The Security and Exchange Commission of Nigeria (“the Commission”) established a Fintech Roadmap Committee (“Committee”) in November 2018 to explore the impact of financial technology on investments and securities in Nigeria and to properly classify and regulate cryptocurrencies and virtual assets. The Committee recommended cryptocurrencies be classed as securities or commodities, among other recommendations.
Consequent to the Committee’s recommendations, the Commission started creating a framework for a virtual currency in Nigeria, and the released Statement is the first step toward cryptocurrency regulations[i].
More recently, as the growth in the global participation of digital/virtual assets became more apparent, the Commission released a revolutionary set of rules on the Issuance, Offering Platforms, and Custody of Digital Assets (New Rules), which covers:
- Rules on Issuance of Digital Assets as Securities;
- Rules on Registration Requirements for Digital Assets Offering Platforms (DAOPs);
- Rules on Registration Requirements for Digital Asset Custodians (DACs);
- Rules on Virtual Assets Service Providers (VASPs); and
- Rules on Digital Assets Exchange (DAX).
These rules are significant as they mark a turning point for the recognition of digital assets in Nigeria. These rules apply to all issuers seeking to raise capital through digital asset offerings.
This article aims to highlight key provisions of the Commission’s New Rules and their implications for the Nigerian capital market.
NOTABLE PROVISIONS IN THE NEW DIGITAL ASSETS RULES ISSUED BY THE COMMISSION
- It allows for the securitisation of digital assets:
As with the usual system, which enables companies to raise capital by offering their shares as securities to the public through Initial Public Offerings (IPOs), the new rules in recognition and legalisation of digital assets, make it possible for entities wishing to raise capital for a project to offer digital assets (known as Initial Digital Asset Offering – IDAO) as securities provided it passes the Initial Assessment Filing as stipulated under the Rule 4.0.
Promoters, entities, or businesses proposing to conduct initial digital asset offerings within Nigeria or targeting Nigerians, shall submit an assessment form and a draft white paper.[ii] A white paper is a document that states the technology behind a project, including a detailed description of the system architecture and interaction with the users, a description of the project and use of proceeds, information on the market capitalisation, anticipated growth, other technical details, and the team and advisors behind the project[iii].
The New Rules also stipulate mandatory filing of white papers for every DAOP and a legal opinion with sufficient justifications on whether or not the tokens to be sold through the initial digital asset offering are securities. The SEC reserves the right to review all submissions and determine whether the digital asset qualifies as securities under the Investment and Securities Act, 2007, upon which the Issuer shall apply to register the said securities.[iv]
Nonetheless, an application for registration may be rejected by the Commission on the grounds of public policy or if it is satisfied that the approval of such application would be injurious to investors and/or offends its rules[v].
- Limitation of Funds to be raised through IDAO/Limitation of Investment:
Both the Issuer and investor under the New Rules are limited by how much can be raised and how much can be invested, respectively.
The Issuer’s fundraise shall not exceed twenty times the Issuer’s shareholders’ funds. The maximum quantum of funds permitted to be raised within any continuous 12-month period shall be subject to a ceiling of NGN10 billion or any other ceiling as the Commission may determine from time to time.[vi]
On the other hand, while a retail investor is limited to a maximum investment of NGN200,000 per Issuer and a total investment limit of NGN2 million within 12 months, high-profile investors are unrestricted in their investments.[vii]
- Exemptions from Registration of Digital Assets:
Without prejudice to the mandatory registration of digital assets by entities, the New Rules exempt certain entities from the registration of digital assets. For instance, a judicial sale of a digital asset (i.e., when a court places for sale a debtor’s digital asset to pay a judgment creditor) in insolvency; or where a pledge holder places for sale the pledgor’s digital asset to satisfy a bona fide debt. Also, digital securities offered or proposed to be offered through crowdfunding platforms or intermediaries are exempted[viii].
