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HIGHER CAPITAL THRESHOLDS AND NEW VASP LICENCES: KEY TAKEAWAYS FROM THE NIGERIAN SECURITIES AND EXCHANGE COMMISSION’S JANUARY 2026 CIRCULAR

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BY ADERONKE ALEX-ADEDIPE AND OMODELE FATODU

Introduction

In January 2026, the Nigerian Securities and Exchange Commission (the “Commission”)  issued a circular that significantly increased the minimum capital requirements for Capital Market Operators (CMOs). The Commission has highlighted that these changes are intended to strengthen market resilience, protect investors, ensure capital adequacy reflects the risks of market activities, and confirm that regulated entities have sufficient financial capacity to meet their obligations sustainably.

Key Changes to Capital Requirements

The revised capital requirements introduce substantial increases across most operator categories. The circular further states that the Commission will issue further detailed guidance to capital market operators on compliance and capital verification processes.  In addition, the Commission has also introduced several new Virtual Asset Service Provider (VASP) license categories, reflecting the growing prominence of digital finance and fintech activities in Nigeria’s capital markets. The newly introduced categories are:

  1. Ancillary Virtual Asset Service Providers (AVASPs)
  2. Digital Assets Intermediaries (DAIs)
  3. Digital Assets Platform Operators (DAPOs); and
  4. Real‑World Assets Tokenization and Offering Platforms (RATOPs).

The formal inclusion of these new VASP license categories classes highlights an area where further regulatory clarity will be required. The circular does not expressly identify the types of activities that fall within each of the newly introduced VASP categories. In practice, this indicates that the Commission is likely to issue further directives, guidelines, and compliance requirements to clarify the scope, licensing thresholds, and compliance obligations applicable to operators who fall within these new categories. To provide a clear view of the changes, we have summarised some capital market operator license categories alongside the newly introduced VASP license categories in the table below:

OPERATOR CATEGORY PREVIOUS MINIMUM CAPITAL  NEW MINIMUM CAPITAL % INCREASE
Brokers (client execution) N200m N600m 200%
Dealers (proprietary trading) N100m N1bn 900%
Broker-Dealers N300m N2bn 567%
Full-Scope Portfolio Mangers N150m N5bn 3,233%
Limited-Scope Portfolio Managers N150m N2bn 1,233%
Robo-Advisers N10m N100m 900%
Ancillary Virtual Asset Providers New N300m New
Digital Assets Intermediaries New N500m New
Digital Asset Platform Operators New N500m New
Real-World Assets Tokenisation Platforms New N1bn New

Implications for Market Operators

The substantial increases in minimum capital requirements carry significant implications for market operators. Operators will need to review and potentially adjust their capital structures, raise additional funds where necessary, and explore partnerships or restructuring strategies to meet the new thresholds. Non-compliance could result in suspension or withdrawal of registration, making proactive planning essential. The Commission has provided an 17-month transitional period, giving operators until June 30, 2027, to comply with the new thresholds.

Conclusion

The Commission’s 2026 capital requirement revision is a significant development for Nigeria’s capital markets. Operators must assess their capital adequacy and compliance strategies, not only to meet higher capital thresholds, but also to prepare for potential upcoming directives relating to the newly introduced VASP categories.

 

 

WHAT IS NEW IN NIGERIA’S MERGERS AND ACQUISITION LANDSCAPE? A REVIEW OF REGULATORY SHIFT.

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BY ADERONKE ALEX-ADEDIPE AND HILLARY OKOROTIE

The regulatory framework governing mergers and acquisitions in Nigeria has experienced a notable shift with the enactment of the Investments and Securities Act 2025 (the “Act”). While the Federal Competition and Consumer Protection Commission (FCCPC) continues to be the primary regulator overseeing all mergers and acquisitions in Nigeria, the Act was recently amended to streamline the role of the Securities and Exchange Commission (the “Commission”) in overseeing mergers and acquisitions related to public companies and the conduct of stakeholders in such transactions.

