REGULATION OF ISSUANCE, OFFERING PLATFORMS AND CUSTODY OF DIGITAL ASSETS IN NIGERIA

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By Seun Timi-Koleolu and Arisoyin Adedolapo

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Introduction
On September 14, 2020, the Securities and Exchange Commission (“SEC”) released a statement announcing its authority to regulate cryptocurrencies and digital assets in Nigeria, as detailed in our article dated September 23, 2020. In furtherance of this, SEC has recently released Proposed Rules for the Registration of Virtual Assets Providers (“VASPs“) in Nigeria, which we highlighted in our article dated April 15, 2022. In addition to this, SEC also released Proposed Rules on Issuance, Offering Platforms, and Custody of Digital Assets (the “Proposed Rules”).

In this article, we will highlight salient points to note from the Proposed Rules.

1. What is the definition of digital assets under the Proposed Rules?
It can be inferred from the Proposed Rules that digital assets are digital tokens issued to raise funds through equity or debt financing. Categories of digital assets include crypto assets, utility tokens, non-utility tokens, etc. Note that such digital assets must be targeted at Nigerians or offered within Nigeria.

2. Who do the Proposed Rules apply to?
The Proposed Rules apply to all issuers seeking to raise capital in Nigeria through digital asset offerings. It also applies to Digital Assets Offering Platforms and Digital Asset Custodians.

3. Who qualifies as an Issuer under the Proposed Rules?
The Proposed Rules do not expressly define who/what companies will qualify as issuers. It can, however, be inferred from general capital market definitions, that an issuer in this case will be a startup or company that develops digital assets for the purpose of raising capital.

4. When will a Digital Asset qualify as securities under the Proposed Rules?

The Proposed Rules provide that SEC shall determine whether the digital asset proposed to be offered qualifies as securities upon reviewing relevant information submitted by the issuer. A key document to be submitted is a white paper setting out information on: (i) the initial digital asset offering project; (ii) business plan; (iii) target audience;  (iv) intended use of the proceeds from the sale of the token, and other stated information.

5. What is the next step to take once a Digital Asset is approved as securities?

Once the digital asset is approved as securities, the issuer is to register the digital asset with SEC. Requirements for registration include: (i) a registration statement of the digital assets, containing the name and ticker of the token, the price per token, etc; (ii) fulfilment of KYC procedures, disaster recovery plans; (iii) corporate governance disclosures; (iv) a solicitor’s opinion confirming that all applicable permits and licenses have been obtained; and (v) evidence of payment of the applicable fees.

Where the issuer complies with registration requirements, SEC may register the digital assets. SEC may reject an application for registration of digital assets if, in its opinion, the proposed activity infringes public policy; is injurious to investors; or violates any of the laws, rules, and regulations implemented by SEC.

6. What are the requirements for registration as a Digital Asset Offering (DAO) Platform under the Proposed Rules?
Digital Assets are required to be offered through a registered electronic DAO platform. Providers of DAO platforms are required to apply for its registration by providing stated documents including a copy of the certificate of incorporation; and must show a minimum paid-up capital of N500,000,000 (Five Hundred Million Naira).

7. Is there an investment limit prescribed by SEC?

An investment in Digital Assets Offerings is subject to the following limits: i) for qualified institutional investors: no restriction on investment amount; ii) for high-net-worth individuals: a maximum of N50,000,000 (Fifty Million Naira) within 12 months; and iii) for retail investors: a maximum of N200,000 (Two Hundred Thousand Naira) per issuer with a total investment limit not exceeding N2,000,000 (Two Million Naira) within 12 months.

8. Who qualifies as a Digital Asset Custodian under the Proposed Rules?
A Digital Asset Custodian is any company maintaining custody of virtual/digital assets for the account of another.

9. What are the requirements for registration as a Digital Asset Custodian under the Proposed Rules?
Digital Asset Custodians are required to satisfy the existing capital market requirements for registration as a Custodian or Trustee. In addition to this, they are to obtain the approval of SEC to provide the services of a digital asset custodian.

CONCLUSION
It appears that the difference between this Proposed Rules and the Proposed Rules for the Registration of Virtual Assets Providers in Nigeria is that the former regulates general digital assets that are for the purpose of raising capital; whilst the latter regulates digital assets that are not for the purpose of raising capital. We expect that the scope of each Rule will be clarified when both Rules are finalised.

