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SAFE VS. CONVERTIBLE NOTES: NAVIGATING FINANCING OPTIONS IN NIGERIA

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BY ADERONKE ALEX-ADEDIPE AND HILLARY OKOROTIE

Introduction

Financing is an important component of every company’s formation and growth. For early-stage companies, founders often face the important decision of selecting the investment model that best supports the company’s development. While there are several financing options available such as direct equity investments and debt financing, this newsletter focuses on Simple Agreements for Future Equity (SAFEs) and Convertible Notes.

Understanding the differences between SAFEs and Convertible Notes is essential for investors and founders seeking to balance risk and growth opportunities in early-stage financing.

 

Understanding a SAFE

Introduced by Y Combinator in 2013, a SAFE is a contractual instrument through which an investor provides funding in exchange for the right to receive equity at a later date and upon the occurrence of a specified triggering event. Under a SAFE, the investor’s return is realized when the company undergoes a liquidity-triggering event. These triggering events are usually defined in the agreement and may include events such as a merger, acquisition, an initial public offering (IPO), a change of control, etc.

SAFEs can be structured in several ways depending on the terms negotiated. The common structures include: (i) a discount, no valuation SAFE, where the investor converts their investment into equity at a discounted price compared to new investors in a future financing round; (ii) a valuation cap, no discount SAFE, which sets a maximum company valuation at which the investment will convert into equity; (iii) a valuation cap and discount SAFE, combining both protections for the investor; and (iv) a Most Favoured Nation (MFN) SAFE, which contains neither a discount nor a valuation cap but allows the investor to adopt more favourable terms offered to future SAFE investors. For more details, please read our newsletter here.

 

Understanding Convertible Notes

Convertible Notes represent a more traditional approach to early-stage financing. Structurally, they are debt instruments that convert into equity or repayment. When an investor provides funds through a Convertible Note, the company is technically borrowing money. The note includes a principal amount, an interest rate, and a maturity date. It is designed to convert into equity or repayment upon maturity.

This structure means that Convertible Notes begin as debt obligations but transform into ownership stakes when a qualifying financing event occurs. Interest accrued over time is usually added to the principal amount before conversion. The maturity date also introduces an additional layer of protection for investors to recoup their investments.

 

Distinction Between SAFEs and Convertible Notes

The most fundamental distinction between SAFEs and Convertible Notes lies in their classification. A SAFE is not a debt instrument, rather, it represents a contractual right for an investor to receive equity in the company in the future upon the occurrence of specified triggering events. As a result, a SAFE does not create an obligation for the company to repay the invested funds and does not accrue interest over time.

Convertible Notes, by contrast, are debt instruments that are designed to convert into equity at a later stage. When funds are provided through a Convertible Note, the company owes the investor the capital sum until the note converts or is repaid. Prior to conversion, the investment typically accrues interest and is subject to a fixed maturity date. At maturity, the principal and any accrued interest may convert into equity depending on the terms of the agreement. These features generally provide investors with additional protection and leverage, while SAFEs tend to offer companies flexibility and no immediate financial obligations.

 

Conclusion

As Nigeria’s startup ecosystem continues to expand, founders and investors will increasingly encounter alternative financing instruments when raising capital. SAFEs and Convertible Notes both serve this purpose, providing an avenue through which companies can secure funding at the early stages of growth.

Choosing between the two often depends on the growth objectives of the company and the level of protection investors seek. Regardless of the structure adopted, obtaining professional legal advice and maintaining a clear understanding of the conversion mechanics are essential to ensuring that both founders and investors are adequately protected.

KEY PROVISIONS OF THE FINANCE BILL 2021

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By Aderonke Alex-Adedipe and Eustace Aroh 

Introduction

In line with the tradition of the current administration, the Finance Bill 2021 (the “Bill”) was recently presented before the legislature for passage into law. Similar to its predecessors, the Bill proposes to amend twelve federal statutes in furtherance of the government’s objectives to foster the growth of the economy, stimulate investment into Nigeria, and boost revenue generation. In this article, we highlighted some key provisions of the Bill.