This newsletter highlights some of the provisions in the Act as they relate to public companies and what they mean for stakeholders.

  • Approval of Mergers by the Commission

The Act provides specifically that all public companies intending to undertake a scheme, transaction, arrangement, or activity or issue securities or offer for subscription or purchase of securities must first seek the approval of the Commission before undergoing such arrangement. Where a public company proposes a compromise, arrangement, or scheme involving the issuance of securities for the amalgamation of two or more listed companies, the public company is required to make an application to the Commission for its approval and obtain an approval in principle. Upon obtaining the approval in principle, the public company is required  to make an application to the Federal High Court(“Court”) for a meeting of the shareholders for their agreement on the merger.

In considering an application for approval of a merger, the Commission will assess whether shareholders are treated equitably and fairly. Once the merger is approved, the parties must apply to the Court for the merger to be sanctioned. Upon the Court’s sanction, the merger becomes binding on all parties involved.

  • Acquiring Voting Rights

The Act provides that no single person shall acquire more than 30% or more of the voting rights of a public company. It further stipulates that no person acting alone or in concert with other individuals may acquire more than 30% or more of the voting rights or such other threshold as may be prescribed by the Commission.

Where a person intends to acquire more than 30% of a company’s voting rights, the Act stipulates that such person must first make an offer to acquire all or part of the voting rights of the company to the shareholders.  This is referred to as a take-over bid and is subject to the approval of the Commission. During such take-over bid, the Commission shall ensure that (i) the identity of the acquirer is disclosed to the shareholders;(ii) the shareholders have reasonable time to consider the offer;(iii) the shareholders are supplied with necessary information to assess the take-over offer made.

In the acquisition of the rights in the company, both the company and the offeror must ensure that the shareholders, particularly minority shareholders are treated fairly in such a transaction.

Where the take-over bid fails, the offeror cannot proceed with the acquisition of the voting rights. In the event that the Commission approves the take-over bid, the offeror may proceed with the take-over bid and acquire the additional voting rights.

  • Payment for Director’s Loss of Office During a Merger or Takeover

The Act provides that payment to a director for loss of office due to the transfer of shares in a company or its subsidiary in the course of a merger or takeover cannot be made unless such payment is made with the approval of the shareholders of the company- specifically shareholders whose shares are being targeted or purchased during the merger or takeover.

In addition, the Act provides that a resolution approving the payment must be disclosed in a memorandum and made available for inspection by the shareholders at least 15 days before the meeting of the members of the company.

  • Penalties for Non-Compliance

Where an acquirer fails to comply with the provisions of the Act on Mergers and Acquisitions, or the directives of the Commission, the acquirer shall be liable to a penalty of ₦10,000 and an additional ₦25,000 for each day the violation continues. Any other party involved in the transaction who fails to comply with the provisions of the Act shall also be liable to a penalty of not less than ₦10,000 and a further sum of ₦25,000 for every day the violation persists. Furthermore, any person who provides the Commission with false or misleading information in relation to a merger or takeover transaction shall, upon conviction, be liable to a fine of ₦5,000,000 or imprisonment for a term of not less than five years, or both.

Conclusion

As public companies proceed with mergers and acquisitions, they must generally ensure that their transactions strictly comply with the Act. The Act ensures that mergers involving public companies are transparent, equitable, and are investor friendly. For companies, it means stricter obligations around disclosure and fairness. For investors, it offers greater protection and recourse in takeover transactions.

BANKING AND FINANCE IN NIGERIA: THE REGULATORY FRAMEWORK AT A GLANCE

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SEUN TIMI-KOLEOLU AND EBIKENIYE BEST

 

In Nigeria, the importance of a well-regulated banking system cannot be overstated, especially in light of the sector’s influence on economic growth, investor confidence and public trust. To achieve this, a robust regulatory framework has been established, one that combines statutory legislation, institutional oversight and evolving policy guidelines to ensure stability and transparency. Both local and foreign businesses wishing to operate in the banking and fintech sector must understand the regulatory framework.