A REVIEW OF THE LAGOS STATE REAL ESTATE REGULATORY LAW 2021

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By Aderonke Alex-Adedipe and Karo Isiorho

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INTRODUCTION

In February 2022, the Lagos State Government signed the Lagos State Real Estate Regulatory Law 2021 (the “Law”) into law. The Law is aimed at regulating and ensuring consumer protection in real estate transactions. This newsletter highlights some salient points to note about the Law.

  1. ESTABLISHMENT OF THE LAGOS STATE REAL ESTATE REGULATORY AUTHORITY (“LASRERA”)

The Law establishes the Lagos State Real Estate Regulatory Authority (the “LASRERA” or “Authority”) as the agency responsible for administering its provisions. Some of the functions of the LASRERA include: (i) formulation and recommendation of policies for the enhancement of real estate transactions; (ii) registration of tenancy agreements; (iii) monitoring and conducting inspections in order to ensure compliance with the Lagos State Tenancy Law; (iv) investigating complaints and petitions against registered persons or organisations dealing in real estate transactions; and (v) mediating and resolving disputes in respect of real estate transactions.

  1. REGISTRATION OF STAKEHOLDERS DEALING IN THE REAL ESTATE SECTOR AND ISSUANCE OF PERMIT

The Law stipulates that a person or organization dealing in real estate business shall be eligible for registration and issued a permit upon the payment of a fee prescribed by the Authority. Going by the definition of real estate transactions in the Law[i], an individual or organization may upon fulfilling certain conditions, be eligible to register if such an individual or organization is engaged in any service, mortgage or financial exchange between a person or an organisation and the public with respect to matters pertaining to real estate including, any transaction in which an agent is employed by one or more principals (landlord or any person that owns a building or structure)  to act.

Furthermore, the Law[ii] specifically provides that a stakeholder dealing in the real estate sector as a — (a) property developer; (b) facility manager; or (c) property management company; whether as an individual or an organisation shall register with the Authority, specifying any project it is undertaking as at the time of registration before it can be issued the necessary permits to engage in real estate transactions.

The Authority shall issue different categories of permits based on the classification of the applicants whether individual or corporate. All permits issued shall be valid for a period of one (1) year and may be renewed not later than two (2) weeks before the expiration of the permit.

A penalty is prescribed for an individual or organisation dealing in real estate transactions who fails to register in accordance with the provisions of the Law. Defaulting individuals are liable on conviction to a fine of not less than Two Hundred and Fifty Thousand Naira (N250,000.00) while organizations are liable to pay the sum of One Million Naira (N1,000,000.00).

  1. ELIGIBILITY AND CONDITIONS FOR REGISTRATION

The eligibility criteria for registration under the Law are listed below;

i. An individual applicant who proposes to deal in real estate in Lagos state shall:

a. be a Nigerian;

b. possess a valid work permit if a non-Nigerian;

c. be at least eighteen (18) years of age;

d. possess Lagos State Residents Registration Agency (LASRRA) number;

e. have an ascertained business premises or office within Lagos state;

f. possess a minimum educational qualification of WASC, GCE or NECO;

g. have proper records of transactions and operate a separate client account;

h. have three (3) years Tax Clearance Certificate preceding the date of registration; and

i. register at least a business name with the Corporate Affairs Commission (CAC).

ii. In addition to the above, a corporate applicant shall:

a. be registered with the CAC;

b. have proper records of transactions and operate a separate client account;

c. have one of its directors possesses the conditions stated in (i) above;

d. ensure that all non-Nigerian directors have valid work permits and comply with all laws in respect of foreigners; and

e. have three (3) years Tax Clearance Certificate preceding the date of

  1. RESTRICTION OF FOREIGNERS’ INVOLVEMENT IN REAL ESTATE TRANSACTIONS

Foreigners who wish to invest in real estate must seek and obtain the permission of the Governor through the Authority. However, subject to the provisions of Acquisition of Land by Aliens Law and all relevant laws in respect of real estate in Lagos state, investment in land by a foreigner shall not exceed twenty-five (25) years including any option to renew.