Proposed Amendment to Companies Income Tax (CIT)

i. The Bill specifically introduces taxation for lotteries and betting companies. These companies will be under obligation to pay income tax on the profit earned from the business of lottery and gaming. To determine their profits, prizes of customers, contribution to the lottery trust fund, agent commissions, and regulatory levies among others will be considered as allowable deductions.

ii. The Bill also confers powers on the Federal Inland Revenue Service (FIRS) to assess foreign digital and technology-driven companies with significant economic presence in Nigeria and charge income tax based on their turnover attributable to their presence in Nigeria.

iii. Income accrued from exports of companies engaging in the upstream, midstream or downstream petroleum operations are no longer exempt from CIT. Therefore, such income is now classified as taxable under the CITA.

iv. Unit trusts are no longer required to pay the usual CIT. Rather, the withholding tax deducted from income generated by the unit trust shall be full and final tax liability due to the unit trust.

v.The minimum CIT of 0.25% (as opposed to 0.5%) for companies that have recorded a loss or no profit has been extended to the period between 1st January 2019 to 31st December 2021. However, the application is only available for two accounting periods (2019-2020 or 2020-2021).

Proposed Amendment to Companies Income Tax (CIT)

vi. The Bill proposes a 5% Capital Gains Tax (CGT) on the proceeds from the disposal of shares in a Nigerian company exceeding 500 million Naira. Nevertheless, where the proceeds (or a portion of the proceeds) are reinvested into any Nigerian company within the same year, the proceeds (or the portion of the proceeds) will be exempted from taxation.

Other Taxation

vii. The Bill proposes the removal of the 0.25% National Agency for Science and Engineering Infrastructure Levy paid annually by commercial companies with over 4 million naira turnover.

viii. The FIRS has also been charged with the task of implementing the provisions of the Nigeria Police Trust Fund (Establishment) Act, 2019. Consequently, the FIRS will be required to assess and collect 0.005% of the net profit of companies operating in Nigeria to be paid into the Nigeria Police Trust Fund.

Conclusion

In addition, the provisions of the Bill attempts to remedy some loopholes in the tax laws (such as appointing the FIRS as the collecting agency of the Nigeria Police Trust Fund) as well as providing obtainable advantages to doing business in Nigeria.

Nevertheless, the annual amendment to the tax laws has made the tax regulations complex by creating a labyrinth of provisions. This will create a herculean task for the FIRS as the agency required to implement these changes. These annual amendments also create confusion among taxpayers on what applies every financial year.

SETTING UP A FINTECH COMPANY IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Introduction

With the rapid growth of technology, Start-ups have continually found ways to improve financial services. This trend has been matched by the growing appetite of consumers globally, for faster and more convenient financial services. The financial sector in Nigeria has witnessed a growth in FinTechs with their revenue expected to reach $543m in 2022.

In this article, we have set out below the process of setting up a fintech company in Nigeria.

1. Licences
For promoters seeking to set up a FinTech, it is generally advised that they understand the existing regulatory space before proceeding to incorporate the business. This will help promoters to understand the acceptable organisational structure, share capital requirements and financial implications attached to any business they seek to engage in.

Fintechs in Nigeria are generally categorized and regulated as follows:

Fintech categories Regulators
i Payment service providers, mobile money operators, digital bank, switch companies Central Bank of Nigeria (CBN)
ii Lending CBN; State Ministry of Home Affairs
iii Savings, investment and funding CBN; Securities and Exchange Commission (SEC)
iv Cryptocurrency CBN; SEC
v Insurtech National Insurance Commission

Notwithstanding the above, some regulators cut across all sectors due to their general regulatory function such as the National Communications Commission (NCC) (for FinTechs providing value added services) and the National Information Technology Development Agency (NITDA) (for users of data, amongst other things).

2. Incorporation
Once there is a clear understanding of the regulatory terrain, the next step is to incorporate the company for the FinTech service. Although the minimum share capital for incorporating a private company in Nigeria is 100,000 naira, the share capital requirement for FinTechs usually exceeds this amount. Promoters must consult the regulators and relevant laws (via their legal advisers) to determine the adequate minimum share capital and shareholding requirement for their FinTech.

There are also capital deposits required by relevant regulators such as CBN for setting up FinTechs, to find out more, click here.

