REGULATION OF CRYPTOCURRENCY AND OTHER DIGITAL ASSETS IN NIGERIA -2.0

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By Seun Timi-Koleolu and Eustace Aroh 

In previous articles, we highlighted the provisions of the proposed Rules for the Registration of Virtual Assets Providers (“VASPs“) and the proposed Rules on Issuance, Offering Platforms, and Custody of Digital Assets in Nigeria (“Proposed Rules”) by the Securities and Exchange Commission (“SEC”).

On May 11, 2022, the SEC consolidated the Proposed Rules and issued New Rules on Issuance, Offering Platforms and Custody of Digital Assets (the “Rules”). The new Rules will regulate the following (i) issuance of Digital Assets as Securities; (ii) Digital Assets Offering Platforms (DAOPs); (iii) Digital Asset Custodians (DACs); (iv) Virtual Assets Service Providers (VASPs); and (v) Digital Assets Exchange (DAX).

In this article, we have highlighted the salient points from the new Rules.

  1. What Companies are regulated by the Rules?

Companies issuing and trading digital assets as securities; companies with platforms offering digital assets; companies carrying on business as digital assets custodians (such as digital asset wallet services); companies with platforms facilitating the exchange of digital assets; and companies that facilitate the transfer of, issuance of, or sale of virtual assets. The Rules also appear to cover fintechs providing financial services on the platform (the scope of the financial services is not clearly defined in the Rules. We believe further clarification is required from the SEC).

Please note that all entities carrying on these activities are required to be registered as a company with the authority of the SEC.

2. What is the Difference between Digital Assets and Virtual Assets?

According to the rules, digital assets are digital tokens that represents assets such as a debt or equity claim on the issuer while virtual assets are digital representation of value which can be used as a medium of exchange/payment, or a unit of an account and is traded digitally.

 

  Issuance of Digital Assets as Securities Virtual Asset Service Providers (VASP) Digital Asset Offering Platforms

(DAOP)

 Digital Assets Custodians

(DAC)

 Digital Assets Exchange

(DAX)
Registration per category Companies that issue digital assets to Nigerian are required to register under this category. Companies that facilitate exchanges between fiat and virtual assets; and transfer or store virtual asset for Nigerian, are required to register under this category. Companies that operate electronic platforms for offering digital assets to the public are required to register under this category.

 

 Companies that maintain, store, and hold digital asset, are required to register under this category. Companies that operate an electronic platform for facilitating the trading of

a virtual or digital asset, are required to register under this category.
Minimum paid up capital The Rules do not state the capital requirement for this category The Rules do not state the capital requirement for this category The minimum paid up capital is 500 million naira and a fidelity bond covering 25% of the paid up capital of the company The Rules do not state the capital requirement for this category The minimum paid up capital is 500 million naira and a fidelity bond covering 25% of the paid up capital of the company
Directors and management requirements The directors and senior management staff are to hold 50% of the shares in the company.

Although not stated in the rule, it is likely that the appointment of the directors will be subject to the approval of the SEC

 VASP are required to have a physical office managed by a director.

A director should be a person of integrity.

Although not stated in the Rules, it is likely that the appointment of the directors will be subject to the approval of the SEC

 The CEO and principal officers are required to hold relevant university degrees and have 5 years cognitive experience.

 

The CEO can only hold the office for two terms of 5 years each (total of 10 years).

The Rules clearly states that the Appointment of the directors is subject to the approval of the SEC.

A director should be a person of integrity.

 A director should be a person of integrity.

Although not stated in the rule, it is likely that the appointment of the directors will be subject to the approval of the SEC

 The CEO and principal offciers are required to hold relevant university degrees and have 5 years cognitive experience.

The CEO can only hold the office for two terms of 5 years each (total of 10 years).

The Rules clearly states that the Appointment of directors in this category is subject to the approval of the SEC.

A director should be a person of integrity.
Limitations Issuers cannot raise funds exceeding 10 billion naira within 12 months. Issuers are also not permitted to accept investment of over 200,000 naira from retail investors. Where the VASP is regulated by another sector regulator, it is required to submit a letter of No Objection from the other regulator. Where the payment service function is outsourced, a no objection of the Central Bank of Nigeria (“CBN”)  must be obtained. A DAC is not to outsource any decision making and client relations  function in the company. The board will remain liable for all outsourced functions. A DAX is to obtain a “No Objection” from SEC before trading any virtual or digital asset.

 

The approval of SEC must be obtained prior to publishing its user fees.

Conclusion

The Rules are a commendable initiative which provide a level of clarity and direction to business in the digital asset sector. Where properly implemented, it has the potential of fostering investment into the Nigerian finance sector.