In-view of the foregoing, we have provided a snapshot of the regulatory framework.

a.     Banks and Other Financial Institution Act, (BOFIA) 2020

BOFIA 2020, which replaced the 1991 Act,[1] is the primary law governing Nigeria’s banking sector. It sets out the Central Bank of Nigeria’s regulatory powers, including the issuance and withdrawal of banking licenses, approval of new or closed bank branches, and the restructuring of banks. It also covers the operation of foreign banks in Nigeria and formally recognises digital banking, providing a clear legal basis for regulating fintech activities.[2]

b.    The Central Bank of Nigeria Act 2007 (“Act”)

The Act established the CBN which is the primary regulator of the Nigerian banking sector. It is charged with the overall control and administration of banks and other financial institutions in Nigeria. The responsibilities of the CBN include but is not limited to (i) ensuring monetary and price stability; (ii) promoting a sound financial system in Nigeria; (iii) issuing guidelines and circulars relating to its responsibility to banks, foreign exchange market, and other financial institutions.[3]

c.     The Companies and Allied Matters Act, (CAMA) 2020

CAMA establishes the Corporate Affairs Commission (CAC), which is charged with the regulatory powers over all registered companies in Nigeria, including banks and other financial institutions. The CAC is responsible for the incorporation of all corporate entities in Nigeria, including banks and other financial institutions; Under CAMA, certain corporate governance principles were introduced which require a public company to have at least three independent directors and prohibit a person from being a director in more than five public companies. These provisions apply to a bank registered as a public company.

d.    The Nigerian Deposit Insurance Corporation Act 2006 (“NDIC Act”)

The NDIC Act established the NDIC which provides regulatory oversight over Deposit Money Banks (DMBs), commonly known as commercial banks. The NDIC is responsible for insuring the deposit liabilities of licensed banks and offering financial assistance to insured institutions facing difficulties, in order to protect depositors. It also plays a key role in supporting the formulation and implementation of banking policies by the monetary authorities.

In cases of bank failure, the NDIC is empowered to take over the management and control of the affected institution, ensuring an orderly resolution or closure without disrupting the stability of the banking system.

e.    Foreign Exchange (Monitoring and Miscellaneous Provisions) Act, 1995 (FEMM Act)

The FEMM Act establishes the regulatory framework for conducting and controlling foreign exchange transactions in Nigeria. It mandates that transactions in the foreign exchange market be carried out in convertible foreign currencies and specifies the permissible monetary instruments that may be used within the market.

f.     The Financial Reporting Council of Nigeria (FRCN) Act 2011

Under the FRCN Act, the FRCN is responsible for developing and enforcing standards on accounting, auditing, corporate governance, and financial reporting. These responsibilities extend to private companies and public interest entities, including banks and other financial institutions, ensuring transparency, accountability, and sound financial practices across the sector.

g.    The Investment and Securities Act (ISA) 2025

The ISA establishes the Securities and Exchange Commission (SEC) which regulates capital market activities and public companies in Nigeria. While a licensed bank will not in the ordinary course of its banking activities fall within the regulatory purview of the SEC, where such a bank is a public company or its affiliate undertakes capital market activities, the bank or the relevant affiliate will fall within the SEC’s purview.

h.     Nigerian Financial Intelligence Unit (NFIU) Act, 2018

As Nigeria’s central national agency for financial intelligence, the NFIU enforces compliance with anti-money laundering and combating the financing of terrorism. This means that the NFIU ensures that banks and other financial institutions comply with the Money Laundering (Prevention and Prohibition) Act, 2022, Terrorism (Prevention and Prohibition) Act, 2022 and the NFIU operational guidelines.[4]

Conclusion

As Nigeria positions itself in the global financial space, the effectiveness of its regulatory institutions will continue to play a significant role. Companies in the banking and fintech sector are advised to liaise with professional advisers to ensure compliance and facilitate ease of doing business.

Further information, do not hesitate to reach out to us.

