Abdul Muhammed Law Practice
Abdul Muhammed Law Practice examines the SEC rules on cryptocurrency in Nigeria.
Broad overview of the ‘rules’
Nigeria’s Securities Exchange Commission Rules dated May 11, 2022 outlines a comprehensive set of rules governing issuance, offering platforms and custody of digital assets.
Part A
Part A sets forth the regulatory framework designed to ensure transparency, investor protection and compliance within the evolving landscape of digital asset offerings in Nigeria.
Part B
Part B outlines the registration requirements and operational guidelines for Digital Assets Offering Platforms (DAOPs) within the context of the Nigerian financial market. The section of the rules cover regulations cover various aspects, including registration procedures, financial requirements, governance structures, risk management, and obligations towards investors.
Part C
Part C outlines the registration requirements and operational guidelines for Digital Asset Custodians (DACs) as per the regulatory framework. DACs are defined as entities providing safekeeping, storage, and custody services for virtual assets/digital tokens on behalf of clients.
Part D
Part D outlines the general requirements and conditions for the registration of Virtual Assets Service Providers (VASPs). It covers various aspects, including exemptions, definitions, and the detailed process for VASP registration.
Part E
Part E delineates the specific rules governing Digital Asset Exchanges (DAX) in addition to the general requirements for Virtual Assets Service Providers (VASPs). It encompasses a range of prerequisites, fees, and obligations to ensure the secure and transparent operation of DAX platforms.
Rules on issuance of digital assets as securities
Introduction
The regulatory framework establishes a robust set of rules governing the issuance of digital assets as securities, emphasizing transparency, investor protection, and compliance with the evolving landscape of digital asset offerings.
The rules on issuance of digital assets as securities are set forth in Part A and the regulatory framework for the digital asset offerings are discussed below.
Applicability
The rules are applicable to all issuers intending to raise capital through digital asset offerings.
Definitions
Key terms include “Digital Asset,” “Digital Asset Offering,” “Initial Coin Offering (ICO),” “Hard Cap,” “Lock-up Period,” “Pre-offer Period,” “Securities Token Offering (STO),” “Soft Cap,” and “White Paper.”
Related provisions
The rules are to supplement existing securities laws and regulations issued by the Commission.
Initial assessment filing
Promoters must submit an assessment form and draft white paper, providing comprehensive information about the project.
The Commission reviews the filing within 30 days to determine if the digital assets qualify as securities.
Determination by the Commission
Upon review, the Commission communicates its determination on whether the proposed digital assets constitute securities.
Revisions and renewal
Issuers can revise the whitepaper during the review period, renewing the 30-day review period.
Post-determination revisions
Revisions after the Commission’s determination require prior review, clearance, and payment of a revision fee.
Security determination
If the digital asset is deemed a security, the issuer must apply for registration.
Registration requirements for digital asset offering
Upon a positive determination, the issuer submits a registration application containing various details, including token information, KYC procedures, security protocols, and corporate governance disclosures.
Moratorium on equity interest
Issuers’ directors and senior management must collectively own at least 50% equity on the issuance date, with restrictions on selling more than 50% until the project’s completion.
Limit on funds to be raised
Issuers may raise funds up to twenty times their shareholders’ funds, with a maximum ceiling and a requirement to refund if the amount raised falls below the soft cap.
Investment limits
Investment limits are defined for qualified institutional and high net worth investors, as well as retail investors.
Exemptions from registration
Certain scenarios, such as crowdfunding portals, judicial sales, or isolated transactions, are exempt from the registration requirements.
Rules on registration requirements for digital assets offering platforms (DAOPs)
Introduction
The regulatory framework for DAOPs in Nigeria involve a comprehensive set of requirements aimed at ensuring the integrity, transparency, and stability of digital asset offerings.
The regulations cover various aspects of operations, governance, risk management, and investor protection, reflecting the commitment of regulatory authorities to fostering a secure and thriving digital assets market in the country.
The regulatory framework for digital assets offering platforms (DAOPs) can be seen in Part B of the rules and the registration requirements are discussed below. (
Definitions
The rules define a DAOP as an electronic platform for offering digital assets.
Requirements
Under the rules emphasizes applicants seeking DAOP registration must comply with specific requirements, including payment of prescribed fees and submission of relevant forms.
Key elements include filing/application fees, processing fees, and a substantial registration fee of N30,000,000.
Additionally, applicants must meet minimum paid-up capital requirements and provide a fidelity bond.
