DOING BUSINESS IN NIGERIA: THE BUSINESS FACILITATION (MISCELLANEOUS PROVISIONS) ACT 2023

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By Aderonke Alex-Adedipe and Sharon Okpo

 

Introduction

As part of the commitments of the Federal Government of Nigeria to continuously create an enabling environment for doing business, on February 13, 2023, the Business Facilitation Bill 2022 (also known as the Omnibus Bill) was signed into law (the “Act”).

The main objective of the Act is to “promote the ease of doing business in Nigeria and eliminate bottlenecks”. To actualize this objective, the Act amends various business-related legislations.

In this newsletter, we highlighted some of these amendments and their possible impact on the Nigerian business environment.

CONSEQUENTIAL AMENDMENTS

  1. Amendments to the Companies and Allied Matters Act (CAMA)2020:
    a) Increase in share capital– The Act has amended the provisions of Sections 127(1) and 149(1) of CAMA to the effect that a company may increase its issued share capital by the allotment of new shares, either in a general meeting or by a resolution of the board of directors, subject to the condition or direction that may be imposed in the Articles or the Company in general meeting. The existing provisions of Section 127(1) of CAMA states that a company may increase its share capital only by the members in general meeting, and not otherwise. This amendment eliminates any constraint or limitation which a company may experience where it seeks to increase its share capital, without the requirement of a general meeting of its shareholders, provided that the shareholders in general meeting or the company’s articles have authorized the board to issue such resolutions.
    Consequently, a company may have to amend its articles to empower the directors to increase its share capital where this is not already provided in its articles. The company may in the alternative have its members sign a resolution empowering the directors to do so and setting the parameters for the exercise of this authority.
    b) Return of allotment of shares: The Act by amending the provisions of Section 154(1) of CAMA has shortened the period within which to make a return on allotment of shares to the Corporate Affairs Commission (CAC) from one (1) month to fifteen (15) days. Companies are therefore required from to ensure that necessary returns and filings are made with the CAC within this time.
    c) Accounting standards for a company’s financial statement: By virtue of the amendment made to Section 378(1) of CAMA, a company’s financial statement must comply only with the requirements of the accounting standards as prescribed by the Financial Reporting Council of Nigeria (FRCN). This amendment eliminates completely the requirement to comply with the accounting standard as provided in the First Schedule of CAMA and the requirements of the FRCN, as stated in the existing provisions of CAMA.

2. Foreign Exchange (Monitoring and Miscellaneous Provisions) (FOREX) Act, 2004:
The Act by amending the FOREX Act has provided for various grounds on which the Central Bank of Nigeria (CBN) may revoke the appointment of an authorized dealer or buyer licensed to deal in foreign exchange. Some of these grounds include-

  1. failure to utilize the license within 30 days;
  2. failure to commence its exchange business within 6 months from the date of issuance;
  3. failure to comply with a directive under the FOREX Act;
  4. where the entity conducts or intends to administer its business in a manner that threatens the interest of customers or potential customers; and
  5. failure to disclose in its application, any material information known to the entity or reasonably expected to have been known by the entity, etc.

3. National Office for Technology Acquisition and Promotion (NOTAP) Act, 2004:
By virtue of the provisions of Section 5(2) NOTAP Act, there is an obligation to register with NOTAP not later than 60 days of execution, every contract or agreement entered into by any person in Nigeria with a person outside Nigeria relating to the use of trademarks, patented inventions, supply of technical expertise, supply of basic or detailed engineering, etc. Following the amendment of this provision by the Act however, companies in their first two years of business operation shall not be liable to late registration penalties where such contracts are registered before the end of the second year of their business operation”.

To qualify for this exemption for late filing, the company must:

  1. not be more than 2 years in operation;
  2. ensure that the contract or agreement is filed not later than the end of the second year of its operation.