  1. REGISTER OF TRANSACTIONS

The Authority is mandated to maintain a register of operations relating to transactions containing details of persons or organisations dealing in the real estate sector and to make such register available for inspection to members of the public and update the list of all realtors and, transactions forwarded to it by a person or organisation dealing in the real estate sector.

  1. OPERATIONAL STANDARDS

There are prescribed operational standards which must be maintained by permit holders while dealing in real estate transactions.  Some of these standards of operation are as follows:

(a) an organization that holds a permit shall register any broker working under that organization with the Authority; (b) an agent shall obtain the consent of a principal before receiving payment from a prospective client; (c) a permit holder shall ensure that clients perform all obligations to the Government under the existing laws by informing them of the statutory obligations, such as the deduction and remittance of Withholding Tax, Value Added Tax or other charges payable in respect of transactions; (d) a property developer shall collect consideration based on a fair market value and rate as may be determined by an estate surveyor and valuer, etc.

  1. APPLICABLE FEES

A person or organisation dealing in real estate shall not demand a fee exceeding ten (10%) percent of the total rent or purchase price received  from a client in respect of a lease or sale.

For instance, if in a tenancy transaction, the rent of the property is Eight Hundred Thousand Naira (N800,000) per annum, by implication the permit holder cannot demand an amount exceeding eighty thousand naira (N80,000) from the tenant.

Furthermore, if there are two or more permit holders retained by a principal in the same sale or lease, the permit holders shall jointly demand an amount not exceeding fifteen (15%) percent of the total proceeds in a sale or lease of interests in property. This will help to protect members of the public against extortion.

  1. ESTABLISHMENT OF A COMMITTEE OF INQUIRY

The law establishes a Committee of Inquiry (“Committee”) that is charged with the duty of hearing and determining reports of misconduct, complaints or petition from the public against persons or organisations dealing in real estate.

The Committee shall after considering the report from the public, invite the concerned permit holder to make an oral or written representation within two (2) weeks of receipt of the notice or complaint and may invite any other person to make a representation relating to the matter.

Where the Committee confirms the allegation to be true, it shall have the option of recommending suspension or revocation of the permit to the Lagos State Real Estate Regulatory Authority Governing Board (the “Board”). The Authority shall serve the affected parties the decision of the Board not later than one (1) month from the conclusion of the hearing.

An aggrieved party has a right of appeal   against the decision of the Committee to a court of competent jurisdiction.

  1. ACQUISITION OF ABANDONED OR UNCOMPLETED BUILDINGS

Under the Law, a building or structure may be considered abandoned if it: (a) has not been developed due to lack of funds; (b) constitutes a nuisance; (c) is a safety risk; (d) contributes to environmental degradation; and (e) is used as a ground for perpetration of criminal activities. The Law provides that where it appears to a Ministry, Department or Agency (MDA) of Government that any abandoned or uncompleted building or structure may constitute any of the foregoing, the MDA(s) shall serve notice on the owner or occupier of such building or structure, requesting the completion of the construction within a period of three (3) months or such period as the Authority may deem fit.

Upon the failure to comply with the initial notice, the MDA shall serve a final notice on the owner personally or by posting on the building or structure, granting an additional period of three (3) months to comply with the notice. The owner may also make a representation to the Authority on the steps or measures taken to facilitate compliance with the notice.

Where after the expiration of the period stated in the final notice, the owner of an abandoned or uncompleted building or structure remains non-compliant or is unable to convince the Authority of the ability to complete the building or structure, the Authority shall issue recommendations to the appropriate authority to revoke the right of occupancy of such owner or occupier. If, however, it appears to the Authority that it will be inequitable to make such a recommendation, it shall jointly evolve a suitable arrangement with the  owner or occupier putting into consideration the type of the structure and financial implications. The Law leaves to the discretion of the Authority the type of arrangement that may be made between the Authority and the owner.

CONCLUSION

One of the challenges in the real estate sector over the years has been fraudulent activities and sharp practices perpetrated by unlicensed real estate agents seeking to exploit prospective homeowners and tenants.  A major cause of this problem has been the lack of a proper framework regulating the conduct of real estate transactions. The Law is aimed at resolving this problem as it stipulates wider and improved standards to be maintained by all stakeholders involved in real estate transactions. This is a step in a positive direction and it is hoped that it will be properly implemented to achieve its aim.

