THE EMERGENCE OF ESCROW PAYMENTS IN E-COMMERCE TRANSACTIONS IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND KOFOWOROLA AYOOLA

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Introduction

The Nigerian e-commerce sector continues to evolve and experience rapid growth and changes. Businesses operating in this sector, however, experience a number of challenges, one of which includes the downside of the Cash-on-Delivery (COD) payment option. As a result, several e-commerce giants in Nigeria have suspended COD on their platforms due to rising operational costs and negative impacts on business profitability. These problems stem from high rates of cancellation by customers who fail to accept and pay for products at the time of delivery and increasing security risks faced by their delivery staff. In response to these challenges, escrow payments are currently gaining traction in Nigeria, particularly for online businesses. This is because they offer a more secure way to conduct transactions by protecting both buyers and sellers, addressing the challenge of trust in online transactions.

This newsletter highlights the growing adoption of escrow payments and its usefulness in Nigeria’s e-commerce sector.

What is an Escrow?

Escrow is a legal concept describing an arrangement where an independent party (the “Escrow Agent”) holds funds or assets in trust on behalf of parties to a transaction until certain obligations or conditions in respect of that transaction have been fulfilled, after which the funds or assets are released to the entitled party by the Escrow Agent.  Escrow transactions are quite common in the financial services sector where banks are appointed to act as Escrow Agents.  In e-commerce transactions, the Escrow Agent collects and retains the buyer’s money until the seller fulfills its obligations. Once the buyer receives the product or service as agreed, the Escrow Agent releases the funds to the seller. This protects and balances the interests of both buyer and seller.

How Does it Work?

For online marketplaces, buyers and sellers agree on the terms and conditions of the transaction, including the use of escrow services. The buyer then deposits the funds with the appointed escrow agent. Once the seller delivers the product or service, the buyer confirms receipt and satisfaction of the order. Upon confirmation, the Escrow Agent releases the funds to the seller.

What is an Escrow Account?

The Escrow Account is a temporary holding account managed by the Escrow Agent, separate from the buyer and seller’s accounts. The Escrow Account is used to warehouse received funds and cannot be accessed by either the buyer or seller.

Who are Escrow Payment Service Providers?

Escrow services are provided by financial institutions in Nigeria such as traditional banks and financial technology (fintech) companies. ICT services companies also provide escrow payment services through partnerships with banks, as they are not licensed to hold customers funds directly. They maintain deposit accounts with banks in their corporate name where the escrow funds are secured. E-commerce businesses integrate trusted escrow payment API into their platforms to automate the escrow process to offer their customers a more secure payment option, build buyer trust and potentially increase sales.

 What are the Laws Regulating Escrow Providers in Nigeria?

There are no specific laws yet regulating escrow service providers in Nigeria as the sector is still evolving. However, they generally operate under regulations set by the Central Bank of Nigeria (the “CBN”) to ensure consumer protection and adherence to anti-money laundering (AML) practices. Financial institutions and platforms that keep escrow accounts or hold funds in escrow need to comply with consumer protection regulations to ensure fair and transparent practices. Section 2 of the CBN Consumer Protection Regulation 2019 (the “Regulations”) imposes a duty on relevant financial institutions and CBN-regulated entities to ensure that non-regulated entities they service or enter into service agreements with, comply with the provisions of the Regulations on fair advertisement practices, pre-contract disclosures and general good business practices.  These include that:

  • advertisements must be factual and not misleading, deceptive or not exaggerate the quality of the products being advertised.
  • details of the cost of a product or services, including fees and associated charges, must be fully disclosed.
  • disclosures must be made regarding potential variations in foreign exchange or interest rates due to market conditions, minimum balance requirements, and other transaction limitations.
  • businesses must operate in a responsible, professional, and ethical manner.
  • businesses must provide clear channels for customer inquiries and complaints.

Also, it is industry practice for sellers, customers and the escrow agent, usually a traditional bank, to execute an Escrow Agreement, detailing the specific rights and obligations of the parties involved and the conditions for releasing the funds.