3. Documentation
Upon incorporation, it is pertinent for the founders to ensure that all relevant contracts are in place to properly protect the business. The founders are generally advised to execute the following: a Founders’ Agreement (to regulate the relationship of the founders of the business); a Shareholders’ Agreement (to regulate the relationship between all shareholders including present and future shareholders); Loan Agreements (to evidence and detail all capital injections including investments by founders and friends into the business); and Employee Stock Option (granting an option of share purchase to key employees).

4. Protecting the Intellectual Property

Founders of FinTechs are advised to ensure that intellectual property developed in the cause of the business are protected. It is important that the company’s logos are registered as trademarks at the Trademark Registry; and the software and codes are registered at the National Copyright Commission or Patent Registry (if it qualifies). Although software and codes are automatically copyrighted under Nigerian law, it is useful to carry out the registration of the software at the relevant registry.

It is pertinent to note that intellectual property rights automatically vests in the developer (which could be employees or contractors of the company) under Nigerian law. To ensure that the rights vest in the company/founder, it is advisable that the FinTech enters into an agreement with the developer assigning rights in the software to the company/FinTech either through an employment contract or a Copyright Agreement.

5. Financing

Founders may choose to first source for funds from family and friends, after which they may need to progress to venture capital and other institution.

The CBN and the SEC recently launched programs to aid FinTechs in test running their software under-regulated spaces. Click here to find out more about these programs.

Conclusion
With the population of unbanked Nigerians currently calculated at above 50% of the adult population, there are great growth opportunities in the FinTech ecosystem. It is, however, recommended that professional advice is obtained by emerging and existing FinTech founders from the inception of the FinTech, to properly guide the business.

 

 

PROPOSED REGULATION OF DIGITAL (ROBO) ADVISORY SERVICES IN NIGERIA

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By Aderonke Alex-Adedipe and Baraebibai L. Ekpebu

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INTRODUCTION

As Lord Denning once said; “If we never do anything which has not been done before, we shall never get anywhere. The law will stand still while the rest of the world goes on, and that will be bad for both”.

On May 5, 2021, The Securities and Exchange Commission (SEC) published its “Proposed New Rules on Robo-Advisory Services1 (the “Rules”), which signifies the progression of certain aspects of the Nigerian legal framework on financial advisory services. In recent times, the extension of technology to money management in the form of “Fully Automated Robo-Advisers,”2  presents an option to an investor willing to take advantage of automated digital investment advisory technology, for discretionary online algorithmic-based financial advice.

This newsletter examines in summary, some key provisions of the Rules and what they mean for the financial business community.

KEY PROVISIONS

Scope: The Rules seek to apply to all capital market operators as well as individuals or corporate bodies, interested in providing “Digital (Robo) Advisory Services”. The Rules also require that all interested individuals and companies shall be subject to registration by the SEC. This is in line with international best practices on investor protection. For example, in the U.S., Robo-Advisers must register with the U.S. Securities and Exchange Commission just like human advisers and are subject to the same securities laws and regulations as traditional broker-dealers.3

Definitions: The Rules offer three (3) definitions, and in essence categorisations of Robo-Advisory services. These are – “Fully Automated Robo-Advisers,” (“Robo-Advisers with no human adviser interaction in the advisory process.”) “Digital Advisory Services” (“the provision of advice on investment products using automate, algorithm-based tools which are client-facing, with little or no human adviser interaction…”) and “Robo-Adviser” (“a person who provides digital advisory services”). Although Robo-Advisory technology exists, there are varying degrees of human interface and influence on the functionalities of this novel technology. This appears to be the rationale for SEC’s decision to seek to hold humans accountable in the deployment of algorithm/artificial intelligence-based financial advisory services.

Additional Regulatory Requirements: The Rules mandate strict compliance by Robo-Advisers to all ‘business conduct requirements’ in the Investment and Securities Act 20074. Robo-Advisers are also instructed to carry out due diligence5 on all third-party providers to assess risks associated with such outsourcing arrangements.6  In addition, Robo-Advisers are to adhere strictly to client’s orders7  and Robo-Advisers intending to perform portfolio management functions are required to comply strictly with the rules and regulations governing Fund/Portfolio Management Functions.8