[i] Section 1 of the Lagos State Real Estate Regulatory Law 2021.

[ii] Section 27 of the Lagos State Real Estate Regulatory Law 2021.

REGULATORY UPDATE: REGULATION OF VIRTUAL ASSETS SERVICE PROVIDERS IN NIGERIA

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Introduction

In our earlier article, we had highlighted the intention of the primary regulator of investments and securities in Nigeria, the Securities and Exchange Commission (the “Commission”) to regulate virtual/digital assets in Nigeria. These intentions were, however, put on hold, (as highlighted in our article) , after the Central Bank of Nigeria (“CBN”) issued a directive to banks and other financial institutions instructing them to close the accounts of all persons or entities transacting in or operating cryptocurrency exchanges (the “CBN Directive”).

Notwithstanding the subsistence of the CBN Directive, the Commission recently released Proposed Rules for the Registration of Virtual Assets Service Providers (“VASP”) in Nigeria. (the “Proposed Rules”).

In this article, we have set out below useful information for companies/startups who intend to conduct business as a VASP in Nigeria, in view of the Proposed Rules.

1. Which Entities are Subject to the Proposed Rules?

The Proposed Rules upon finalization will be applicable to platforms that facilitate the trading, exchange and transfer of virtual assets. It will also be applicable to all entities whose activities involve, blockchain-related and virtual asset services; and entities that provide portfolio management services, investment advice, custodian or nominee services, amongst others. In addition, foreign and non-residential operators that actively target Nigerian investors directly  or indirectly through agents, promotions, publications in Nigeria or direct emails to Nigerian addresses will be subject to the Proposed Rules.

2. What is a Virtual Asset?

The Proposed Rules define a virtual asset as a digital representation of value which can be used as a medium of exchange/payment, or a unit of an account and is traded digitally.  Virtual assets unlike legal tenders (or digital representations of a legal tender e.g e-naira or mobile money) gain their status upon agreement within the community of users of virtual assets and therefore, are not issued or guaranteed by any country or state and therefore, are not legal tender.

3. What is a VASP?

A VASP is any entity that conducts: (i) exchange between virtual assets and fiat currencies i.e legal tenders; (ii) exchange between one or more forms of virtual assets; (iii) transfer of virtual assets; (iv) safe keeping and/ or administration of virtual assets or instruments; and (v) participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset, for or on behalf of another entity. Examples of VASPs include virtual asset exchanges, wallet providers, brokers etc.

4. What are the registration requirements for VASPs?

The Proposed Rules require all entities that conduct business as VASPs to be registered with the Commission. Application for registration is to be made by filling the appropriate SEC form and submitting required documents including:

i. the rules of the applicant which should principally provide for the protection of investors and public interest;

ii. a business model;

iii.an approval letter or a letter of no objection (if any ) from the relevant sectorial regulator of the applicant;

iv. sworn undertakings that the applicant will comply with the Proposed Rules and that all information furnished by the applicant are not false or misleading;

v. documents which show or attest to the following amongst others;

  1. that the applicant will be able to operate an orderly, fair and transparent market in relation to the securities that are offered or traded on or through its platform;
  2. that the applicant is still a going concern; and
  3. that the applicant, its directors, chief executive and other persons primarily responsible for its operations or financial management are fit and proper

5. What is required from Entities Conducting Business as Digital Assets Exchange Operators?

Digital Assets Exchange Operators (“DAX Operators”) are essentially VASPs that operate platforms (electronic) that facilitate the trade of virtual assets. Some of the salient requirements of the Proposed Rules for DAX Operators are stated below.

i. Application for registration– VASPs that intend to conduct business as DAX Operators are required to apply to the Commission to be registered as a DAX Operator. The DAX Operator is required to provide (i) information technology (IT) assurance of the readiness of its platform; and a written declaration by its internal auditors confirming that it has sufficient resources (human, financial and IT ), adequate security measures, systems capacity and other checks in place to ensure the protection of investors and the general public.

ii. Minimum paid-Up Capital- the Proposed Rules require entities who intend to conduct business as a DAX Operator to have a minimum share capital of N500,000,000 (Five Hundred Million Naira) and to provide evidence of such amount to the Commission. The DAX Operator is also to take up a Fidelity Insurance Bond covering at least 25% of the minimum paid-up capital as stipulated by the Commission’s Rules and Regulations.

iii. Trading of Virtual Assets- the Proposed Rules require DAX Operators to apply to the Commission for approval to facilitate the trading of any virtual asset. Transaction fees payable to a DAX are also subject to the prior review and approval of the Commission.

iv. Commission Fees- The Commission is entitled to charge fees on virtual assets transactions carried out on a DAX at a percentage to be determined by the Commission from time to time .