[1] https://pavestoneslegal.com/revised-banking-law-in-nigeria-bofia-2020/

[2] https://pavestoneslegal.com/5074-2/

[3] https://pavestoneslegal.com/licensing-requirements-for-banks-and-other-financial-institutions-in-nigeria/

[4] https://pavestoneslegal.com/anti-money-laundering-regulation-in-nigeria-recent-updates/

Investment and Securities Act 2025 – The New Era of Securities Exchanges

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BY SEUN TIMI-KOLEOLU AND OLAWALE ATANDA

Investment and Securities Act 2025 – Securities Exchanges

Introduction

The Investment and Securities Act, 2025 (ISA 2025) represents a significant regulatory development, particularly for those operating in and around digital asset markets including Fintech. In our previous newsletter*, we highlighted the important changes made to the capital market by the ISA 2025.

A notable development is the expansion of the definition of a “securities exchange” to include platforms dealing in virtual assets, in addition to traditional securities, commodities, and financial instruments. This change aligns with the evolving regulatory direction of the Securities and Exchange Commission (SEC), which includes the introduction of the Rules on Virtual Asset Service Providers (VASPs)* and the Accelerated Regulatory Incubation Program (ARIP)*.

More importantly, this development offers long-awaited regulatory clarity to Fintechs that have enabled users to invest in local and foreign securities as well as virtual assets like crypto. Platforms such as Yellow Card and similar operators, which function in many respects as digital exchanges, can now rely on a statutory framework that permits them to register with the SEC, rather than operating in a legal grey area.

Given the more assertive stance by SEC on unlicensed operations in recent months, this reform is not only timely but essential. The ISA 2025 provides the legal basis for compliance in securities investment, while also recognising the innovation that continues to define Nigeria’s Fintech ecosystem.

This newsletter examines the significance of the introduction of the classification of new exchanges and the potential implications for digital investment platforms and broader market integrity.

New Definition of Exchanges

Notably, The ISA 2025 clearly defines “securities exchange or registered exchange” as an organized facility with the following functions:

  • bringing together buyers and sellers of securities, virtual assets, commodities, and/or financial products/instruments;
  • matching bids and offers among these parties; and
  • enabling transactions through the matched orders.

This definition underscores that platforms trading in virtual assets are squarely within the ambit of the ISA 2025.

New Classification of Exchanges

The ISA 2025 establishes two primary categories of securities exchanges:

  1. Composite Securities Exchange

A composite securities exchange is permitted to list, quote, and trade all types of securities, commodities, and financial instruments. This broad-based approach is intended for entities that wish to offer a diverse range of assets on a single platform.

  1. Non-Composite Securities Exchange

This classification is further segmented into

  • Mono Securities Exchange – This exchange is designed for platforms that list, quote, and trade a single type of asset, commodity, or financial product. Given that many fintech and digital asset operators generally deal with a specific asset class – such as virtual assets (which includes cryptocurrency) or digital tokens – this classification might be more appropriate for them.
  • Alternative Trading System (ATS) – This exchange is designed for platforms that facilitate trading via electronic systems, either at physical locations or virtually via  online platforms.

What Are the Implications for Fintech and Virtual Asset Platforms?

The updated classification system carries several key implications for fintech startups and digital asset operators such as:

  1. Regulatory Clarity and Compliance

The clear delineation between composite and non-composite exchanges affords fintech operators a defined regulatory path. Entities that previously operated in a regulatory grey area, particularly those facilitating crypto and tokenized asset trades, now have an opportunity to register under the non-composite category. This will help such platforms secure legitimacy and enhance investor trust by aligning with the new licensing requirements.

  1. Alignment with SEC Rules and the ARIP Program

The ISA 2025 explicitly includes virtual assets within the definition of a securities exchange, as it establishes an organized facility where buyers and sellers are brought together to transact in securities, virtual assets, commodities, and financial products. This clear inclusion reinforces the SEC’s guidelines on VASPs* and adds legitimacy to digital asset operations. Notably, the ARIP program which is integral to the SEC’s framework for registering virtual asset service providers, benefits from this enhanced clarity by offering a practical pathway for these platforms to secure regulatory registration and credibility.