What are the Benefits of the Escrow Payment Option for E-commerce Companies?

  • Increased Trust: Escrow builds trust between buyers and sellers as buyers are assured they will not pay for undelivered or substandard goods, and sellers are guaranteed payment upon fulfilling their obligations.
  • Increased Sales Conversion Rates: Customers are more likely to make purchases knowing that their money is secure in escrow and will be refunded by an independent party, with minimal efforts by the buyer, where the seller fails in its obligations.

Conclusion

Escrow payments offer a promising solution to challenges faced by e-commerce businesses in Nigeria and provide protection to buyers against fraud. While there are currently no specific regulations governing escrow payments in Nigeria, it is expected that the CBN will issue directives or guidelines to regulate this evolving market in the near future.

 

ESG INVESTING: A GUIDE TO ATTRACTING INVESTORS

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BY SEUN TIMI-KOLEOLU AND QASIM OGUNJIMI

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Introduction

ESG (Environmental, Social, and Governance) investing is gaining traction globally, and Nigeria is no exception. It involves assessing companies for potential investment based on their environmental practices/ impact, social responsibilities, and governance frameworks. With the increasing emphasis on sustainable and ethical business conduct, Nigerian companies have a unique opportunity to attract a diverse array of local and international investors by incorporating robust ESG principles into their operations.

In this newsletter, we will discuss the benefits of ESG investing for Nigerian businesses and provide a roadmap for attracting ESG-conscious investors. This overview will help businesses understand the significance of ESG criteria and how to leverage them for long-term success.

UNDERSTANDING ESG INVESTING

ESG investing is a holistic approach to investment decision-making that considers not only financial returns but also the environmental, social, and governance impacts of a company’s operations. The following are the components of this approach:

Environmental Factors

Environmental criteria assess how a company manages its impact on the natural world. This includes considerations such as carbon emissions, energy efficiency, waste management, and resource conservation. Importantly, these considerations are not limited to sectors traditionally associated with environmental concerns, such as oil and gas. Companies across all sectors—from manufacturing and agriculture to technology and finance—are evaluated on their environmental practices. Investors look for companies that prioritize sustainability, reduce their environmental footprint, and mitigate climate-related risks, regardless of the industry they operate in.

Social Factors

Social criteria evaluate a company’s relationships with its employees, customers, communities, and broader society. This encompasses issues like labour practices, human rights, diversity and inclusion, product safety, and community engagement. For ESG investors, these social factors are crucial as they determine a company’s reputation and indicate its commitment to ethical practices and social sustainability, which can lead to long-term stability and lower risk.

Governance Factors

Governance criteria focus on the systems and processes that govern a company’s operations, including its leadership structure, board composition, transparency, and ethical standards. This criterion is paramount to ESG investors as it provides insights into a company’s management practices and integrity. Companies with robust governance frameworks are perceived as more trustworthy and are better positioned to deliver sustainable long-term returns, making them attractive investments for ESG-conscious investors.

WHY ESG MATTERS

Understanding ESG criteria is key for Nigerian businesses as it directly impacts their long-term sustainability. Firstly, companies with robust ESG practices tend to attract more investors, as they signal a commitment to responsible and sustainable business conduct. This heightened investor interest translates into improved access to capital markets (e.g. Carbon Offsetting Investments) and lower borrowing costs (e.g. ESG Bonds), providing companies with the financial resources needed for growth and innovation. Moreover, by addressing environmental, social, and governance risks, businesses can proactively manage potential crises and enhance their resilience in the face of evolving market dynamics. Beyond financial considerations, embracing ESG principles also enhances a company’s reputation and brand value. Consumers and stakeholders increasingly expect businesses to operate ethically and contribute positively to society, and companies that prioritize ESG factors are better positioned to earn trust, attract customers, and build lasting relationships. Furthermore, by promoting sustainable business practices, ESG investing allows for long-term value creation, aligning the interests of investors, businesses, and society at large.