4. Trademarks Act, 2004:
Under the Trademarks Act, a trademark is required to be registered in respect of particular goods or classes of goods, and subject to this registration, no person shall have the right to institute an action against any person for the infringement of an unregistered trademark. Under the Trademarks Act, no provision was made for the definition of “goods”, neither is there any provision for such definition under the Interpretation Act of 1990.
Following the amendment to Section 67 of the Trademarks Act, “goods” has been defined to include services. Consequently, the definition of trademark under the Trademark Act has been amended thus-

“trademark” means a mark used or proposed to be used in relation to goods or services for the purpose of indicating a connection between the goods or services and a person having the right, either as a proprietor or as a registered user, to use the mark, with or without any indication of the identity of that person, and may include shape of goods, their packaging, and combination of colours.”
This amendment provides more clarity on what the words “goods” as used by the Trademark Act means and also enlarges the scope to include services provided by a person.

CONCLUSION
The provisions of the Act are a welcome development, as we hope that it improves the ease of doing business in Nigeria, and also enhances the efficiency of the working relationships between businesses and regulatory authorities. There is no certainty about when the Act shall become effective. We expect that directives will be issued by the heads of the various authorities regarding the amendments made by the Act and their implementation.

STARTUP FINANCING: FUNDRAISING THROUGH SYNDICATES

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By Seun Timi-Koleolu and Adedolapo Arisoyin

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Fundraising is a crucial part of any business, especially for Startups, as access to capital is essential for the growth and continuity of its operations.

In view of the economic downturn and challenges encountered by startups in achieving their growth expectations, Venture Capitalists (VCs) have become more risk averse. Recently, VCs are utilizing the syndicate structure to manage their risk in investments.

In this article, we provide more information on this Syndicate investment structure.

  1. What is a VC Syndicate and how are they structured?

A VC Syndicate is a group of venture capitalists coming together for the purpose of investing in a Startup. The collaboration is typically carried out through a special-purpose vehicle (SPV). An SPV is a company incorporated specifically for the purpose of the investment project.

 

  1. How is a Syndicate formed and what kind of documentation is required?

A syndicate to invest in a startup is typically formed by a group of investors who are interested in pooling their resources to invest.  The syndicate can be set up by either setting up an SPV, particularly for this purpose, or setting up a Joint Venture.

 

The transaction documentation required to set up the syndicate includes:

i. Joint Venture Agreement: This outlines the key terms and conditions of the proposed investment, such as the amount of funding being offered, the valuation of the startup, the rights and preferences of the investors, and specific terms or conditions that apply.

ii. Shareholders Agreement: This is a legal document that formalizes the commitment of each investor to participate in the syndicate. It includes the rights of the investors, the amount of money being invested, the equity stake proportionate to the investment made, etc.

  1. Who is a Syndicate lead/member?

A Syndicate lead typically takes the lead in structuring the syndicate and negotiating terms with the startup. The lead is usually an institutional or individual investor with vast experience in investing in startups, selecting investment opportunities and suitable co-investors to invest in such opportunities.

A syndicate lead is usually entitled to compensation or fee for a syndicate investment, where the investment generates a profit, which is termed a “Carry”.

A Syndicate member is typically an individual investor or VC who joins the syndicate to invest in the startup. Syndicate members typically rely on the lead investor to negotiate terms and conduct due diligence.

  1. What are the advantages of fundraising through a Syndicate?

There are numerous advantages to raising through a Syndicate, which include:

i. access to higher sums of capital: syndicates allow startups to tap into a larger pool of capital than they might be able to access through traditional funding channels;

ii. removal of investment barriers, as a syndicate of investors, gives the startup the opportunity to pool a variety of investors with varying knowledge and expertise to join an investment round;

iii. a less time-consuming process of investment, as the founders do not have to negotiate with multiple investors;

iv. raising funds through a syndicate may also increase the visibility of the startup, as the syndicate’s investors may promote the startup to their networks and help to build traction around the startup; and

v. efficiency of the startup’s cap table as the investment is done through an SPV, thereby limiting the number of investors on the cap table.

  1. What should a startup consider before raising through a Syndicate?

i. Syndicate lead: Startups should conduct adequate due diligence on potential lead investors to ensure that they have a commendable reputation and are of good standing in the startup community and possess the expertise required to add value to the investment.

ii. Dilution: Fundraising through a syndicate can result in significant dilution of the startup’s equity. Startups should carefully consider the size of the investment and the percentage of equity that the syndicate will receive to ensure that they are comfortable with the level of dilution.

iii. Syndicate terms: The terms of the transaction documents will require legal and financial expertise to navigate. Startups should engage experienced professionals to negotiate the terms of the transaction to ensure that it resonates with the vision and objective of the startup.