Corporate documentation and additional requirements
Applicants must submit certified copies of essential corporate documents, including the Certificate of Incorporation and Memorandum and Articles of Association. Financial documentation such as audited accounts and tax clearance certificates is required.
The regulations also stipulate additional requirements, such as draft rules, undertakings, and disclosures related to the company’s structure, procedures, and governance.
Board approval and CEO Appointment
DAOPs must obtain approval from the regulatory commission for their board composition. The Chief Executive Officer (CEO) holds office for a specified term, subject to reappointment, and appointments require prior approval from the commission. CEOs and principal officers must meet specific criteria, including integrity, educational qualifications, and experience.
Governance obligations
DAOPs are required to establish rules supporting financial stability and efficiency. Governance structures should possess a mix of skills, and the platform must disclose relevant information to investors, ensuring transparency.
The rules outline obligations regarding due diligence on issuers, maintaining fair treatment for clients, and continuous risk management.
Risk management, internal audit and conflict of interest
DAOPs must identify and manage risks, establish internal audit functions, and disclose any conflicts of interest, particularly in shareholdings.
The regulations specify requirements for cybersecurity, business continuity plans, and comprehensive risk management frameworks.
Outsourcing and cessation of operations
The rules outline rules for outsourcing functions, emphasizing the need for appropriate service providers and notifying the commission of any outsourcing arrangement.
DAOPs are prohibited from ceasing operations without prior notification and approval from the commission.
Cancellation of registration and withdrawal
The commission has the authority to cancel DAOP registration under specific circumstances, including submission of false information, failure to meet regulatory requirements, or non-payment of prescribed fees.
DAOPs can apply to withdraw their registration, subject to meeting outstanding obligations and liabilities.
Rules on registration requirements for digital asset custodians (DACs)
Introduction
The rules aim to ensure that DACs operate transparently, securely and in the best interest of clients, with emphasis on risk management, conflict resolution and compliance with regulatory requirements.
Part C of the rules provide a comprehensive structure for DAC registration, operations, and compliance within the defined legal and ethical boundaries and these are discussed below.
Registration requirements
DAC applicants must meet eligibility criteria for registration as a Custodian or Trustee.
Registered Custodians or Trustees seeking to offer DAC services must seek approval from the Commission.
Compliance with prescribed fees is mandatory for registration.
Registration of foreign DACs
Foreign DACs can be registered if they meet specified requirements. Conditions include authorization in their home jurisdiction and regulatory arrangements with the Commission.
Obligations of DACs
Acting in the best interest of clients, avoiding conflicts of interest; safeguarding clients’ access to virtual assets and preventing unauthorized access; transparent and fair fee structures and compliance with reporting requirements, laws, and regulations, including AML/CFT/PF.
Other obligations include implementation of risk management, business continuity plans and industry-aligned practices; fair treatment of clients, identification and management of cyber threats; immediate notification to the Commission of breaches, adverse events, or business continuity plan activation and maintenance of accurate transaction records and provision of access to the Commission.
Risk Management
DAC are also tasked with establishment of a comprehensive risk management framework; maintaining strategies, policies, and reporting mechanisms for identifying, assessing, and controlling material risks.
Conflict of interest management
DACs are required to prioritize clients’ interests in case of conflicts and establish written policies for identifying, monitoring, and managing conflicts of interest.
Internal audit
Regular internal audit checks on operations, with reporting to the Board is required and the internal audit framework must be specifically approved by the Board.
Key generation and management
Secure storage for clients’ virtual assets must be guaranteed and policies for key generation, safeguarding, and security mechanisms must be robust and functional.
Segregation of client Assets
The rules mandate proper segregation of clients’ assets from the custodian’s assets and maintenance of accurate records.
Transaction handling
Up-to-date transactional records, denominated in Nigerian Naira is mandatory and submission of transaction information to the Commission is required.
Outsourcing
Appointment of efficient service providers must avoid conflicts of interest and adequate restrictions on outsourcing decision-making functions and client interactions must be in place. Furthermore, all consideration of material outsourcing arrangements must meet regulatory conditions.
Outsourcing information
There is an obligation to notify the Commission before entering into outsourcing arrangements and detailed information on the provision of outsourced functions and persons with access to records must be supplied to the Commission. Notification of variations, termination, or adverse developments must also be reported.
Cessation of business or operations
There is a duty to inform and engagement with the Commission before cessation and there is a need to make compliance with Commission’s directions for orderly cessation in every case of cessation of business.