STEPS TO ATTRACT ESG INVESTORS

Attracting ESG-conscious investors requires a proactive approach that demonstrates a company’s commitment to sustainability, transparency, and responsible business practices. Here are some key steps Nigerian businesses can take to attract ESG investors:

  1. Conduct an ESG Assessment: The first step in attracting ESG-conscious investors involves conducting a comprehensive assessment of the company’s ESG performance and existing framework across environmental, social, and governance dimensions. This assessment helps identify areas of strength and weakness, gaps in ESG disclosure, and opportunities for improvement. Companies may adopt recognized ESG frameworks and standards, such as the ones set by the Global Reporting Initiative (GRI), Sustainability Accounting Standards Board (SASB), or other sector-specific standards.
  2. Develop an ESG Framework: With insights gained from the ESG assessment described in (i) above, companies can develop a clear and comprehensive ESG strategy that outlines their goals, priorities, and action plans. This strategy should include measurable targets and timelines for achieving ESG objectives, ensuring alignment with business goals and stakeholder expectations.
  3. Enhance ESG Disclosure and Reporting: Enhancing ESG disclosure and reporting is another critical step in attracting ESG investors. It is not enough for companies to have a documented framework. Publishing regular reports that provide detailed insights into its ESG performance allows the company and potential ESG investors to track the company’s ESG practices in reality. Additionally, leveraging digital platforms and channels to disseminate ESG information to investors, stakeholders, and the public can enhance visibility and credibility. Similarly, participating in ESG-focused investor conferences and events also provides a platform to showcase ESG initiatives and engage with potential investors. For example, international financial services firms like JPMorgan Chase, Wells Fargo, and Goldman Sachs release annual reports that thoroughly examine their ESG strategies and the outcomes of these initiatives.
  4. Engage with ESG Rating Agencies and Investors: To attract ESG investors, engaging with ESG rating agencies is vital for gaining recognition and validation of the company’s ESG efforts.

CONCLUSION

As global interest in sustainable and ethical investment grows, Nigerian businesses have a unique opportunity to attract investors by adopting good ESG practices. The presence of regulatory frameworks, including the SEC Guidelines on Sustainable Financial Principles for the Capital Market, SEC Social Bond Rules, SEC Green Bond Rules, and CBN’s Nigerian Sustainable Banking Principles (NSPB), underscores the country’s commitment to encouraging ESG investing and aiding responsible business practices.

As Nigerian businesses embark on their ESG journey, it is essential to recognize that the adoption of ESG principles is not just a trend but a strategic imperative for long-term success and resilience in an increasingly complex and interconnected world.

REGULATORY UPDATE: PROPOSED NEW RULES ON THE ISSUANCE AND ALLOTMENT OF SECURITIES BY PRIVATE COMPANIES IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND EBIKENIYE BEST

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Introduction

On May 7, 2024, the Securities and Exchange and Commission (“SEC”) issued the “Exposure of Proposed New Rules for the Issuance and Allotment of Securities by Private Companies” (“Rules”). The Rules are made pursuant to Section 43(1) (b) of the Business Facilitation (Miscellaneous Provisions) Act, 2022 which amended the provisions of Section 67(1) of the Investment and Securities Act and empowers SEC to prescribe regulations for the issuance and allotment of private companies’ securities.

In this article, we have provided useful information in connection with the Rules.

1. What do the Rules seek to achieve?

Currently, private companies wishing to raise capital may do so by sourcing for equity or debt investments from investors. Only public companies in Nigeria are permitted to issue securities to the general public, either through private placement or public offering.

The Rules now seek to grant private companies the right to issue and allot securities to the public subject to obtaining the approval of SEC.

2. What is the proposed scope of the Rules?

The Rules are to apply to:

a. debt securities issued by private companies either by public offering, private placement, or such other methods as may be approved by SEC;
b. registered exchanges and platforms that admit debt securities issued by private companies for trading, price discovery, or information repository purposes; and
c. registered capital market operators who are parties in the issuance and allotment of debt securities of private companies.