Rebalancing of Client Investment Asset Allocation: The procedure for digital advisory services which involves requesting a set of information regarding the risk appetite and preferred portfolio of the investor, is described under the Rules. Upon providing the requested data, the Robo-Adviser provides the best investment option, which is algorithm-based. The client may accept or reject the advice. Where the client, however, chooses to act on the previously rejected advice, the Rules refer to this as “Rebalancing”. The Rules mandate Robo-Advisers to seek the express consent of an investor when presented with a revised portfolio after rejecting a previously recommended one. 9

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance.  Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Developing the Client-Facing Tool: Robo Advisers are required to ensure that the technology utilized is programmed to carry out tasks to a premium standard. This includes the collection of information, analyses, and recommendations given by algorithm-driven advisor tools. Robo-Advisers are mandated to identify inconsistent responses from clients, identify and eliminate clients who are unsuitable for investing10 and also ensure that algorithms can detect bias, assign risk profiles correctly and consistently, and produce the intended asset allocation and investment recommendation.

Monitoring and Testing of the Client-Facing Tool: Robo Advisers are required under Section 7 of the Rules to ensure the establishment of policies, procedures, and controls for regular monitoring and testing of algorithms to ensure optimum performance. Advisory services are to be suspended where an error or bias within an algorithm is detected and compliance checks on the quality of advice provided by the client-facing tool are to be carried out regularly. The frequency of such compliance checks, however, should be commensurate with the size and complexity of the Robo-Adviser’s operations.

Information on Algorithms: Another innovative inclusion in the Rules is the requirement for Robo-Advisers to disclose in writing, to their clients, all assumptions, limitations, and risks associated with the algorithms, circumstances where Robo-Advisers may override algorithms or halt services, and material adjustments to the algorithms.

CONCLUSION

Robo-Advisers have the potential to offer investors speedy and cost-effective access to investment advisory services. However, the fiduciary nature of this role demands prompt oversight. The provisions highlighted above, reveal that investor protection is at the heart of the Rules.  Whilst implementing rules against an algorithm may seem impossible, ensuring that persons behind such algorithms are responsible for ensuring their efficient operation can be achieved. Therefore, the proposed monitoring of these innovations and future implementation of safeguards is a necessary step for the protection of investors in Nigeria.

 

  1. SEC NIGERIA, ‘Proposed New Rules and Sundry Amendments To The Rules And Regulations Of The Commission’ (2021) < https://sec.gov.ng/proposed-new-rules-and-sundry-amendments-to-the-rules-and-regulations-of-the-commission/> Accessed 19 May 2021
  2. Section 1 of the proposed Robo-Advisory Rule defines this to mean Robo Advisers with no human intervention
  3. CFA Institute, ‘Robo-Advisors’ (2021)< https://www.cfainstitute.org/en/advocacy/issues/automated-advisors> Accessed 19 May 2021
  4. Section 3 (i) of the Proposed New Rules on Robo-Advisor Services
  5. Section 3 (iii) of the proposed New Rules on Robo-Advisor Services
  6. Section 3 (ii) of the proposed Robo-Advisory Rule provides that third-party providers to whom development and maintenance of client-facing tools have been outsourced to by a Robo Advisor are required not to be registered by the commission.1. https://www.companybug.com/what-is-share-capital/
  7. Section 27(2) of the Companies and Allied Matters Act, 1990.
  8. Section 27(2) of the Companies and Allied Matters Act, 2020.
  9. Paragraph 13 of the Companies Regulations, 2021
  10. Section 130 of the Companies and Allied Matters Act, 2020.

TRADING OF FOREIGN LISTED SECURITIES IN NIGERIA – REGULATORY UPDATE

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By Seun Timi-Koleolu and Baraebibai L. Ekpebu

Introduction

Regulators of financial service sectors all over the world grapple with the overwhelming effect of disruptive technologies which have left policymakers and academics alike scratching their heads in search of a coherent set of regulatory remedies. This trend also applies to Nigeria, as evident by the recent directive of the Securities and Exchange Commission (SEC), that fintech companies facilitating trade in foreign listed securities, should desist from offering such securities to the Nigerian public through the fiat of registered Capital Market Operators.