Licensing, Governance, and Compliance Obligations

The ISA 2025 imposes a rigorous framework to ensure that all registered securities exchanges adhere to high standards of licensing, governance, and compliance.

  1. Licensing Requirements
  • Corporate Structure and Registration – All securities exchanges must be registered as companies with the Corporate Affairs Commission.
  • Application and Documentation – Applicants are required to submit comprehensive documentation, which includes detailed proposals on membership rules, listing criteria, and trading procedures.
  • Good Character and Business Integrity – A core element of the licensing process is the verification that all members, participants, and executives exhibit a high degree of business integrity.
  1. Governance Standards, Compliance and Regulatory Oversight
  • The appointment of the chief executive officer and other key officers is subject to prior written approval from the SEC.
  • Registered exchanges are required to file quarterly reports detailing their surveillance and enforcement activities.
  • Exchanges must maintain clear rules for board composition and have balanced representation
  1. Enforcement Provisions and Sanctions
  • Suspension or Prohibition of Trading – In circumstances where the SEC deems it necessary for the protection of persons transacting in particular securities, it may suspend or prohibit trading in those securities. Should the exchange fail to prevent trading after receiving a warning notice, the SEC may enforce a prohibition for an initial period of up to 14 days
  • Penalties for Non-Compliance – If an exchange continues to permit trading in violation of a notice to suspend trading, it will be subject to severe financial penalties. Specifically, the exchange may face a minimum penalty of NGN1,000,000, with an additional NGN50,000 imposed for each day that the contravention persists.
  • Revocation of Registration – The SEC may revoke an exchange’s certificate of registration under certain conditions. These include if the exchange ceases to operate as defined under the law, is wound up, operates in a manner detrimental to the interests of investors and the public, or engages in business activities for which it is not duly registered under ISA 2025.

Conclusion

The ISA 2025 redefines the regulatory landscape by integrating virtual assets into the framework governing securities exchanges. Founders who structure their operations in line with this framework can better navigate compliance requirements while positioning their platforms for scale and long-term sustainability.

Endnotes

1.For more on the ISA 2025, please see our review here – https://pavestoneslegal.com/staying-informed-staying-ahead-a-review-of-the-investment-and-securities-act-2024/

2.Please see our newsletter on the ARIP here – https://pavestoneslegal.com/insights-into-the-sec-accelerated-regulatory-incubation-program-framework/

3.Please see our newsletter on the VASP rules here – https://pavestoneslegal.com/regulatory-update-regulation-of-virtual-assets-service-providers-in-nigeria/

 

OPERATING A CRYPTO TRADING COMPANY IN NIGERIA: REGULATORY REQUIREMENTS

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By Seun Timi-Koleolu and Hillary Okorotie

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Introduction

The Nigeria Securities and Exchange Commission (“SEC”) by a press release issued on August 29, 2024, announced that it has granted two Digital Asset Exchanges an “Approval in Principle” under the Accelerated Regulatory Incubation Program (“ARIP”). The framework for ARIP was introduced by SEC in June 2024 (see our previous newsletter for details) for the purpose of onboarding virtual asset exchange companies.

With this new update there is more clarity on the regulatory requirements for companies wishing to provide crypto trading services in Nigeria.  In view of the forgoing we have set out guidelines for companies wishing to provide crypto trading services in Nigeria.

  1. Are all Crypto Trading Companies Required to Register with SEC?

Yes, all digital exchanges and platforms wishing to provide crypto trading services in Nigeria are required to register under ARIP and obtain the approval of SEC in order to provide such services in Nigeria.

  1. What Approval will be Issued by SEC to Qualified Companies.

Upon undergoing registration under ARIP, an Approval in Principle will be granted to eligible companies. Once the condition for the Approval in Principle given by SEC has been satisfied by the company, the company will then be given full registration by SEC.

  1. Is the Company required to be Incorporated in Nigeria?

Yes, all companies wishing to provide crypto trading services must be registered with the Corporate Affairs Commission (CAC). The Certificate of Incorporation is one of the documents that is required to be shown for registration under the ARIP.