Suspension or cancellation or withdrawal of registration
Commission has the authority to suspend or cancel DAC registration. DAC has a right to apply for withdrawal with reasons, subject to Commission approval.
Rules on virtual assets service providers (VASPs)
Introduction
Part D of the rules establishes a robust regulatory structure for VASPs, ensuring market integrity, investor protection and adherence to anti-money laundering laws.
The rules strike a balance between fostering innovation in the digital asset space and safeguarding the interests of investors and the integrity of the capital market.
The regulatory framework for virtual assets service providers (VASPs) is discussed below.
Applicability and exemptions
The rules apply to platforms facilitating virtual asset trading, DLT-related services and digital asset issuers targeting Nigerian investors.
VASPs shall be structured as a body corporate.
Exemptions may be granted by the Commission based on justifiable reasons and compliance with the rules’ intended purpose.
Definitions
Virtual Asset, Digital Asset, DAX (Digital Asset Exchange) and VASP are defined.
Virtual Asset represents a transferable digital value, excluding fiat currencies and securities.
DAX refers to an electronic platform facilitating virtual or digital asset trading.
VASP encompasses entities conducting various virtual asset-related activities.
Requirements for VASP registration
Registration applications require completion of SEC forms and submission of various documents and undertakings.
Applicants must declare their ability to operate a fair, transparent market and fulfill obligations outlined in the rules.
Verification of the applicant’s financial and managerial integrity is mandatory.
Submission of the entity’s rules, business model, and security arrangements is required.
Applicants who are regulated by other sectoral regulators must provide a relevant no objection or an approval letter.
Obligations of registered VASPs
VASPs must monitor rule compliance, ensure fair user treatment, and provide accurate disclosures.
User risk acknowledgment forms and disclaimers about trading risks must be obtained and displayed.
Compliance with anti-money laundering laws and continuous awareness programs are mandatory.
Transparent fee structures, fair business practices, and disclosure of relevant information on the platform are required.
The Commission must have access to the platform and any necessary registers and immediate reporting of system errors, failures, or malfunctions is mandatory.
Rules on digital assets exchange (DAX)
Introduction
Part E of the rules establishes a comprehensive regulatory framework for digital asset exchanges, ensuring financial stability, investor protection and market transparency.
The rules strike a balance between encouraging innovation in the digital asset space and safeguarding the integrity of the capital market.
Compliance with these regulations is crucial for DAX Operators to contribute to a secure and transparent trading environment for virtual assets.
Requirements for DAX registration
Payment structure:
Filing/application fee: N100,000; processing fee: N300,000; registration fee: N30,000,000; and sponsored individuals fee: N100,000.
Forms and capital:
Submission of SEC forms and payment evidence; minimum paid-up capital: N500,000,000 with verification of fund sources and fidelity bond: 25% of minimum paid-up capital, subject to periodic review.
Additional financial requirements may be imposed by the Commission.
Individuals documentation
Sponsored individuals and directors must demonstrate compliance with SEC Rules and Regulations for registration.
Corporate documentation
Submission of certified copies of Certificate of incorporation, memorandum and articles of association, CAC forms and audited accounts.
Governance, and internal structures
DAX Platform requires Board approval subject to Commission’s endorsement. CEO’s appointment for five years, subject to renewal, and compliance with specified criteria.
Governance framework including rules, policies, and conflict of interest management will be needed and will be verified.
Outsourcing plan, policy and rules submission
Accountability for outsourced functions and adherence to SEC rules is required. Submission of proposed outsourcing rules and policy to the Commission for approval is mandatory.
Reporting requirements
Regular submission of trading statistics, financial reports, and compliance reports is required. Annual submission of audited financial statements is required.
Business cessation
Notification of business cessation to the Commission is mandatory.
Conflict of interest management
Establishment of conflict of interest policies addressing proprietary trading and information management is obligatory.
Risk mitigation and internal controls
Capacity for the identification and mitigation of operational risks must be demonstrated and business continuity plan addressing significant disruptions is required as well as establishment of an internal audit function.
Trading operations and market transparency
No trading facilitation is proper without Commission’s “no objection” and disclosure of market structure, order types, and real-time trading information is mandatory. Adequate arrangements must be in place to manage volatility, error trades, and system malfunctions.
That was a long one and thank you for staying till the end!
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Linktree: Abdulateef Muhammed