Nevertheless, it is imperative that an explanatory note is issued by the SEC to provide clarity on obscure provisions within the Rules. In addition, given the CBN ban of cryptocurrency issued last year, it is important that the CBN and SEC provide a joint statement/position on the regulation of digital assets.

 

FOREIGN EXCHANGE REGULATORY UPDATE IN NIGERIA; GUIDELINES FOR THE IMPLEMENTATION OF THE NON-OIL EXPORT REBATE SCHEME

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Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

On February 25, 2022, the Central Bank of Nigeria (“CBN”) released the Operating Guidelines for the RT200 Non-Oil Export Proceeds Repatriation Rebate Scheme (the “Scheme”). The Scheme was initiated in furtherance of the CBN’s Race to $200billion FX Repatriation Programme (RT200 FX Programme), an initiative which involves the implementation of policies and programmes geared towards raising $200 billion in foreign exchange from non-oil proceeds exported from Nigeria, within the next 3-5 years. The objective of the Scheme among others, is to ensure the stability and sustainability of foreign exchange inflows in Nigeria.

Today’s newsletter briefly highlights the incentives available under the Scheme, the eligibility criteria for accessing the incentives and the application procedure.

What incentives are available under the Scheme?

The Scheme provides for the payment of:

a. N65 (sixty-five naira) to eligible non-oil exporters (“Eligible Exporters”) for every US$1 (one United States Dollar) repatriated by the exporters into Nigeria and sold at the Investors’ & Exporters’ Window (“I&E Window”) to authorized dealer banks (“ADB”) for use by third parties; and

b. N35 (thirty-five naira) to Eligible Exporters for every US$1 (one United States Dollar) repatriated and sold at the I&E Window to ADBs for use by the Eligible Exporter.

Who can Benefit from the Scheme?

Exporters of Non-oil products and services will be eligible to benefit from the incentives under the Scheme (“Incentives”), where they fulfil the criteria listed below:

a. Investment in eligible transactions– Exporters of non-oil goods and services (“Applicants”) will be deemed eligible for the Incentives on a transactional basis. To qualify for the Incentives, the Applicant is required to have exported finished and semi-finished goods wholly or partly processed or manufactured in Nigeria; or exported goods and services (IT and creative business-related) that are permissible and excluded from the export prohibition list. It is noteworthy that despite the fact the CBN has begun making payments to Eligible Exporters, it is yet to proffer any clarification on businesses deemed as creative businesses;

b. Registration with regulatory agencies- the applicant is required to be registered with the Corporate Affairs Commission (CAC) as a company and the Nigerian Export Promotion Council (NEPC).

c. Repatriation and sale of proceeds of eligible transactions at the I&E Window– The Applicant is required to repatriate the proceeds of the eligible transactions (as highlighted in a above) and sell the foreign currency to an ADB at the I&E Window[1].

 

How to apply for the Incentives

The application process for obtaining the Incentives is detailed below.

a. Submission of a written application to an ADB

To request for the Incentives, the Applicant is required to submit a written application to the ADB that registered its Form NXP[2], in addition to the following documents:

  1. a completed application form;
  2. documentation required for exports (such as the NXP Form) as provided for in the Foreign Exchange Manual, 2018;
  3. evidence of repatriation and sale of export proceeds at the I&E Window; and
  4. Any other documents required by the CBN

b. Processing of the Application by the ADB

Upon submission of the documents by the Applicant to its ADB, the ADB is required to confirm the completeness of the documents submitted and the eligibility of the Applicant. Upon confirmation, the ADB will be required to forward such application to the CBN (Director, Trade & Exchange Department) within 5 working days from the completion of the sale of the Applicant’s export proceeds at the I&E Window.

c. Approval by the CBN

Upon approval by the CBN, the operating guidelines provide that payment of the Incentive to the Eligible Participants will be made at least one week after the end of the quarter.

 

Conclusion

It is interesting to note that while the Scheme is similar to the CBN’s  Naira4Dollar which was also initiated to improve the inflow of foreign currency into the Country, they differ to the extent that  the Scheme is  geared towards non-oil exports while the Naira 4 Dollar scheme is applicable to recipients of diaspora remittances.

Overall, the Scheme is aimed at promoting the exportation of non-oil goods and the inflow of foreign currency in Nigeria, as the cumulative exchange rate under the Scheme will reduce the margin between the I&E Window and parallel market rates.  Although the Scheme is laudable, it will be interesting to see how the Scheme fairs in view of the ever-rising parallel market rates.