 

Conclusion

The Proposed Rules (though still in draft form) provides hope to local and foreign companies/startups desiring to trade in virtual assets in Nigeria, that the government is taking intentional steps to create an enabling environment for such transactions.

REGULATORY UPDATE: LICENSE FRAMEWORK FOR THE ESTABLISHMENT OF MOBILE VIRTUAL NETWORK OPERATORS IN NIGERIA

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By Aderonke Alex- Adedipe and Adedolapo Arisoyin

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Introduction
The Nigerian Communications Commission (the “Commission”) recently released the License Framework for the Establishment of Mobile Virtual Network Operators (MVNOs) in Nigeria (the “Framework”).

Over the years, Mobile Network Operators (MNOs) such as MTN, Airtel, 9mobile, amongst others, have thrived and made immense waves in propelling the Telecommunications (“Telecoms”) sector in Nigeria. With the advent of MVNOs, the Telecoms sector has created increased opportunity for entry and competition within the industry.

This article summarizes the requirements for obtaining an MVNO license and the guidelines for operating within the ecosystem.

What is an MVNO?
An MVNO is a telecommunication service operator that rides on the capacity of an MNO or a licensed service provider. The difference between an MVNO and an MNO is that an MVNO does not own the infrastructure required to provide mobile network service, as it primarily leases the infrastructure from an MNO, and resells it to its customers at reduced/retail prices.

What are the criteria for eligibility?
The criteria for obtaining an MVNO license include:
(i) the applicant must be a corporate body;
(ii) the applicant is required to file a contract with an MNO at the Commission;
(iii) the applicant must meet the technical requirements of the Commission for its tier of choice;
(iv) the applicant is required to show proof of local content in its ownership and service delivery.

What is the procedure for obtaining a license?
The licensee must complete an introduction form and submit a PBG (Performance Bank Guarantee), FBG (Financial Bank Guarantee), and a summary of capital structure proving its capacity to fund and maintain its operations through the tenure of the license, and other requirements stipulated by the Commission.

What is the Tenure of a license?
The license shall be valid for a period of 10 (ten) years, with an option to renew for another period of 10 years, provided that the requirements for renewal are met. The Commission also reserves the right to suspend or revoke a license after its issuance if the MVNO flouts any of its requirements or guidelines for its operations.

Does the Framework regulate the relationship between the MNO and the MVNO?
It is interesting to note that the Framework does not provide a specific regulation for the guidance of the relationship between the MNOs and the MVNOs. It merely stipulates that the contractual agreement binding them will serve as the reference for their engagement. The Framework also provides that the terms of a contract should be fair and the parties should act in good faith.

What are the categories of licenses and their peculiarities?
i. Services Virtual Operator (Tier 1) – These operators can provide only one of the following services, which include:
a. owning a brand,
b. owning a sales and distribution channels,
c. owning content/applications,
d. hosting and distributing value-added services (such as ring tones, voice mail, top up e.t.c).

They do not own any switching or Intelligent Network (IN) infrastructure for provision of value-added services. Simply put they do not own a network that can allow them provide basic services like voice calls, fax or text services or provide value added services (such as ring tones, games, call directory services). They rely on the host licensee to deliver their products and services to their customers.

ii. Simple Facilities Virtual Operator (Tier 2) – These operators do not have core switching and interconnect capabilities but can set up their own Intelligent Network infrastructure to provide their own Intelligent Network services to the customer. In other words, they do not have the infrastructure to provide basic services like voice calls, fax, or text services, however they can provide value added services to their customers. The areas in which the operator can provide services under this category include owning and issuing sims, owning, and operating the provision of value-added services. In addition to any one of these services, they may also provide the services listed under Tier 1.