From a neutral point of view, the above-mentioned platforms which include companies like Bamboo, Chaka, Risevest, etc. have so far offered Nigerians an opportunity that was hard to imagine not too long ago; the ability to invest in some of the juiciest foreign stocks, bonds, and other securities from US companies like Apple, Amazon, Tesla, Facebook, PayPal, etc. with a few swipes on a mobile phone, thereby expanding their investment reach beyond the borders of Nigeria.

As can be expected, this SEC directive on local trading of foreign securities is viewed from different perspectives by concerned Nigerians. This article aims to analyse the rationale/implications of SEC’s recent directive.

What was the legal basis for the directive?

The SEC directive of 8th April 2021[1] referred to existing provisions of the SEC Rules and Regulations 2013 (Rule 414 and Rule 415), and the Investment and Securities Act, 2007 (Section 67 – 70).

Some points to note from the above-mentioned legislation include the following:

  1. Rule 414 of the SEC Rules and Regulations 2013 permits the sale or offer for subscription of foreign securities to the Nigerian public, through the Nigerian Capital Market.
  2. Rule 415 provides that “Every foreign issuer of securities is required to file an application for registration of its securities with the Commission, accompanied by a draft prospectus and under such conditions as prescribed by the Commission.” (Form SEC 6F).
  3. Section 67 of the ISA 2007 permits only authorised public companies, statutory bodies, or banks (in Nigeria), to offer corporate securities to the public, or deposit money with any Nigerian company for such purposes.
  4. Section 67 also mandates compliance with obligations placed on Sub-Brokers, Market Makers, Underwriters, and Issuing Houses under sections 73 to 87 of ISA 2007. Penalties are prescribed for default, and the written consent of the SEC is compulsory for any such public offers of securities to the public.

Analysis

Notably, the SEC does not introduce any new laws, but simply refers affected companies to pre-existing laws. The SEC Rules do not place an absolute restriction on the sale or offer of foreign securities to local investors. Nonetheless, entities who intend to offer foreign securities for sale within Nigeria, are mandated to register such securities with the SEC. This requirement appears reasonable as it is understandable that economies often opt for protectionist policies geared at aiding domestic investment and curbing capital flight. However, regulators and policymakers need to conduct more research on the economic benefits which the exposure of Nigerian citizens to trading in foreign securities may offer to the economy at large. Though it may seem that Nigerian capital is being invested in foreign jurisdictions to the detriment of the local economy, consideration should also be given to the economic benefits which accrue from successful investments by the Nigerian middle class whose spending power is improved and who obtain a level of insulation from naira devaluation.

Furthermore, Section 67 of the ISA permits only Nigerian public companies, banks, or statutory bodies to offer corporate securities to the public or deposit money with any Nigerian company for trading in local or foreign securities. A capital market must be able to pool funds from both local and international financial markets through the formulation and implementation of policies that promote competition and foreign investment. Therefore, by restricting eligibility to public companies, Section 67 of the ISA may hinder foreign companies wishing to make their stock available to the Nigerian capital market and stifle the ease of doing business in this respect. Financial Authorities may need to explore additional options for the ‘onboarding’ of foreign securities to the Nigerian capital market through technological means.

Conclusion

Studies have shown that the efficiency in the way the Nigerian stock market (or any other stock market globally) dispenses with its functions, is a major determinant of economic growth in the country.[2] Although the development of the tech space in Nigeria (particularly Fintech) has created several investment opportunities within Nigeria and outside Nigeria; for evident economic growth, it is imperative that laws evolve to encourage, whilst regulating innovative technological developments.

The SEC in their efforts to ensure proper regulation of the capital market, may choose to ‘borrow a leaf’ from other jurisdictions such as India and the USA, where investments in foreign company stocks are permitted through several specialized, but regulated schemes.

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[1] Securities and Exchange Commission Nigeria ‘Proliferation of Unregistered Online Investment and Trading Platforms Facilitating Access to Trading in Securities Listed in Foreign Markets’’ <https://sec.gov.ng/proliferation-of-unregistered-online-investment-and-trading-platforms-facilitating-access-to-trading-in-securities-listed-in-foreign-markets/>  Accessed on the 10th of April, 2021

[2]Oladayo Timothy Popoola, ‘The Effects of Stock Market on Economic Growth and Development of Nigeria’ (2014) Journal of Economics and Sustainable Development Vol.5, No.15

DOING BUSINESS IN NIGERIA: THE RELEVANCE OF THE CERTIFICATE OF CAPITAL IMPORTATION TO FOREIGN INVESTORS IN NIGERIA

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By Aderonke Alex-Adedipe and Praise Adetunmibi

Introduction

While foreign investors often seek opportunities to invest in emerging markets, one major concern is whether there are any foreign exchange controls and the impact that such rules may have on the repatriation of their capital and earnings on their investments.