 

[1] It is important to note the Foreign Exchange manual, 2018 requires all exporters to repatriate and credit the proceeds of export to their export domiciliary account with a Nigerian bank within 180 days from the date on the Bill of Lading.

[2] Form NXP is simply the Nigerian Exports Proceeds Form. It is a mandatory document required to be completed by persons intending to export goods out of Nigeria through an ADB

 

ESTABLISHING A PARENT COMPANY FOR A NIGERIAN STARTUP IN DELAWARE

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By Seun Timi-Koleolu and Karo Isiorho

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INTRODUCTION

In an earlier article, we highlighted why some venture capital firms require Startups to incorporate an offshore holding company prior to funding. It has been reported that around seventy percent of Nigerian Startups that incorporate their parent companies outside Africa choose Delaware in the United States of America (“Delaware” or the “State”).[i] Interestingly, Delaware recorded almost 250,000 additional business registrations in 2020, increasing the number of businesses domiciled in the State to over 1.6 million.[ii]

In this newsletter, we have set out below useful information for Startups who intend to set up a parent company in Delaware.

  1. Why do most Nigerian Startups register in Delaware?

There are several reasons a Startup may consider Delaware a country of choice for incorporating its parent company. Essentially, the State boasts of a business-friendly court system and tax laws that are favourable to Startups and investors. Most angel investors and venture capitalists prefer that the Startup they invest in is domiciled in Delaware.

  1. How does an investor provide funds to a Startup through its parent company?

Investors can invest in the Startup through the parent company and bring in capital to operate the Nigerian business through a Certificate of Capital Importation (“CCI”) issued by an authorized dealer (usually a commercial bank) licensed by the Central Bank of Nigeria (“CBN”). This ensures that the investments and dividends can be repatriated to Delaware when required. Click here to read our newsletter on the Relevance of Certificate of Capital Importation to Foreign Investors.

  1. What are the forms of corporate organizations/structures for foreign Startups in Delaware?

There are various corporate structures in Delaware which include: Public Benefit Corporations; Public Benefit LLC; Limited Liability Partnerships (LLP); Limited Partnerships; Limited Liability Companies (LLC), corporations,  etc. Notwithstanding this, the type of business structure typically preferred by Startups in Delaware is the corporation structure.

A corporation is a business entity which offers perpetual succession and personal liability protection for its founders, directors and members.  A Startup registered as a corporation in Delaware has the ability to raise investments by selling shares of stock in the corporation.[iii]

  1. Is there a minimum shareholding requirement for foreign Startups in Delaware?

Delaware does not have a minimum capital requirement to form a corporation. Furthermore, corporations may be incorporated with a single director and single shareholder of any nationality. It is also not compulsory for corporations to have a resident director or physical address to conduct their businesses in Delaware.

  1. What are the requirements to qualify for registration in Delaware?

To set up a Delaware corporation the applicant is required to:

i. choose and reserve a corporate name that must not be similar to the names of other business entities already  registered with the Delaware Secretary of State;

ii. complete a Certificate of Incorporation which must include the proposed name, address for service, purpose, authorised number of shares/stock to be issued by the Startup and the names of the initial directors; and

iii. submit the Certificate of Incorporation through an appointed registered agent for filing.

Upon a successful review of the application, the applicant will be issued an approved Certificate of Incorporation by the Delaware Division of Corporations. It is important to note that corporations with foreign founders such as Nigerian founders are required to file an annual tax report with the Delaware secretary of state. Failure to comply on time can result in payment of a penalty as prescribed by the State.[iv]

  1. Are there any tax implications for Startups in Delaware?

Delaware is a low tax jurisdiction, therefore, newly registered corporations and companies who conduct their businesses outside Delaware are not required to pay state income taxes. Furthermore, shares of stock owned by non-residents are not subject to Delaware taxes.[v] Nonetheless, all companies (excluding non-profit making organizations) are mandated to pay an annual fee known as a Franchise Tax to the State. The Franchise Tax may be calculated based on the authorized shares or assumed par value capital of the corporation.[vi]

CONCLUSION

In determining whether or not to set up an offshore entity in Delaware, Startups must carefully consider the pros and cons of this decision. Although Delaware offers some great advantages, establishing a parent company in Delaware can also be cost-intensive for small Startups, particularly where they do not intend to raise investments through venture capital funding.

