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REGULATION OF CRYPTOCURRENCY AND OTHER DIGITAL ASSETS IN NIGERIA -2.0

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By Seun Timi-Koleolu and Eustace Aroh 

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

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

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

  1. What Companies are regulated by the Rules?

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

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

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

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

 

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

(DAOP)

 Digital Assets Custodians

(DAC)

 Digital Assets Exchange

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

 

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

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

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

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

A director should be a person of integrity.

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

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

 

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

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

A director should be a person of integrity.

 A director should be a person of integrity.

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

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

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

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

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

 

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

Conclusion

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

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

 

REGULATORY UPDATE – REVISED RULES ON MERGERS, ACQUISITIONS AND TAKE-OVERS IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Prior to 2019, the Securities and Exchange Commission (“SEC”) was the primary body responsible for mergers, acquisitions and take-overs of public and private companies in Nigeria. With the enactment of the Federal Competition and Consumer Protection Commission (“FCCPC”) Act 2019, the provisions within the Investment and Securities Act 2007 on mergers were repealed and the FCCPC became the primary body responsible for regulating mergers. Notwithstanding, SEC maintained its rights to regulate mergers and acquisitions affecting public companies on the basis that it is the primary regulator of the capital market in Nigeria.

Consequently, SEC released an Amendment to the SEC Rules on Mergers, Take-Overs, and Acquisitions (“Amendment”) on August 30, 2021. In this article, we have highlighted some salient provisions of the Amendment.

 

What Transactions require the approval of SEC?

Although all companies are required to obtain an approval for mergers and acquisitions from the FCCPC, the Amendment mandates public companies to apply to SEC for approval in respect of the following transactions.

  1. Any amalgamation or merger involving a public company.
  2. The conversion of a public company to any other form of company or the reconstruction of the shares of a public company.
  3. Restructuring of a public company which includes “carve-outs”, “spin-offs” and “split-offs” as defined in the Amendment.
  4. Acquisition or disposal of assets that result in a significant change in the business direction or policy of the public company.
  5. Any of the foregoing transactions carried out by a subsidiary of a public company.

The power to prevent monopoly and restraint of competition, however, remains with  FCCPC.

 

Whose obligation is it to apply for the approval?

It is the obligation of the public company involved in the transaction to apply to SEC for approval notwithstanding the involvement of other types of companies in the transaction.

 

What are SEC criteria for granting approval?

In obtaining the approval of SEC, the applicant must prove that all the shareholders of the public company are treated fairly, equitably and are given sufficient information in connection with the transaction.

 

What transactions are exempt from the requirement to obtain SEC approval?

The following are exempt.

  1. Any acquisition by a public company of a business or asset which does not involve the issuance of shares of the public company as consideration for the acquisition. The company will, however, be required to provide pre and post-acquisition financial statements to its shareholder; and disclose any conflicting interest with respect to the transaction.
  2. Any divestment of the asset of a public company that is less than 15% of the total asset of the company or any divestment of assets that do not form a core part of the business. The company may, however, voluntarily notify SEC of any such divestment.

 

What is the process of obtaining the approval of SEC?

In addition to complying with the requirements under the Companies and Allied Matters Act 2020 and the provisions of the FCCPC Merger Review Guidelines, a public company is also required to make an application to SEC. Prior to the merger, the public company is required to make a preliminary application to SEC and obtain an approval in principle before arranging court-ordered meetings for the shareholders of the respective companies. The public company is expected to invite SEC to this meeting. Upon approval of the shareholders of the respective companies, a formal application is to be made to SEC.

 

Conclusion

The Amendment helps to provide a level of clarity on SEC requirements pertaining to mergers, acquisitions and take-overs involving public companies. Please note, however, that not all changes introduced by the Amendment were highlighted by SEC in the document as new introductions. Companies are, therefore, advised to seek professional support when engaging in such transactions.

REGULATORY REQUIREMENTS FOR OBTAINING A DIGITAL SUB-BROKER LICENCE; SEC RULES & FINTECH IN NIGERIA

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By Aderonke Alex-Adedipe and Eustace Aroh

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Over the last decade, technology has continued to disrupt the financial sector while regulators have struggled to keep up. The capital market sub-sector has not been spared as fintech companies facilitate transactions in Nigerian and foreign listed securities through digital platforms.

In a move to maintain oversight over all activities within the Nigerian capital market, the Securities and Exchange Commission (“SEC”) obtained an order from the Investment and Securities Tribunal directing Chaka Technologies Limited (a Fintech company that offers Nigerians the opportunity to purchase Nigerian and foreign quoted shares through a digital platform) to refrain from facilitating investment in securities. Consequently, on April 22, 2021, the SEC issued the Major Amendments (“Amendment”) to the Securities and Exchange Commission Rules and Regulations, 2013 (“Rules”), making significant changes to the provisions relating to Sub-Brokers.

