various stages of raising capital, including their requirements and the legal considerations for each round, to ensure their legal and commercial preparedness.

This article identifies the various stages of fundraising and the requirements applicable to each stage.

Stages of fundraising

1.Pre-seed

This is the commencement of the lifecycle for the startup, where its product is undergoing development and testing. Investors at this stage typically include friends, family, and angel investors. It is a critical stage for investors because investment is based solely on what they believe to be the strength of the product and the core team as no traction has been gained to prove that the startup is investment-worthy.

Legal considerations and Documentation:

  • A founders’ agreement should be drawn up at this stage. It is crucial for the founders to also determine the timelines and the procedure for their shares to vest.
  • The preferred nature of investment must also be determined – either through debt, equity, convertible note or a SAFE.
  • Intellectual Property (IP) protection is also crucial. Trademarks, designs and patents should be duly registered.
  • Knowledge and compliance with the regulatory requirements applicable to the sector in which the startup is doing business is also important.
  • An accurate and detailed capitalization table1 (cap table) as well as a pitch deck for a proper presentation which will arouse the interest of potential investors and assist them in making an informed decision.

2.Seed Round

At this stage, investors are interested in the startup’s business which has gained some level of traction and market share. The most common investors at this stage are family and friends, angel investors, early venture capitalists, e.t.c.

Legal considerations and Documentations:

  • Investors at this stage, typically invest in the startup in exchange for equity which is negotiated based on the valuation of the business and which may be calculated with the use of various methodologies and subject to different factors.
  • It is also typical for investors to conduct due diligence on the business, its corporate structure and assets to ensure that the startup is generally compliant and investment-worthy.
  • Important agreements to be executed include an investor term sheet, a share purchase agreement, and a shareholders agreement.

3.Series Stage

At this stage, the business already has dedicated users and is generating steady revenue. There is no limit to how many funding rounds a business can go through. The common funding Series are however highlighted below:

Series A: This involves a stage where a startup does not only have a great business idea and model but a proven strategy for creating long-term profit.

Series B: This occurs at a stage where a startup is generating consistent revenue but requires additional funding to be able to scale to meet its growing market demand.

Series C and beyond: At this level, startups with strong financial performance seek expansion into new markets, develop new products, buy out businesses, or prepare for an initial public offer. The common investors at this stage include; accelerators, angel investors, venture capitalists, corporate venture capital funds e.t.c, who are eager to participate in this round.

Legal considerations and Documentation:

  • Similar to the Seed round, Series financing results in the investors receiving shares in the startup. In addition, term sheets, share purchase and shareholders agreements are also typical.

4.Initial Public Offering (IPO)

Once a company is large and stable enough, it may choose to make its shares available to the public. An IPO occurs when the startup’s shares are offered up for public purchase for the first time. The IPO is used to generate funds and for further growth.

Legal Considerations and Documentation:

  • It is important to set up a team of professionals to assist with the IPO.
  • At this stage, the rules of the Securities and Exchange Commission in relation to an IPO will be applicable. The company needs to ascertain compliance with all the rules.
  • Some of the prerequisites to the registration of an IPO include; filing of the SEC form 6, extract of the board and shareholders resolutions authorizing the offer, copies of the startup’s incorporation documents, signed copies of the startup’s audited account for the preceding 5 (five) years, copies of the draft prospectus2, draft underwriting agreement, vending agreement, and other documents required under the SEC rules and regulations3.

Conclusion

While investing in startups poses a high degree of risk, it also presents potential opportunities for immense rewards.  It is important that startups engage services of professionals including lawyers, accountants, and financial advisers at every stage of financing to ensure that the investments are adequately negotiated, and the rights and obligations of the parties are clearly expressed.

1.a capitalization table provides an analysis of the startup’s percentage of ownership, equity dilution and value of equity in each round of investment by founders and investors.

2.This is a legal document designed to provide information and full details about an investment offering for sale to the public.

3.Securities and Exchange Commission; checklist for processing applications.

DOING BUSINESS SIMPLIFIED: NAVIGATING IMMIGRATION REQUIREMENTS IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Introduction

For a foreign company looking to expand and set up operations in Nigeria, it is important that personnel with a good understanding of the company’s strategy are available to support in the establishment and the nascent stages of the company.

In this article, we have highlighted the basic immigration requirements for a foreign company carrying on business in Nigeria and salient points to note on the new Guidelines on the Administration of Expatriate Quota and Other Business Instruments issued on January 24, 2022  (the “New Guidelines”).

What is a Business Permit?

A company that is wholly or partly owned by a foreigner (individual and corporate) is required to apply and obtain a Business Permit (“BP”) from the Nigerian Ministry of Interior, Citizenship and Business Department (the “Ministry”). The BP is issued to the company to enable the foreigners legally carry on the business of the company in Nigeria.

How is the BP different from the NIPC Business Registration?

The Nigerian Investment Promotion Commission (“NIPC”) is authorised under the Nigerian Investment Promotion Commission Act to register the investment of any foreign individual or company in Nigeria for the purpose of maintaining up to date records (and also developing suitable programs to attract investments) whilst a BP authorises foreigners to carry on a registered business in Nigeria.

What is an Expatriate Quota?

Under the Nigerian Immigration Act 2015, any company that wishes to employ an expatriate is required to apply for an Expatriate Quota (“EQ”) from the Ministry. Based on the company’s application, the EQ shall specify the number of expatriates to be employed and the positions to be occupied by the expatriate. The company is also required to attach two Nigerian understudies to the expatriate.

The EQ when granted would be issued for three years. Upon expiration, it can be renewed for additional periods of 2 years until the expiration of its 10 years life span.

It is important to note that under the New Guidelines, a company with EQ positions is now required to:

  1. submit online monthly returns stating how the company is utilizing the EQ positions obtained; and
  2. ensure the expatriate and the Nigerian understudies obtain their National Identification Number (NIN) and include this information in the monthly returns filed.

When can a Company apply for Permanent Until Reviewed Status?

A company with EQ positions may apply to the Ministry for a Permanent Until Reviewed (PUR) status for the EQ positions. Upon approval, the EQ positions will become permanent (i.e. without a need for renewal). The EQ with PUR status is, however, subject to review by the Ministry at periodic intervals.

What is the Combined Expatriate Residence Permit and Aliens Card (CERPAC)?

To enable the expatriate reside and work in Nigeria, the company is also required to apply for the Combined Expatriate Residence Permit and Aliens Card (CERPAC). This is a combination of a resident permit and a work permit which authorises the holder to live and work in Nigeria. The CERPAC is issued further to the EQ positions of the company.

To read more on immigration requirements in Nigeria, click the links below to our other articles.

  1. The New Nigerian Visa Policy: Key Features To Note
  2. What You Need To Know About Corporate Immigration In Nigeria