  1. Registration Requirements

According to the rules set by SEC, digital asset exchanges specifically are required to have a minimum paid-up capital of 500 million naira and must maintain a fidelity bond covering 25% of the paid-up capital of the company. Additionally, the Chief Executive officer and other principal officers of the company must possess relevant university degrees and at least five years of cognate experience. Furthermore, digital asset exchanges must obtain a “No Objection” letter from SEC before commencing its operations and trading any virtual or digital assets.

  1. Do these rules apply to Foreign Business wishing to operate Crypto Trading Companies in Nigeria?

Yes, these rules apply to foreign companies wishing to provide crypto trading services in Nigeria including incorporating a company with the CAC for the purpose of providing the services.

 

Conclusion

As the market for digital assets continues to grow, businesses interested in entering this space must ensure full compliance with the regulatory requirements set out by SEC and other relevant authorities.

We advise that companies wishing to provide crypto trading  services work closely with their legal advisors to ensure that they successfully operate within the confines of the relevant regulations.

 

INSIGHTS INTO THE SEC ACCELERATED REGULATORY INCUBATION PROGRAM FRAMEWORK

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By Aderonke Alex-Adedipe and Olawale Atanda

 

Introduction 

The Securities and Exchange Commission (SEC) on June 28 2024, released the Framework on Accelerated Regulatory Incubation Program (ARIP) for the onboarding of Virtual Assets Service Providers (VASPs) and other Digital Investments Service Providers (DISPs). The ARIP Framework (the “Framework”) aims to streamline the onboarding process for current and potential entities seeking registration as VASPs by the SEC, and overall, to enhance compliance with the SEC’s regulatory standards.

This article answers key questions regarding the ARIP Framework and provides relevant guidance for entities seeking to participate in the ARIP.

  1. What is the Objective of the ARIP?

In addition to fast-tracking the onboarding of entities applying to the SEC and potential applicants seeking registration, participation in the ARIP grants entities preliminary approval to operate as VASPs pending the implementation of the Digital Assets Rules which regulate VASPs and other DISPs.

The ARIP provides participants with the opportunity to gain guidance on the SEC’s regulatory requirements before becoming fully operational in the capital market. Conversely, it will allow the SEC gain deeper insights into digital asset business models and through this understanding, enhance its regulations to ensure they effectively address market integrity, investor protection, and anti-money laundering concerns.

The ARIP is designed to foster innovation within the virtual assets space while ensuring robust regulatory oversight from the SEC. Through the ARIP, the SEC will be able to work closely with VASPs, facilitate their compliance with existing regulations, and promote best practices.

  1. Who is Eligible For the ARIP?

The scope of the ARIP is broad and applies to VASPs and other DISPs seeking or having approached the SEC for registration.  In particular, the Framework covers:

i. VASPs, platforms, token issuers operating in Nigeria or offering services to Nigerian consumers, regardless of their physical location.

ii. Individuals or entities involved in initial token offerings and unregistered digital investment platforms operating in the Nigerian capital market.

iii. Entities involved in Distributed Ledger Technology (DLT)-related services such as order execution, portfolio management, and custodian services.

iv. Foreign or non-residential issuers or sponsors of digital assets, including foreign operators targeting Nigerian investors through promotions, publications, or direct communication.

Entities who fall under the scope of the ARIP must be incorporated and have an office in Nigeria with its Chief Executive Officer/Managing Director resident in Nigeria. In addition, eligible entities must be performing investments and securities business and seeking registration or have pending virtual asset related applications with the SEC.