Who is a Sub-Broker?
The Rules define a Sub-Broker as a person or company who is not a member of an Exchange but acts as an agent of a sponsoring broker/dealer or assists investors in buying and selling securities through the sponsoring broker/dealer. The Amendment now recognises that a Sub-Broker may utilize a digital platform to engage investors and interact with sponsoring brokers (“Digital Sub-Broker” or “Sub-Broker Serving Multiple Brokers Through A Digital Platform”).

In effect, Digital Sub-Brokers such as Chaka, Bamboo and Rise now fall within the ambit of the Rules and are required to be registered with the SEC, provided the requirements for registration are complied with.

What can a Sub-Broker do?
A Sub-Broker may purchase and sell securities on behalf of investors through the sponsoring broker. The Sub-Broker is required to remit any fund, certificate and warrants supplied to it by the investor to the sponsoring broker within two (2) working days of receipt.

What are the obligations of a Sub-Broker?

Records of transactions
Under the Rules, a Sub-Broker is required to keep adequate records of transactions for and on behalf of investors. The records should include: (i) the mandate form; (ii) proof of payment for the purchase of shares; (iii) all communications with the investors, amongst others.

Risk Management

Specifically, all Digital Sub-Brokers are required to implement a risk management practice which includes the implementation of the following:

  1. procedures and controls to monitor and test the algorithms on a regular basis;
  2. internal policies to address technology risks;
  3. adequate cyber-security mechanism;
  4. an anti-money laundering/combatting financing of terrorism (AML/CFT) policy in line with applicable regulation;
  5. operational and technical controls systems to manage the risks;
  6. ensuring that all electronic communication is digitally signed, encrypted and secured with a backup stored in soft and secured form;
  7. a complaint management policy in compliance with SEC Rules; and
  8. complying with the SEC technology risk guidelines, amongst others.

What are the requirements for obtaining a Digital Sub-Broker license?
In addition to fulfilling all the requirements applicable to a Sub-Broker, Rule 67(4) of the Rules, specifically contains provisions that are clearly tailored towards fintech businesses. Some of the requirements for obtaining the Digital Sub-Broker license include:

  1. providing a detailed description of the technology infrastructure to be used by the proposed Sub-Broker;
  2. evidence of adequate KYC processes in respect of investors;
  3. evidence of notice of potential risks and obligations of parties issued to investors; and
  4. evidence of minimum paid-up capital of Ten Million Naira and current fidelity insurance bond covering twenty per cent (20%) of the minimum paid-up capital.

Conclusion
The development of fintech in Nigeria has provided the average Nigerian with multiple investment opportunities within the capital market sub-sector and consequently, required regulators such as SEC to provide adequate protection for investors through regulation. This effort is indeed commendable. Chaka Technologies Limited became the first company to obtain the Digital Sub-Broker licence as announced in its public statement of June 23, 2021.
In anticipation of continuous innovation and disruption, a holistic review of the SEC Rules to include, where applicable, provisions permitting digital involvement is advised. In addition, an integration of all current amendments into the Rules will prove most helpful and unambiguous to investors seeking to penetrate the Nigerian market.

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

PROHIBITION OF CRYPTOCURRENCY TRANSACTIONS BY THE CENTRAL BANK OF NIGERIA

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By Aderonke Alex-Adedeipe and Olawale Atanda

On the 5th of February 2021, the Central Bank of Nigeria (CBN)[i] released a letter addressed to banks and other financial institutions which stated that dealing in cryptocurrencies and facilitating payment for cryptocurrency exchanges are prohibited. The CBN further instructed all banks and other financial institutions to identify individuals or entities who transact in cryptocurrency or operate cryptocurrency exchanges and close the accounts of such persons or entities.

Not surprisingly, the letter elicited major concern amongst the public with many concerned about the potential negative effect it could have on Nigeria’s growing cryptocurrency market and innovation in the fintech industry.

In response, the CBN issued a press release (the “Press Release”) on the 7th of February 2021, addressing its earlier directive and providing reasons for its prohibition of cryptocurrency transactions by banks and other financial institutions.

In this article, we shed light on the directive of the CBN, its effect on cryptocurrency trading in Nigeria, and the Securities and Exchange Commission’s (SEC) stance on cryptocurrency in Nigeria.

What are the Justifications for the Prohibition of Cryptocurrency Transactions?