3. What do private companies need to show to be eligible?

Based on the proposed Rules private companies are to satisfy certain requirements to be eligible including:

i. be a company duly incorporated under the Companies and Allied Matters Act (CAMA), 2020, or other enabling laws;
ii. have at least 3 (three) years track record of operation;
iii. not be in default of payment of interest or repayment of principal in respect of previous debt issuance(s) for a period of more than 6 (six) months;
iv. cause the bonds to be rated by a rating agency (this however is not mandatory for private placements); and
v. ensure that all necessary approvals are obtained from relevant regulatory authorities other than SEC, and such approvals are duly filed with SEC.

4. Are there any restrictions on issuance and allotment of securities?

According to the proposed Rules, private companies are only expected to issue debt securities to the public. A private company is not permitted to offer its equity securities to
the public.

5. Are there registration, reporting and disclosure requirements?

In order for private companies to issue and allot securities to the public, they will be required to register with SEC by submitting the requisite documents. They will also be required to comply with reporting and disclosure requirements as set out in the Rules.

6. Are there sanctions/penalties in the Rules?

According to the proposed Rules private companies that issue and allot securities without the approval of SEC are liable to sanctions and penalties including monetary fines, suspension or withdrawal of the registration with SEC.

Conclusion

The exposure draft offers an opportunity for private companies to raise funds beyond the
current available fundraising options. We expect that the finalized Rules will provide
clarity on the requirements of SEC for private companies wishing to raise funds by issuing
securities to the public.

REGULATION OF CYBERCRIME IN NIGERIA AND THE CYBERSECURITY LEVY

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BY SEUN TIMI-KOLEOLU AND HILLARY OKOROTIE

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INTRODUCTION

On May 6, 2024, the Central Bank of Nigeria (“CBN”) published a circular providing “Implementation Guidance on the Collection and Remittance of theNational Cybersecurity Levy” (the “CBN Circular”) introduced by the Cybercrime (Prohibition, Prevention, etc.) Act of 2015 and amended by the Cybercrime (Prohibition, Prevention, etc.) Amendment Act 2024 (the “Act”). The Circular has raised concerns about its implications for businesses and individuals. There are also concerns about whether the CBN has properly interpreted the application of
the levy.

In this article, we have provided a general background on the regulation of Cybercrime in Nigeria and also set out our view on the implementation of the Cybercrime levy by the CBN.

A. What is the Applicable Law on Cybercrime in Nigeria?

In Nigeria, Cybercrime is primarily regulated by the Cybercrime (Prohibition, Prevention, etc.) Amendment Act 2024. The Act addresses various cyber-related offences and is aimed at instituting an effective regulatory framework that prohibits and prosecutes cybercrime in Nigeria. It prescribes different cybersecurity obligations for organizations including financial institutions in the country.

It also grants the President the right to designate certain major computer systems, programs, and networks as critical national information infrastructure and prescribe minimum standards, guidelines and rules in respect of such infrastructure.

B. What is Recognized as Cybercrime under the Act?

The Act provides a list of different activities that will be considered to be Cybercrime in Nigeria including:

(i) knowingly altering data with the intention that such data will be acted upon as if it were authentic;

(ii) misdirecting electronic mail with the intention to fraudulently obtain financial gains;

(iii) unlawfully destroying or aborting any electronic mail through which money or valuable information is being conveyed, etc. The Act also states the penalties for such activities.

C. Where did the Cybersecurity Levy Originate From?

The Cybersecurity Levy (the “Levy”) was introduced by section 44(2)(a) of the Act and amended by the Cybersecurity Amendment Act. The Act (as amended) provides that a Levy of 0.5% or 0.005 is to be remitted by the following businesses (set out in the second schedule of the Act) to a National Security Fund domiciled with the CBN:

i. Banks and other Financial Institutions
ii. GSM Service providers and all telecommunication Companies
iii. Internet Service Providers
iv. Insurance Companies
v. Nigerian Stock Exchange.