In recognition of the above and to encourage foreign investments in Nigeria, the federal government to a large extent[1], guarantees repatriation of capital, dividend and profits provided that the capital was imported by the investor by obtaining a Certificate of Capital Importation (“CCI”).

In this article, we have highlighted the relevance of a CCI to foreign investors and the procedure for obtaining it.

What is a CCI?

A CCI is a document issued by an authorised dealer (usually a commercial bank licensed by the Central Bank of Nigeria (“CBN”) to deal in foreign exchange) to an investor as evidence of inflow of foreign currency or goods such as plants, equipment, machinery or raw materials, into Nigeria for investment purposes.  Thus, where an investor imports capital through the official foreign exchange market, a CCI is usually issued in this case, within 24 of inflow of funds into Nigeria and in the case of equipment or raw materials, within 24 hours of submission of final shipping and other relevant documents.

In September 2017, the CBN introduced the electronic CCI (e-CCI) which replaced the paper CCI. The e-CCI has the same effect as the paper CCI and can be issued, managed and monitored via an electronic platform administered by the CBN, referred to as the Electronic Certificate of Capital Importation System (eCCIS).

Why is a CCI relevant to foreign investors?

The possession of a CCI confers certain benefits on the foreign investor which includes the following:

  1. the right to repatriate capital, dividends, and profits at the official foreign exchange market rates in a freely convertible currency subject to payment and deductions of all applicable taxes. This is particularly important to investors in a country like Nigeria where currency devaluation is a frequent occurrence;
  2. the right to operate a domiciliary account with any authorised dealer for investment purposes; and
  3. the right to invest in the securities of Nigerian companies.

How is a CCI obtained?

An application should be made to the authorised dealer, prior to the arrival of funds/equipment, requesting a CCI. The letter will be accompanied by supporting documents which the bank will request, depending on the nature of the capital being imported.

Conclusion

In summary, every foreign investor requires assurance that their investments can be returned to the source without hassle. To achieve this, it is important that investors are aware of the requirements for obtaining a CCI and whether there are any existing rules or legislation that may impact their ability to repatriate.

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[1] In 2016, due to the consistent paucity of foreign exchange in the Nigerian market, the Central Bank of Nigeria placed a restriction on 42 imported items that are ineligible for foreign exchange at the official market.

NIGERIA’S CROWDFUNDING REGULATIONS; IMPACT ON FUNDRAISING

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By Aderonke Alex-Adedipe and Praise Adetunmibi

 

Introduction

The size of the global crowdfunding market is steadily on a rapid increase as a large number of start-up businesses engage crowdfunding platforms for the purpose of raising capital. The value of the global crowdfunding market was reported[i] to be at 13.9 billion U.S dollars in 2019 and expected to triple by 2026. Start-ups in Nigeria also use crowdfunding platforms such as Kickstarter, GofundMe, Patreon amongst others, to raise capital. Crowdfunding in Nigeria however, remained unregulated until January 2021 when the Securities and Exchange Commission (SEC) issued the SEC Rules on Crowdfunding (the “Rules”).

In our previous article[2], we had provided an overview of the proposed Rules, prior to the final issuance by SEC. In today’s article, we examine some of the provisions of the Rules and their impact on businesses in Nigeria.

Meaning of crowdfunding

Crowdfunding involves the use of an online web-based platform to raise funds from a large number of individuals or organizations in order to fund a project or business. It is important to note that the SEC Rules are only applicable to investment-based crowdfunding. i.e. where funds are raised in exchange for ordinary shares, plain vanilla bonds or debenture and simple investment contracts or other instruments approved by SEC. Such investment instruments can only be issued through a crowdfunding portal operated by an entity registered with SEC as a crowdfunding intermediary.