The CBN stated in the Press Release that cryptocurrencies are issued by unregulated and unlicensed entities and as such, the use of cryptocurrencies in Nigeria contravened existing law as they are not legal tender. It also identified the anonymity of cryptocurrency as an issue. It stated that anonymity and the lack of KYC made it susceptible to illegal use such as money laundering and the financing of terrorism. Another justification was the volatility of cryptocurrencies which it said has threatened the stability of financial systems in other countries.

The Effect on Cryptocurrency Trading in Nigeria

Nigeria has the second largest Bitcoin market in the world with over $500 million worth of Bitcoin traded over the last five years. The CBN’s directive on cryptocurrency transactions will understandably have an effect on the cryptocurrency market in Nigeria as it essentially prevents traders from buying cryptocurrencies with their credit/debit cards issued by Nigerian banks or receiving proceeds of cryptocurrency sales from exchanges which facilitate the buying and selling of cryptocurrency.

It appears However some exchanges have found a way around the restriction by switching to peer-to-peer trading which enables individuals buy or sell cryptocurrency from individual traders as opposed to the exchanges. In effect, this does away with the need for exchanges to operate settlement accounts in Nigerian banks.

In response to the CBN’s directive, banks have begun to identify and deactivate the account of individuals with inflows/outflows from/to cryptocurrency exchanges. It is unclear if affected individuals would be able to reopen accounts with these banks in future.

SEC’s Intention to Regulate Cryptocurrencies

On September 14 2020, the SEC issued a statement[2] announcing its intention to regulate “digital assets” which includes cryptocurrencies. In light of the CBN’s directive, the SEC faced calls to clarify whether there was a contradiction in the policies of the two regulators.

Subsequently, on February 11 2021, the SEC issued a statement stating that it would partner with the CBN to analyse and better understand the identified risks of cryptocurrency to ensure that appropriate regulations are put in place if cryptocurrency transactions are allowed in future.

Conclusion

The CBN’s decision on cryptocurrency has also attracted attention from the highest levels of government. On the 11th of February, the Nigerian Senate deliberated on the CBN’s directive, with some senators expressing reservations about the ban on cryptocurrency transactions.The Senate thereafter resolved to invite the CBN Governor to give a briefing on the actions of the CBN.

More interventions like this may be seen as stakeholders deliberate on the potential far-reaching effects of the CBN’s stance on cryptocurrency in Nigeria

 

[i] Pavestones has written several articles on CBN regulations and licenses. You can view them at https://pavestoneslegal.com/tag/cbn/

[2] Pavestones wrote on the statement here https://pavestoneslegal.com/regulation-of-cryptocurrencies-and-other-digital-assets-in-nigeria/

 

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 .

Setting Up a Venture Capital Company for Startup Investment in Nigeria

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By Seun Timi-Koleolu and Olawale Atanda

Startups require funding for their operations and to scale.[i] This is where venture capital companies (VCs) come in. VCs (as a subset of private equity) provide early or late stage financing to startups. VC funding is booming in Nigeria and has led to startups receiving increased financing year-on-year. Nigeria attracted $747 million in VC funding in 2019 with a majority of investments going to fintech companies. Although, a large number of these VCs are foreign, there is an increasing number of local VCs such as Ventures Platform, EchoVC, and Microtraction which invest in Nigerian startups. In this article, we list important points to consider when setting up a VC fund in Nigeria.

 

Company Structure

In Nigeria, VCs may be registered[ii] as a Limited Liability Partnership or a Limited Liability Company under the Companies and Allied Matters Act 2020.[iii] VCs may also register as limited partnerships under the Partnership Law of Lagos State but would however need to register as business names by the Corporate Affairs Commission to operate outside the state.

 

Regulation

The Securities and Exchange Commission (SEC) mandates private equity funds (such as VCs) to register with the commission where investor funds are above ₦1 billion. Registered VCs are prevented from soliciting funds from the public and may only privately source funds from qualified investors. They may also not invest more than 30% of their assets in a single investment. Under SEC regulations, the fund manager of a registered private equity fund must have a minimum paid-up capital of ₦20,000,000.00.

 

Raising Funds

VCs raise funds from a variety of sources which consist of banks and other financial institutions, insurance companies, pension funds, (“institutional investors”) high net worth individuals, etc. However, regulations that cover institutional investors may restrict the extent to which they may invest in VCs. For example, the Banks and Other Financial Institutions Act limits investments to the extent that such investment does not at any time exceed 10% of the bank’s shareholders funds and not more than 40% of the investee company’s paid up share capital. Foreign VCs who bring in funds into the country are guaranteed the transferability of interests on dividends and repatriation of investments in startups. Funds should be brought in through authorized dealers (usually banks) who then issue a Certificate of Capital Importation (CCI) as proof of the importation of capital. The CCI allows foreign VCs to repatriate funds without restriction.