D. What is the Cybersecurity Levy to be Used For and Who is to
Administer the Fund?

What is clear from the Act is that the levy collected is to be administered by the Office of the National Security Adviser and included as part of the National Security Fund. The Act states that 40% of the Fund (which comprises of various levies collected by government) may be used for programs relating to countering violent extremism.

E. What is stated in the 2024 CBN Implementation Guidance on the
Collection and Remittance of the National Cybersecurity Levy?

Although the Cybersecurity Levy is a levy introduced by the Act, there had been no steps taken by regulators to implement it until the recent CBN Circular.

With the recently issued CBN Circular, CBN placed a responsibility on Banks, Payment Service Providers, and other Financial Institutions (the “Financial Institutions”) to commence the collection of the Cybersecurity Levy from
businesses and customers in the course of their transactions. The Circular requires Financial Institutions to collect a Cybersecurity levy of 0.5% on all electronic transactions at the point of the electronic transfer origination and
remit the sums collected to the Fund. The deducted amount is to be reflected as “Cybersecurity Levy” in the customer’s account.

F. When is the CBN Guidance to Take Effect?

According to the Circular, all deductions from electronic transactions is to commence 2 weeks from the date the circular was published. Commercial, Merchant, Non-Interest Banks, and Mobile Money Operator are to ensure they configure their systems within 4weeks to collect the levy in an automated manner whilst all other Financial Institutions have been given eight weeks to configure their systems to collect the levy in an automated manner.

G. What Transactions Are Exempted?

The Circular sets out 16 transactions excluded from the Cybersecurity levy including the following:

i. loan disbursement and repayment;
ii. salary payments;
iii. inter-branch transfers with one bank;
iv. letters of credits;
v. intra-bank transfers between customers of the same bank;
vi. bank transfers to CBN;
vii. educational institution transactions including tuition payments and other
related transactions;
viii. non-profit organization transactions, etc.

H. Is There a Penalty for Failing to Deduct the Cybersecurity Levy?

The Guidance states that institutions that fail to deduct the Levy as prescribed will be fined at least 2% of the institution’s annual turnover.

Conclusion

A review of Section 44 of the Act on its own, suggests that the intention of the draftsman when introducing the Cybersecurity Levy was for the levy to apply to businesses as stated in the Second Schedule listed above; and not to broaden its implementation to affect all individuals and businesses in the Country in the manner that the CBN Circular purports to achieve.

We note that the implementation of the Circular by the CBN is currently being challenged by the House of Representatives and the public. We expect that more clarity will be provided on the application of the Cybersecurity Levy once deliberations have been concluded.

 

LEGAL GUIDANCE FOR NAVIGATING THE TECH STARTUP TERRAIN IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND OMOWUMI OLONADE

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INTRODUCTION

In the dynamic Startup scene in Nigeria, attaining success depends not only on innovation and
market traction but also on effectively navigating the intricate realm of legal requirements.

Therefore, this newsletter provides some guidance essential for ensuring the prosperity and
sustainability of tech startups in Nigeria.

 

What is a Start Up?

The Nigeria Start Up Act (2022) defines a startup as a company that has operated for no longer
than a decade, dedicated to the creation, innovation, production, development, or adoption of a
distinct digital technology, innovative product, service, or process.

What is the legal framework governing technology in Nigeria?