  1. What do Syndicates typically expect/require from a startup upon investment?

i. Equity Stake: In exchange for their investment, the syndicate typically requests for an equity stake in the startup. The percentage of equity that the syndicate receives is dependent on the size of its investment and the valuation of the startup.

ii. Governance: The governance structure of the startup may be influenced by the syndicate’s investment. The syndicate may request a seat on the startup’s board of directors, or that a board observer attend its meetings to monitor the startup’s progress.

iii. Syndicate transaction documents: A typical transaction document to be executed between the syndicate and the startup may include: i) antidilution provisions; ii) reporting/information requirements to receive financial reports; iii) investor rights to participate in future funding rounds; iv) a clear exit strategy to ensure that they can get a return on their investment, etc. It is important that startups ensure that their legal advisers take a critical look at these investment terms before proceeding with the investments.

 

Conclusion                                                                                

Raising funds through a syndicate can be a great way for a startup to secure funding and gain access to a network of investors. It is imperative that parties to the transaction, i.e  the syndicate and startup engage legal counsel to ensure that they enter into suitable agreements that protect their interests and meet their investment needs.

FINANCIAL SERVICES REGULATION IN NIGERIA: THE PAYMENT CARD INDUSTRY DATA SECURITY STANDARDS

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By Aderonke Alex- Adedipe  and Feyijuwa Akinyanmi

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Introduction

Since the introduction of electronic payments systems in Nigeria, the Central Bank of Nigeria (“CBN”) has sought to maintain a high standard of conduct within the banking sector to protect consumers. One of the measures implemented by the CBN to achieve this, is the requirement that financial institutions involved in electronic payments are required to comply with the provisions of the Payment Card Industry Data Security Standards (“PCI DSS”).

This newsletter provides a brief exposition on PCI DSS and the compliance requirements.

What is PCI DSS?

PCI DSS is a set of security standards developed by prominent card schemes: MasterCard, Visa Inc., American Express, Discover Financial Services and JCB International, to ensure the security of debit and credit card transactions and prevent data theft and fraud. It includes technical and operational requirements which are designed to protect the data of payment cards. The PCI DSS is managed by the above- mentioned card schemes, which form the Payment Card Industry Security Standards Council and are responsible for the review of the PCI DSS [1].

Who should comply with the PCI DSS?

The PCI DSS requires all financial institutions that store, process, and/or transmit cardholder data to be compliant. Furthermore, merchants/vendors that accept or process payments cards are also to comply with the standards.

In addition to the above, the CBN through its Guidelines for Card Issuance; and Usage in Nigeria and the Guidelines on Operation of Electronic Payment Channels in Nigeria, requires all financial institutions that process, transmit and/or store cardholder information to ensure compliance with the PCI DSS and to conduct continuous reviews of their policies and practices in line with the standards.

Examples of these financial institutions include Deposit Money Banks, Microfinance Banks, Payment Service Operators e.t.c.

What are the Requirements of the PCI DSS?

To be compliant with the PCI DSS, the financial institution is required to meet 6 goals as highlighted in the table below.

S/N Goals Requirements
1. Build and maintain a secure network and systems •Install and maintain network security controls.

•Apply secure configurations to all system components.
2. Maintain an Information Security Policy •Support information security with organizational policies and programs.
3. Regularly Monitor and Test Networks •Support information security with organizational policies and programs.

•Log and monitor all access to system components and cardholder data.

•Test security of systems and networks regularly.
4. Protect Account Data •Protect stored card account data.

•Protect cardholder data with strong cryptography during transmission over public network.
5. Maintain a Vulnerability Management Program •Protect all systems and networks from malicious software.

•Develop and maintain secure systems and software.
6. Implement Strong Access Control Measures •Restrict access to system components and cardholder data by business need to know.

•Identify users and authenticate access to system components.

•Restrict physical access to cardholder data.

How are PCI DSS assessments conducted?

Entities required to comply with the PCI DSS are to undergo a form of assessment to determine their compliance with the PCI DSS. Each card scheme is permitted to develop their compliance programs which would dictate the form of assessment the entity needs to conduct.
The assessment could be through Self- Assessment Questionnaires which is filled by the entity or Report on Compliance- a report by Qualified Security Assessors appointed by the Payments Card Industry Security Standards Council which is constituted by the card schemes.