Eligibility of a fundraiser

An entity seeking to raise funds through a crowdfunding portal must be a Micro, Small and Medium Enterprises (MSME) incorporated in Nigeria and must;
(i) have been in operation for at least 2 years or;
(ii) where the entity has been in operation for less than 2 years, it must have a strong technical partner that possesses a minimum of a 2 -year operating track record or have a core investor.

How to raise funds

Funds can only be raised by an eligible fundraiser through a registered crowdfunding portal i.e. one that has been registered by SEC.

In addition, it is important to note that a crowdfunding investment offer can only remain on the portal for a period of 60 days and can be extended for a further period of 30 days after which the offering is to be withdrawn.

Where an offer has been withdrawn, a new offering cannot be made by the same fundraiser until (i) after the expiration of 30 days after the withdrawal date and (ii) after the fundraiser has updated all financial information to the satisfaction of the crowdfunding intermediary.

 

[i] https://www.statista.com/statistics/1078273/global-crowdfunding-market-size/

[2] https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

Establishing a Cooperative Society For Investment Purposes in Nigeria

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By Aderonke Alex-Adedipe and Olawale Atanda

Investment entities may take several forms in Nigeria. Investors may set up a Limited Liability Company (LLC) to buy shares or other investment vehicles. They may also set up a Limited Liability Partnership (LLP) or even a Cooperative Society depending on the needs of the investors, the advantage a particular entity for investment has over others, or the type of investments the entities intend to hold.

A Cooperative Society is one formed by a group of persons who share common goals relating to their social and economic advancement. Although, not as popular as LLCs or LLPs, Cooperative Societies afford certain advantages that investors may find favourable.

 

Applicable Law and Regulation

Cooperative Societies are governed by the Nigerian Cooperative Societies Act and are registered by the Director of Cooperatives in each state. In Lagos State, the Ministry of Commerce, Industry and Cooperatives oversees the registration and regulation of Cooperative Societies.

Cooperative Societies are also exempt from the provisions of the Companies and Allied Matters Act (CAMA). Consequently, obligations required of LLCs and LLPs by CAMA such as the filing of annual returns and registration of charges and debentures do not apply to Cooperative Societies.  However, returns are expected to be submitted to the Director of Cooperatives at intervals determined by the Director or such agency that regulates Cooperative Societies.

 

Benefits of Cooperative Societies

Similar to an LLC, Cooperative Societies are of limited liability and have a legal personality separate from that of its members. They also have the powers to hold movable and immovable property, enter into contracts, and perform such functions or actions as stated in their constitution.

Members can hold shares in Cooperative Societies, however, no individual member can hold more than 20% of the shares of the society.

 

Investment of Funds

Cooperative Societies may invest their funds in a bank, in federal government-backed securities, or in any other manner provided for in their constitution.

 

Taxes

Cooperative Societies are exempt from payment of company income tax on the profit or income generated from its activities including shares or interest held in other entities. Cooperative Societies are also exempt from the payment of stamp duties and registration fees payable in relation to the registration of instruments.

 

Registration

Cooperative Societies are to apply to the Director of Cooperatives for registration and such application must be signed by at least ten individuals qualified for membership of the society. The bye-laws of Cooperative Societies, which will govern its affairs, are to accompany the application.

 

Conclusion

Investors are constantly looking for opportunities to increase profits while reducing expenses such as operational costs and tax liabilities. Cooperative Societies provide for lower tax exposure and less regulatory oversight than LLCs and LLPs.

Regulation of Collective Investment Schemes (CIS) in Nigeria

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By Aderonke Alex-Adedipe and Omotola Abudu

  1. Introduction

Recent reports by the Securities and Exchange Commission (SEC) show that there has been an increase in the total net asset value of CIS in Nigeria, from N782.64 billion in May 2019, to N1.322 trillion in May 2020. This is a clear indication that despite the coronavirus pandemic, investments made via CIS have maintained their profit yield. In today’s newsletter, we provide a cursory overview of CIS in Nigeria.

  1. What is a CIS?

According to the Investment and Securities Act, a CIS is a scheme or a company which invites members of the public to invest money or other assets in a portfolio and share the risk and benefit of investment in proportion to their participatory interest in the portfolio of the scheme.  It is essentially a joint investment vehicle which allows investors to pool funds to invest in select securities, boost returns and minimize risk.