iii. Core Facilities Virtual Operator (Tier 3) – These operators have the capacity to launch and operate a full core network with switching and interconnect capabilities. This means that they can provide basic services like voice calls, fax, or text services. Nevertheless, the operator relies totally on its host to provide the telecom infrastructure (of voice and data communication) to deliver these services to its customers.

iv. Virtual Aggregator/Enabler (Tier 4) – The operator stands as a middleman between the MNO and multiple MNVOs. The aggregator facilitates the purchasing of bulk capacity from a licensed network operator and resells it to multiple MNVOs, while the enabler provides a platform for MNVOs to outsource their business and operations systems, so they can focus on the sales, marketing, and distribution. In order to improve national coverage, these operators are permitted to directly engage customers within an underserved and unserved region.

v. Unified Virtual Operator (Tier 5) – An operator within this tier can decide the level of service it desires to offer ranging from tier 1 to tier 4. This gives the operator freedom of choice to provide its services the way it deems fit.

Conclusion
It appears that the aim of the Commission is to encourage and ensure a conducive regulatory environment that facilitates growth and development in the Telecommunications sector, through the different services offered by the operators. This will also complement the efforts of the current government on the ease of doing business initiative, spur growth and extend telecommunications services to the rural, unserved, and underserved communities in the country.

REGULATORY UPDATE: INTRODUCTION OF CREDIT GUARANTEE COMPANIES IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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On March 23, 2022, the Central Bank of Nigeria (“CBN”) issued Guidelines for the Regulation and Supervision of Credit Guarantee Companies (“CGC”) in Nigeria (the “Guidelines”). It is expected that the introduction of CGCs will encourage more financial institutions to lend money to micro, small and medium enterprises (“MSME”) in Nigeria. We have set out below useful information on CGCs and the Guidelines.

1. What are Credit Guarantee Companies?

A CGC is a company licensed by the CBN to guarantee loans issued to MSMEs by banks and other financial institutions (“Financial Institutions”) against a default.

2. Who is to engage a CGC?

Under the Guidelines, either the borrower or the lender (the Financial Institutions) of a loan transaction may apply to licensed CGCs for their credit guarantee services. It is, however, expected that the services of CGCs will be more often required by Financial Institutions as a form of security for loans granted to MSMEs.

3. What are the conditions to access the services of a CGC?

The services of a CGC are limited to loans issued to MSMEs by financial institutions licensed by the CBN. MSMEs are companies with less than 200 employees and less than 500 million naira in assets, excluding landed properties.

4. What are the permissible activities of a CGC?

In addition to providing the guarantee services, CGCs may also provide advisory and technical services for financial and business development to their clients.

5. Are there limitations to the guarantee services of CGCs?

A CGC cannot provide guarantee services in the following instances: (i) to related entities or entities within its holding company structure; (ii) to entities outside Nigeria; and (iii) where it is indebted to the entity.

6. What is the Consideration for the Guarantee Services?

Remuneration payable to the CGC for its guarantee services will be as negotiated between the Financial Institutions and the CGC.

7. How to apply for a CGC license?

A CGC license can be obtained by applying to the CBN with the following supporting documents:

  1. evidence of minimum paid-up capital of 10 billion naira and capital contribution of the proposed shareholders;
  2. detailed business plan;
  3. details of the proposed directors and shareholders;
  4. draft of the memorandum and articles of association;
  5. detailed manuals and policies;
  6. payment of the application fee; and
  7. other required documents.

Upon a successful assessment of the application, the CBN will issue an approval in principle. Within 6 months of the issuance of the approval in principle, an application is to be made to the CBN for the issuance of the final license, subject to a satisfactory physical inspection.

8. Conclusion

A challenge Financial Institutions have faced with lending to MSMEs in Nigeria over the years, is the lack of suitable security for loans. With an undeveloped credit rating system in Nigeria, Financial Institutions struggle to have sufficient comfort that loans will be repaid. The growth of CGCs in Nigeria is expected to help provide a level of comfort to concerned Financial Institutions and encourage lending to MSMEs. A major factor, however, that will determine how useful CGCs will be in encouraging lending to MSMEs is the fee charged for their services.

Notwithstanding the foregoing, it is imperative that the credit rating system is improved in Nigeria as this will provide more comfort for Financial Institutions and in turn, achieve the goal of stimulating lending to MSMEs.