The regulatory framework governing technology in Nigeria extends across multiple subjects,
including intellectual property rights, data privacy and security, electronic commerce,
telecommunications, regulatory compliance, amongst others. Additionally, it encompasses
emerging areas such as blockchain technology, artificial intelligence, and biotechnology.
Recognizing the complexities involved in navigating the legal landscape in Nigeria, the following
steps are outlined with the aim at offering guidance to startups:

1. Incorporation of Company: Commencing a startup’s journey in Nigeria necessitates the
formal incorporation of a company. During the incorporation process, adherence to the
legal framework outlined by the Corporate Affairs Commission (CAC) is paramount.
Additionally, the selection of the business structure, which could be a Limited Liability
Company (LLC), a Partnership, or a Public Limited Company (PLC), is pivotal. Each
business structure entails distinct requirements and implications pertaining to liability and
governance. Furthermore, determining the share capital structure, which includes the
authorized share capital, (which in some cases, is sector specific) and the allocation of
shares among shareholders are integral components of the incorporation process.

2. Intellectual Property Protection: The core of any technology development company is
rooted in intellectual property (IP). Safeguarding innovations via patents, trademarks, and
copyrights registration is crucial for preserving the company’s competitive advantage. The
Trademarks, Patent and Design Registry and the Nigerian Copyright Commission (NCC)
are responsible for registering and safeguarding these assets.

3. Contractual Prudence: It is essential for startup companies to meticulously draft all
contractual agreements, including contracts with clients, suppliers, independent
contractors, and employees. This is important because it will help clarify the rights
and obligations of each of the parties involved, thereby reducing the likelihood of
disputes. Ensuring contractual prudency is instrumental to the protection of the
rights of startup companies.

4. Regulatory Compliance: Startup companies must stay abreast of regulatory requirements
pertaining to technology, data protection, and cybersecurity. Considering the substantial
reliance of technology companies on data, it is imperative for them to register with the
Nigeria Data Protection Commission (NDPC) and adhere to data protection laws such as
the Nigeria Data Protection Regulation (NDPR) and the Nigeria Data Protection Act
(NDPA), to ensure compliance and mitigate potential legal risks. In addition, enforcing
robust data protection policies and resilient cybersecurity protocols to effectively
minimize the risks associated with potential data breaches is crucial.

5. Tax Considerations: All companies, including startups, are required to have a Tax
Identification Number (TIN) issued by the Federal Inland Revenue Service (FIRS), as it is
necessary for tax compliance. Technology companies are subject to corporate income tax, and
certain transactions may attract Value-Added Tax (VAT). A thorough comprehension of these
tax obligations is imperative for seamless operations and ensuring that the technology
development company fulfills its fiscal responsibilities.

6. Funding and Investment: In the pursuit of investment, startups must be aware of the legal
requirements and implications entailed in securing funding, including the privileges and
equity sought by investors as prerequisites for financing. In Nigeria, startups have access to a
variety of capital-raising avenues, such as equity financing, debt financing (through loans
sourced from financial institutions or private lenders with predetermined repayment terms
and interest rates), venture capital, and crowdfunding.

7. Employment: Compliance with employment regulations with respect to recruitment,
termination, remuneration, and occupational safety is very crucial. It is important to
safeguard the company’s interests by establishing transparent employment policies and
complying with regulatory mandates. This will reduce the risk of legal liabilities for the
startup company.

8. Dispute Resolution Mechanisms: Considering the potential for disputes to arise during
business transactions, it is imperative for companies, including startups, to implement
efficient dispute resolution mechanisms. This may include mediation in contracts to facilitate
amicable resolution of disputes, thereby averting the need for court intervention or
adjudication through arbitration.

9. Corporate Governance: It is important to promote a culture centered on transparency and
accountability by implementing sound corporate governance practices amongst all
stakeholders including the management and employees. Ensuring meticulous recordkeeping,
conducting frequent board and team meetings can help uphold ethical standards to
cultivate trust and enhance credibility.

Conclusion
It is crucial for startup companies to give priority to legal compliance and corporate governance in
order to avoid regulatory pitfalls and sanctions. Through steadfast adherence to regulatory
mandates, protection of intellectual property, and cultivation of transparency and accountability
within their culture, startups can effectively mitigate risks, cultivate trust among stakeholders, and
fortify their position for sustained growth and resilience amidst the ever-evolving business
environment.