  1. What are the Application Steps and Requirements for the ARIP?

Applying for the ARIP involves several steps:

i. Initial Expression of Interest: Qualified entities must submit an initial expression of interest to the SEC via its online portal.

ii. Detailed Application: Where the SEC approves the initial expression of interest, a detailed application must be submitted consisting of a sworn undertaking, an ARIP operational plan and business model, the rules of the entity, a letter of no objection (if regulated by another sectoral agency), company documents, evidence of registration with the Nigerian Financial Intelligence Unit (NFIU), and other documents as required under the SEC Rules.

iii. Issuance of Approval in Principle (AIP): The SEC will assess the application and if cleared, will issue an AIP to the entity. The entity will be required to operate in line with the Investment and Securities Act (ISA), 2007 and the SEC’s Rules. Approved entities will operate within the ARIP for a period yet to be determined by the SEC.

  1. What Happens After the ARIP Period?

Upon the expiration of the ARIP period, participants are expected to be registered formally by the SEC. The SEC may take one of several actions:

i. grant successful participants formal registration approval to operate in the Nigerian capital market, subject to compliance with all existing rules and regulations;

ii. adopt new regulations, guidelines, or notices based on insights gained from the ARIP;

iii. or deny permission for the participant to operate in Nigeria under the SEC Rules.

In granting registration status, the SEC may also organize training and examinations for sponsored individuals, with successful candidates interviewed prior to registration. It is important to note that the ARIP framework is not intended to circumvent existing rules and regulatory requirements.

  1. Can SEC Terminate or Remove Entities From the ARIP?

The SEC reserves the right to terminate participation in the ARIP if a participant is deemed unfit, breaches any imposed conditions, violates the ISA, SEC Rules, or other relevant laws, deviates from its operational plan, or for any other reason the SEC finds appropriate.

Additionally, the SEC may withdraw or suspend approval to participate in the ARIP at any time if the participant fails to implement required safety measures, submits false or misleading information, contravenes any applicable law, undergoes liquidation, breaches data security and confidentiality requirements, operates in a manner detrimental to customers or the public, or fails to address defects leading to service disruptions or fraud incidents.

  1. What Fees and Penalties Are Associated with the ARIP?

i. ARIP applicants must pay a non-refundable processing fee of N2,000,000 (Two Million Naira). They must also provide evidence of the required shareholder funds and maintain a current Fidelity Bond covering at least 25% of the required shareholder funds.* In addition, the SEC may impose additional financial requirements based on the nature, operations, and risks of the participant’s business.

ii. Participants who fail to comply with the stipulated requirements in the Framework face a penalty of at least N5,000,000 (Five Million Naira) initially, plus an additional N200,000 (Two Hundred Thousand Naira) for each day of default. Further administrative sanctions stated in the SEC Rules may apply depending on the severity of the violation.

iii. Commercialized VASPs operating trading, offering, and custody platforms without proper authorization or registration by the SEC will incur a penalty of at least N20,000,000 (Twenty Million Naira). Other digital investment platforms, including crypto brokers, dealers, advisers, and market makers operating without due authorization, will face a penalty of at least N10,000,000 (Ten Million Naira).

iv. Entities failing to comply with SEC rules and regulations may also face suspension from capital market activities.

Conclusion

The ARIP is a welcome development and a step forward in the advancement of the  regulation of digital assets and services in Nigeria. By providing a structured pathway for VASPs and DISPs to gain preliminary approval and align with regulatory standards, the SEC, through the Framework, is signaling to investors and other stakeholders that it promotes innovation while safeguarding market integrity and investor protection.

For more on digital assets, please see our articles here:

1.https://pavestoneslegal.com/regulation-of-cryptocurrencies-and-other-digital-assets-in-nigeria/

2.https://pavestoneslegal.com/regulation-of-cryptocurrency-and-other-digital-assets-in-nigeria-2-0/

3.https://pavestoneslegal.com/update-on-regulation-of-digital-assets-in-nigeria-some-lessons-from-switzerland/

4.https://pavestoneslegal.com/regulatory-update-regulation-of-issuance-offering-platform-and-custody-of-digital-assets-in-nigeria/ 

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* The SEC has not stated the required shareholder fund for participants in the ARIP as of the date of this publication.

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.