Taxes

Taxes payable by VCs are dependent on the structure of the fund. Where a VC is registered as a Limited Liability Company, the company will be liable to pay income tax on its profits as provided under the Company Income Tax Act (CITA). Funds registered as business names will not subject to corporate income tax, instead, each partner would be taxed based on its individual income from the business. The investee company is however required by the CITA to withhold 10% of the interest on dividends due to investors. Where a VC is a resident of a country that Nigeria has a double tax agreement with, the withholding tax rate is pegged at 7.5%.

 

Conclusion

Nigeria is a profitable market for VC funds which is evidenced by the impressive growth of startups and tech companies over the years. VCs who intend to set up shop in Nigeria or as foreign VCs, invest in Nigerian startups must be conversant with the rules on investing in Nigeria. This is important to ensure adherence with regulatory rules and conformity to proper business and corporate governance procedures.

[i] You can access our article on startup funding here https://pavestoneslegal.com/startup-funding-raising-capital-as-a-startup-in-nigeria/

[ii] Although, the Companies and Allied Matters Act 2020 has been passed into law, the Corporate Affairs Commission is yet to begin the registration of Limited Liability Partnerships.

[iii] You can read our analysis on the Companies and Allied Matters Act 2020 here    https://pavestoneslegal.com/tag/cama-2020/

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.

Startup Funding: Raising Capital as a Startup in Nigeria

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Lack of financing is a major constraint which businesses experience at the startup phase. Seed capital is required for startups to fund their operations and scale, thereby returning profits to founders and investors.

A major indicator that a startup may thrive is the availability of capital. Where capital is low or inadequate, the business operations will be impacted and the startup will likely fail. Research conducted on small businesses in the U.S. indicates that 79% of businesses fail because they start out with too little money and are unable to fund their operations.

It is therefore essential that founders are familiar with the several ways in which capital may be raised and identify the funding path that is best suited for the startup. Below are several funding sources that founders should consider when seeking capital.

  1. Crowdfunding

The proliferation of technology has seen the emergence of digital solutions aimed at solving every day problems. An example of this is the growth of crowdfunding sites which enable founders raise funds from the public. Crowdfunding[i] entails pitching the business idea of a startup to willing investors via an online platform. Investors may receive equity in exchange or a percentage of interest over a period of time. Crowdfunding is particularly advantageous to founders because they can decide the terms of the investment and easily retain control of their company.

  1. Incubators and Accelerators

Incubators and accelerators nurture and prepare startups to scale. Incubators are focused on startups  at the conception stage while accelerators target startups that are viable and ready to scale. Startups who successfully pass through incubators or accelerators typically receive a seed investment at the end of their program from the incubators/accelerators or investors/mentors introduced to the startups in exchange for nominal equity.

  1. Business Loans

Although, not typical, startups may apply for loans from banks or microlending companies. These may however attract high interest rates. Startups therefore must consider their revenue flow and ability to repay loans obtained from banks and other lending institutions.

  1. Angel Investors and Venture Capital Funding

Angel or seed investors typically fund startups at the beginning of their lifecycle while venture capital firms usually provide funds to startups that are viable with a recognized customer base and established revenue stream. These funding sources provide much needed capital in exchange for equity in the startup. The terms of the funding and equity participation are contained in agreements such as Simple Agreement for Future Equity and convertible loan agreements.

  1. Bootstrapping

Bootstrapping means growing a startup without external funding. Startups would have to rely on funding from its founders to operate and rely on revenue from sales. Bootstrapping is perhaps the toughest method of funding startups as it means that growth might be stifled or delayed due to the absence of funds required to scale their operations. However, where founders subsequently decide to receive external funding, it portrays a sense of seriousness to investors that the startup depended on the sweat and faith of its founders to grow and generate revenue. With bootstrapping, founders are also assured of absolute creative and operational control of the startup.

Conclusion

Although there are several sources of funding which startups can take advantage of, startups must consider which funding source is most suitable by weighing the pros and cons of the funding options available to them.

 

[i] Equity-based crowdfunding in Nigeria is potentially regulated by the Securities and Exchange Commission (SEC). Please find our article on the crowdfunding rules proposed by SEC here https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

You can also watch a brief analysis of the crowdfunding rules by our Partner, Aderonke Alex-Adedipe, here https://furtherafrica.com/2020/05/05/insights-funding-startups-in-nigeria-video/