Conclusion

Although the PCI DSS does not provide for sanctions and penalties for failure to comply with its requirements, card schemes are at liberty to set out penalties against financial institutions and vendors found to be non-compliant. In addition, the CBN is also empowered to sanction non-compliant organisations. It is therefore advisable that all financial institutions take the relevant steps to understand the requirements of the PCI DSS and adhere to them.

Additional information about the PCI DSS is contained here.

 

REGULATORY UPDATE: THE CENTRAL BANK OF NIGERIA’S NATIONAL DOMESTIC CARD SCHEME

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By Seun Timi-koleolu and Nuratulahi Yishawu

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On the 26th day of January 2023, the Central Bank of Nigeria (“CBN”) in collaboration with the Nigeria Inter-bank Settlement System Plc (“NIBSS”) launched the Nigerian National Domestic Card Scheme, known as AfriGo. This was done to strengthen the national payment system and deepen the usage of electronic platforms in Nigeria. It is expected to provide more options for domestic consumers and promote the delivery of services in an innovative, cheaper and competitive manner.

1.What is a card scheme?

A card scheme is a central payment network that provides infrastructure for users to conduct transactions using their debit or credit cards. For example, if a person intends to withdraw money from an ATM or PoS agent, that transaction is made possible by technology provided by a card scheme. Currently in Nigeria there are three major card schemes–Visa, Mastercard and Verve. AfriGo is expected to be the fourth once it becomes operational.

2. What is a National Domestic Card Scheme?

This is a card scheme fully owned and controlled by the government of a country. Other countries such as China, Russia, Turkey and India also have a National Card Scheme.

3.What impact will it have on the banking system?

NIBSS has listed the following as the expected impact of the National Card Scheme:

  • Reduced operating cost for financial institutions: Payment of operating cost of card schemes such as Mastercard and Visa card are made in dollars which makes the cost susceptible to dollar fluctuation. Charges on AfriGo card will be paid in Naira and its operating cost may be lesser as compared to other card schemes. This is expected to reduce the operating cost of cards in the country.
  • Data Autonomy: Valuable data are generated when financial institutions process financial transactions. Two of the largest players in the card space, Mastercard and Visa are owned by foreign organisations. While this may not be considered a security threat, it is a source of concern and in an age where data has assumed great significance, the CBN desires to have increased data sovereignty.
  • Financial Inclusion: The CBN has stated that the introduction of AfriGo will help drive financial inclusion in the country by addressing local peculiarities of the Nigerian market and provide the option of cheaper card services.
  • Reduced usage of Foreign Reserve: According to NIBSS, charges for card schemes such as Mastercard and Visa are paid in dollars which takes a toll on Nigeria’s Foreign Reserve. The CBN intends to reduce this through the issuance and usage of AfriGo, as payments will be done in Naira instead of Dollars.
  • Increased competition: Unlike Visa and Mastercard, Verve is owned by a Nigerian company called Interswitch. Nevertheless, CBN intends to spur competition by creating an alternative option.

4.Is it compulsory I use AfriGo?

According to the CBN, it is currently not compulsory for Nigerians to use the AfriGo card as other card schemes will still continue to function.

5.Can I make international transactions with AfriGo?

National Card Scheme usually work within a country, with only a few working outside the country. The AfriGo card will be used for all online and offline transactions within Nigeria. It is, however, most likely that Nigerians will not be able to pay for transactions conducted outside the country as CBN has currently restricted the usage of Naira debit cards for international transactions.

6.How secure is AfriGo?

The security of one’s personal data is very important especially in the current age of cybersecurity attacks. The CBN has stated that the new card scheme complies with global security standards, including EMVCo.

7.How can I get AfriGo?

Just like other card schemes, anyone with a bank account in Nigeria should be able to request for the AfriGo card at their Bank. There is no available information on how much the AfriGo card will cost. It is, however , expected that it will cost less.

Conclusion

The CBN has stated that the Afrigo card will soon be available to Nigerians as banks are currently working on its adoption. Nonetheless, CBN has announced that a deadline will be given to banks in the coming weeks. This is expected to spur the banks into issuing the card faster.