 

NON-FUNGIBLE TOKENS (NFTs): REGULATORY CONSIDERATIONS IN NIGERIA

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By Seun Timi-Koleolu and Karo Isiorho

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A survey conducted by Finder.com in 2021 revealed that Nigeria ranked 6th amongst 20 countries in the world that have adopted Non-Fungible Tokens (“NFTs”). The reason for this is not far-fetched. As a result of the continued devaluation of Naira, Nigerians are constantly on the lookout for new ways to stay above inflation. One of such ways appears to be delving into the acquisition and sale of digital assets – NFTs.

Given the rapid growth of the NFT ecosystem in Nigeria, we have provided useful information to guide NFT transactions in Nigeria.

  1. What is a Non-Fungible Token?

An NFT, also known as a Non-Fungible Token is a digital asset that represents real-world objects like art, music, in-game items and videos which are typically logged and authenticated on cryptocurrency blockchains, primarily Ethereum.

  1. What is the difference between a Fungible Token and a Non-Fungible Token.

Fungible tokens or assets are divisible and non-unique assets that store value such as a $1 note or 1 Bitcoin whilst Non-Fungible Tokens are unique and non-divisible assets that store data like digital artworks, tweets, music composition, digital shots, etc. They are similar to a deed of title for assets. In 2021, Twitter CEO, Jack Dorsey, sold his first-ever tweet for $2.9 million dollars as an NFT.

  1. Who are those that can benefit from NFTs?

Artists, buyers, collectors and marketing platforms can benefit from NFTs.

NFTs create a medium for artists to showcase and monetize their work on a broader spectrum. Artists get to retain their intellectual property rights in the works after it is sold and receive royalties on subsequent sales of the digital works. For buyers/collectors, acquiring an NFT gives a right of ownership to a unique asset that cannot be easily replicated and holds the potential for good future profit where the NFT increases in value. NFT marketing platforms, where artists can offer their NFTs for sale, also provide good business opportunities.

 

  1. What are the Regulations affecting NFTs in Nigeria?

Since NFTs are quite new in Nigeria, there has been no law or regulation specifically enacted in respect of it. There are, however, certain laws that might affect its operations in  Nigeria which are worthy of note as highlighted below:

  1. Copyright Act: Under the Copyright Act, literary works, musical works, artistic works amongst others are eligible for copyright. Accordingly, authors of digital works – NFTs will be deemed to have copyright in such works (unless as otherwise agreed in writing) and will therefore have the right to seek relief in connection with violation of their intellectual property rights in the NFT.
  2. Cybercrime (Prohibition, Prevention, etc) Act: Creators of NFTs can seek relief or claims over infringement of their NFTs under the Cybercrime Act where they are able to prove unauthorized use of their unique words or phrases that form the basis of their NFT. There are several penalties the law prescribes for those found guilty of these offenses.
  • The Securities and Exchange Commission: The Securities and Exchange Commission ( “SEC”) is the body empowered to regulate securities and investments in Nigeria. SEC through its statement on digital currencies suggests that virtual assets including blockchain based offers of digital assets- within Nigeria; or by Nigerian issuers; or sponsors; or foreign issuers targeting Nigerian investors- shall be subject to the regulation of  SEC. In view of this, it is likely that NFTs will be subject to the regulation of SEC unless issuers can prove otherwise.
  1. Central Bank of Nigeria (the “CBN”):The CBN is yet to release any circulars particularly on the use of NFTs. It has, however, repeatedly prohibited the use of virtual currencies as a legal tender by banks and other financial institutions in Nigeria. The fact that NFTs are traded using blockchain technology such as Ethereum, creates uncertainty as to whether the CBN will fully welcome its operations in Nigeria.  There is, however, no indication that Peer to Peer sale of NFTs will be affected by CBN regulations.

Other legal considerations also exist in areas such as taxation and data protection.

Conclusion

Despite the growth of the NFT amongst Nigerians, it remains a novel concept. A large number of the population are still unaware of its operations. Also, the government is yet to provide an elaborate and uniform regulation to guide its usage in Nigeria. It is important for current investors to stay vigilant in their dealings in NFTs in order to protect their 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.

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.