  1. What types of CIS are available in Nigeria?

Under Nigerian law, there are five recognised types of CIS. They are Unit Trust Scheme, Venture Capital Funds, Open-ended Investment Companies, Real Estate Investment Schemes and Specialized Funds, with the most common type being Unit Trust Scheme. A Unit Trust Scheme is a fund into which individual investors or subscribers contribute small sums of monies to form a pool and enable professional fund managers invest in money market instruments, shares and stocks on their behalf.

  1. How are Investors protected?

The provisions of the Securities and Exchange Commission 2013 Rules (“the Rules”) along with the recently released Amendment to Rules on Collective Investment Schemes 2019 (“the Amendment”) jointly ensure the protection of investors who wish to pool their funds into CIS and the accountability of fund managers. The Rules and the Amendment contain provisions which prevent self-dealing and ensure that interests of the investors are placed above those of the fund managers.

  1. Who are the relevant parties to a CIS?

For every CIS, there is a relationship between key parties, which promotes a strong level of accountability and clarity.

  1. The Unit Holder/Subscriber
  2. The Fund Manager
  3. The Trustee
  4. The Custodian
  5. The Registrar

6. Conclusion

While the SEC has gone through commendable lengths to ensure proper accountability and transparency of the parties involved in CIS, attention should also be placed on the actions of digital players who operate CIS related platforms, in order to regulate them and ensure due process is followed in the handling of customers funds .

REGULATION OF CRYPTOCURRENCIES AND OTHER DIGITAL ASSETS IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

  1. INTRODUCTION

Through Blockchain, digital assets were introduced to the world in 2009 with no central controlling authority. Very quickly, cryptocurrency transactions became popular in various parts of the world including Nigeria and have remained unregulated. Specifically, the Central Bank of Nigeria declared in 2018 that cryptocurrencies are not regarded as legal tender, discouraging Nigerians from participating in cryptocurrency transactions. Recent events however continue to suggest that cryptocurrency is largely embraced as Nigeria remains the largest source of bitcoin trading in Africa.

In recognition of the above, the Nigerian Securities and Exchange Commission (“SEC”) on September 14, 2020 issued its Statement on Digital Assets and Their Classification and Treatment (the “Statement”). The Statement proposes a set of rules which seek to regulate cryptocurrencies and other digital assets classified as securities.  This article highlights some salient provisions in the Statement and their effects on transactions relating to digital assets in Nigeria.

 

  1. WHAT CLASS OF DIGITAL ASSETS WILL BE REGULATED?

According to the Statement, digital assets provide investment opportunities. The SEC, being the primary regulator of investments and securities in Nigeria, assumes jurisdiction over the regulation of digital assets, provided they can be classified as securities.

It is SEC’s position that all virtual crypto assets are deemed as securities, except otherwise proven by the issuer of the asset who is required to make an initial filing with SEC. Where upon assessment, the asset is found to constitute securities, it will have to be registered with SEC. Consequently, all digital assets including Digital Assets Token Offering (DATOs), Initial Coin Offering (ICOs), Security Token ICOs and other Blockchain-based offers of digital assets classified as securities by SEC, will need to be registered.

 

  1. WHO WILL BE REGULATED UNDER THE PROPOSED RULES?

Any person engaging in receiving, dealing, transmitting and executing orders on behalf of people, portfolio management, investment advice, custodian or nominee services as it relates to virtual digital assets services must be registered by SEC. The regulation will cover digital assets within Nigeria, by Nigerian issuers or sponsors and foreign issuers targeting Nigerian investors. Foreign issuers or sponsors will be recognized where a reciprocal agreement exists between Nigeria and the foreign country or where the country is a member of the International Organisation of Securities Commission. Foreign issuers or sponsors may, however, be required to establish a branch office within Nigeria.

 

  1. CONCLUSION

Although countries have continuously stated that cryptocurrencies do not qualify as an official legal tender, the unprecedented growth rate of digital assets have forced countries to issue rules regulating digital asset transactions. In Nigeria, specifically, the SEC has stated that the intention of the proposed rules is to safeguard the interest of participants, rather than stifle the growth of technology. The rules if implemented with these factors in mind, will ensure protection and transparency of digital asset transactions in Nigeria.