 

 

 

 

[i] Tom Jackson ‘Why African tech startups are increasingly domiciling overseas’

‘https://disrupt-africa.com/2020/03/10/why-african-tech-startups-are-increasingly-domiciling-overseas

[ii] Delaware Division of Corporation ‘Annual Status Report’ https://corp.delaware.gov/stats/

https://www.nolo.com/legal-encyclopedia/how-form-corporation-delaware.html

[iii] UpCounsel ‘Delaware C Corp vs LLC: Everything You Need to Know’https://www.upcounsel.com/delaware-c-corp-vs-llc’

[iv] Delaware Division of Corporations ‘Annual Tax Report and Information’ https://corp.delaware.gov/frtax/#:~:text=The%20penalty%20for%20not%20filing,in%20December%20of%20each%20year

[v] Offshore CompanyCorp ‘Why Do Companies Incorporate in Delaware, USA’  https://www.offshorecompanycorp.com/insight/jurisdiction-update/why-incorporate-in-delaware-us  

[vi]  Trent Dykes ‘Delaware Franchise Tax: An Overview’ https://www.dlapiperaccelerate.com/knowledge/2018/delaware-franchise-tax-an-overview.html

 

DATA PROCESSORS; THE RULES OF ENGAGEMENT UNDER NIGERIAN LAW

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By Aderonke Alex-Adedipe and Eustace Aroh

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The requirement to leverage on third party service providers for the dissemination of products and services has remained in constant demand for businesses. With the continuously increasing number of data-driven businesses around the world,  engaging third party data processors to process the personal data of customers has also become relevant. Given the emerging rules surrounding the protection of personal data, it is also crucial for a business (“Controller”) to understand certain steps which should be taken before engaging the services of a data processor (“Processor”).  Today’s newsletter highlights a few of these steps to ensure compliance with the Nigerian Data Protection Regulations 2019 (“NDPR“).

  1. Researching Applicable Law.

It is important for the company to, first and foremost, conduct research into the applicable laws. This is relevant as there are certain restrictions on the processing of personal data. For instance, the following restrictions apply to the processing of personal data;

  • Sensitive personal data cannot be processed except with the consent of the data subjects[i]
  • Bank Verification Number of individuals can only be processed for banking purposes and cannot be stored or processed outside Nigeria.[ii]
  • Personal data cannot be transferred to countries which are not on the whitelist without the specific consent of the data subject[iii]

2. Conducting a DPIA

It is also important to conduct a Data Protection Impact Assessment (DPIA). A DPIA is an assessment conducted to identify, evaluate and minimize the possible risks associated with a data processing activity. Prior to engaging the services of a Processor, it is prudent for the Controller to assess the potential risks attributable to the processing activity. This can be carried out by a Data Protection Officer or a licensed Data Protection Compliance Organisation (DPCO). This is particularly more important where it is a new business process or activity which would involve the use of sensitive information or heavy use of personal information of individuals. Generally, the DPIA will enable the Controller identify the risks and mitigate such risks.

3. Audit of the Service Provider

Under the Nigeria Data Protection Regulation (NDPR), the Controller is responsible for ensuring that the Processor has complied with the provisions of the NDPR. Consequently, before a Processor is engaged, the Controller is required to conduct an audit/ of the practices of the Processor to ensure that the Processor generally complies with the NDPR and any other applicable data protection laws in relation to collection, storage and other processing activities. This is also imperative because the Controller and Processor will be jointly liable for the acts or omissions of the Processor.

The audit may be conducted by sharing a questionnaire requesting responses and evidence on relevant data privacy matters as well as conducting an on-site inspection by a representative of the Controller.

4. Entering into a Data Processing Agreement

A company engaging a Processor is expected to enter into a contract with the Processor, containing provisions which ensure that the Processor:

  • only processes personal data as instructed by the Controller;
  • adopts adequate security measures to prevent a data breach;
  • together with its employees, are under confidentiality obligations;
  • do not engage a sub processor without the consent of the Controller and subject to compliance with the law;
  • assists the company to comply with the Data Subject rights;
  • assists the company in the event of a breach (notification of the National Data Protection Bureau and the data subject) or conducting a DPIA;
  • deletes the data upon conclusion of the engagement;
  • provides evidence of compliance with the NDPR including allowing and contributing to audits and inspections.

Conclusion

The President of Nigeria recently approved the establishment of the Nigeria Data Protection Bureau (NDPB), a government agency precisely dedicated to promoting and implementing the NDPR and other data privacy issues, previously within the scope of the National Information Technology Development Agency.[iv]

With the growing awareness of data protection in Nigeria, companies are expected to adopt proper steps before engaging Processors to ensure their compliance with the data privacy laws.

[i] Article 5.3.1 NDPR Implementation Framework

[ii] Article 1.9 Central Bank of Nigeria Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-list for the Nigerian Banking Industry

[iii] Article 2.12 of the NDPR and 7.2 of the NDPR Implementation Framework

[iv] The website of the NDPB is https://www.ndpb.gov.ng/