- It stipulates the registration requirements for Digital Assets Offering Platforms (DAOPs):
For Digital Assets Offering Platforms (DAOPs) looking to operate in the market, the Commission requires that in addition to the requirements in Part D of the New Rules, the DAOPs are to file and pay an application fee of NGN100k, a Processing fee of NGN300k, and a registration fee of NGN30 million. There is also a required sponsored individual fee of NGN100k
The DAOPs will also need to have a minimum paid-up capital of NGN500 million and will be required to provide a current “Fidelity Bond” covering 25% of the minimum paid-up capital as stipulated by the Commission’s Rules and Regulations.[ix]
- Appointment and Tenure of a Chief Executive Officer and Principal Officers of the board of a DOAP:
The New Rules provide that the appointment of a Chief Executive Officer and Principal Officers of a DAOP shall be subject to the approval of the Commission and shall hold office for five years, subject to reappointment for another period of five years and no more[x].
- Internal Audit
The New Rules bestow on the DAOPs the responsibility for creating an internal audit to develop, implement and maintain an internal audit framework that will go in line with the business and operations of the DAOP[xi].
- Conflict of interest management
The New Rules provide that a DAOP, including all its directors and shareholders, shall disclose to the public on its platform if: it holds any shares in any of the Issuers or virtual assets/digital tokens issued by any Issuers hosted on its platform; or it pays any referrer or introducer or receives payment in whatever form, including payment in the form of shares, in connection with an Issuer hosted on its platform[xii].
A DAOP’s shareholding in any of the Issuers hosted on its platform shall not exceed thirty (30) percent, subject to the approval of the Commission.
A DAOP is prohibited from providing direct or indirect financial assistance to Investors to invest in the virtual assets/digital tokens of an Issuer hosted on its platform.
8. A DAOP is required by the New Rules to operate a trust account to establish systems and controls for maintaining an accurate and up to date records of Investors and any monies or virtual assets/digital tokens held in relation to Investors; establish and maintain with a registered Receiving Bank one or more trust accounts, designated for the monies received from Investors; among others. The DAOP is allowed to release the funds to the Issuer after the necessary conditions, such as the target amount, are met and no material change relating to the DAOP or the Issuer during the offer period is fulfilled[xiii].
- Risk Management:
The New Rules provide that a DAOP must prove beyond reasonable doubt that it has the equipment and ability to manage both future foreseen and unforeseen business risks. It must also have a business continuity plan in the case of risk occurrence[xiv].
It is also provided that a registered DAOP is required to ensure appropriate security arrangements, considering the scale of its business, and comply with the necessary enterprise risk management framework.
- Outsourcing of functions like internal audit function, compliance function, risk management function, and material functions as stipulated in the Rules to even a non-citizen is allowed, as long as the DAOP provides the Commission with a letter of decision and undertaking two weeks before entering any outsourcing arrangements[xv]. However, a DAOP is not allowed to outsource any function that involves the decision-making functions of the DAOP; or b) any interaction or direct contact with the DAO Issuer or token holders[xvi].
- It is pertinent to note that the New Rules also provide that the registration of digital assets offering platforms can be canceled if the Commission discovers that the DAOP submitted false or misleading information or an omission; fails to meet the requirements of the Investment and Securities Act 2007; fails to pay any fee prescribed by the Commission, or contravenes any obligation, condition or restriction.
- Finally, the New Rules stipulate the requirements for registration of Virtual Assets Service Providers (VASPs).
VASP is defined as any entity that conducts one or more of the following activities or operations for or on behalf of another person:
- exchange between virtual assets and fiat currencies;
- exchange between one or more forms of virtual assets;
- transfer of virtual assets;
- safekeeping and/or administration of virtual assets or instruments enabling control over virtual assets; and
- participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset.
The New Rules is a commendable action as it could help provide the needed regulatory lucidity for the scope of a digital asset as security in Nigeria. This will further give way for the adoption of transactions of cryptocurrencies in Nigeria.
[i] John O. Oladipo, ‘ Central Bank Digital Currencies: Growth and Relevance’, https://omaplex.com.ng/wp-content/uploads/2021/08/Central-Bank-Digital-Currency-Growth-Relevance_Thought-Leadership.pdf accessed: 16/05/22
[ii] Rule 4
[iii] Rule 2
[iv] Rule 4
[vi] Rule 7
[vii] Rule 8
[viii] Rule 9
[ix] Rule 11
[x] Rule 14
[xi] Rule 18
[xii] Rule 19
[xiii] Rule 20
[xiv] Rule 17
[xv] Rule 24