DAO Art Worthy
New SEC Rules greenlights Digital Assets Offerings; Also FIRS Directive on Certificates of Acceptance and has NUPRC finally killed the Seplat-Exxon Deal?
Hey guys, trust you have been good.
We have been a little quiet as things started off quite slow this year.On the regulatory side, I guess things have been a little petered out because Nigeria is gearing up for the 2023 elections.
Usually, this would mean we are all more focused on the politicking and the drama around it, and when I saw ‘we’, I mean the regulators themselves get carried away sometimes {you know who I’m talking about right 😉}
Anyways, enough of the yidiyada, much has happened since the last time we published a story. Here is a quick look at the highlights for today:
New SEC Rules on Digital Asset Offerings
FIRS Directive on Certificate of Acceptance(s)
NUPRC Kills Seplat-Exxon Deal?
DAO Art Worthy: New SEC Rules on Digital Assets Offerings
Singing thou art worthy O Lord as a young church boy was probably one of the fun things to do in church then… Only today, it helps me introduce a good pun for DAOs (digital assets offerings) which are now regarded as tradeable securities by Nigerian law.
To provide a bit of background context to the new Securities and Exchange Commission (SEC) Rules, we should cast our minds back to a digital assets statement released by the SEC back in 2020. We spoke about the impact of that SEC statement and an eventual direction from the Central Bank of Nigeria banning banks and financial institutions from facilitating cryptocurrency transactions, in one of our very first articles on NR. Have a throwback read here.
Okay, that gives enough context.
On 11 May 2022, the SEC published new rules regulating the issuance, offering platforms, and custody of digital assets. You can access a copy of the new Rules here.
The new Rules provide a broader scope of the approach that Nigeria’s Securities and Exchange Commission (SEC) may be taking towards regulating digital assets - a fancy word for cryptocurrencies and the like…
Let’s dig in a little into the new rules.
The Rules are made up of 5 Parts covering - the Rules on the Issuance of Digital Assets as Securities; Rules on Registration Requirements for Digital Assets Offering Platforms; Rules on Registration Requirements for Digital Assets Custodians; Rules on Virtual Assets Service Providers; and Rules on Digital Assets Exchange.
For ease of reference, we will be taking the Rules by Parts.
Part A - On the issuance of digital assets as securities, the new rules define digital assets as any digital token that represents assets such as a debt or equity claim on the issuer. It’s important to distinguish that it seems this definition would only be applicable to the part of the rules regulating the issuance of digital assets as securities. This distinction will be much justified later on… In addition, the new Rules define DAOs, initial coin offerings (ICO), and ICO projects. It also covers the description of the assets offerings, highlighting documentation, processes, and corporate governance that an issuer (entities listing digital assets) need to comply with.
A significant point to probably mention here is that issuers of a digital asset under the new Rules are limited on the amount of funding they can raise - which is either an amount not more than 20x the issuer’s shareholder’s funds, and subject to a total cap limit of N10billion. In addition, the new Rules impose investor limits applicable to digital assets offerings [retail investors would only be able to invest a maximum of N200k per issuer, subject to a total investment limit of N2 million in a 12-month period]. On the other hand, qualified institutional investors and high-net-worth investors do not have investment limits.
Okay, a little general note here. In trying to make sense of the Rules and what the SEC may be driving at, I imagine the use case for the digital-assets-as-a-security is for issuers to be able to structure DAOs the same way stocks (equity) and commercial papers (debt) are structured to raise financing on the domestic capital market. I guess understanding it as the new way through which corporates can raise capital while dressing up their proposal with digital assets that are equity-backed or debt-backed is a good form of dumbing down.
Part B - this section broadly provides for the registration requirements for DAO Platforms (DAOPs). DAOPs are the electronic platform used to offer digital assets, as operated by the DAOP operator. DAOPs are designed to act as self-regulatory gatekeepers in the DAO market. Broadly, part of their roles in the industry includes doing due diligence and assessing issuers of digital assets and ensuring the information regarding any issuance or digital assets listed on its platform is accurate and available to the investing public.
In a snapshot, to register as a DAOP, an entity must have a minimum paid-up capital of N500million, must be registered as a virtual assets service provider {‘VASP’ - we will get to these guys later on}; have to pay an N100k (application fee), N300k (processing fee), N30million (registration fee), and N100k (for registration of sponsored individuals through the DAOP). Other important requirements include the maintenance of a fidelity bond, which will cover about 25% of the minimum paid capital of the DAOP. In addition to these, the DAOP would need to submit documentation such as incorporation docs, risk management framework, and other policy documents, before the SEC would consider and approve the DAOP application.
Part C - this section speaks to the registration requirements for digital assets custodians (DAC). DACs are defined as persons providing safekeeping, storing, holding, or maintaining custody of virtual assets/digital tokens for another person. It would be easier to understand DACs as the ‘vault/personal wallets’ in the general digital assets’ space. Notably, the Rules provide that transactions handled DACs shall be denominated in the Nigerian Naira.
On registration as a DAC, it would seem the SEC is open to the option of current registered custodians/trustees wanting to extend such services to digital assets. Regardless, a DAC is also required to be registered as a VASP. Also, foreign DACs are eligible to register with the SEC where the conditions are complied with. Well, hello Coinbase. Generally, the Rules provide for the obligations binding on DACs which mostly cover investor protection, fee transparency, risk management, audit processes, and the general corporate governance issues surrounding custodial services.
Part D - the new Rules provide extensively on the registration requirements for VASPs - virtual assets service providers. The VASP rules have a wider scope, applying to all platforms facilitating trading, exchange, and transfer of virtual assets, as well as any person (individual or corporate) involved in DLT or virtual asset services. Additionally, the Rules apply to such entities whether they are foreign or non-residential. Again, hello Coinbase, Binance, and the like? The exception where the VASP rules may not apply is where an entity is providing infrastructure/software/design system/communication for digital asset exchanges or is merely a financial aggregator.
Importantly, this part of the rules defines virtual assets as a ‘digital representation of value that can be transferred, digitally traded and can be used for payment or for investment purposes, with the exception of digital representation of fiat currencies, securities, and other financial assets. Contrasted to the definition of digital assets, this is quite a wider definition for virtual assets and I assume it covers stuff like bitcoin and the like. Little note, I guess the digital representation of fiat currencies will be things like the e-Naira? Would it cover virtual assets like stablecoins that are cryptocurrencies pegged against fiat currencies? I’m not sure.
Anyways, the Rules further clearly define digital asset exchanges (DAXs) and VASP. It also outlines the registration requirements for VASPs, including requirements for a business model, entity rules, and platform security, among others. The rules also impose self-regulatory roles on VASPs, requiring them to ensure fair treatment of users, accurate disclosures of information on virtual assets, and risk disclaimers, among other stuff that ensures investors are protected and have enough knowledge of the kind of assets they are dealing in.
Part E - speaks to the role and registration requirements for DAXs. To register, a DAX must be registered as a VASP and is expected to pay an N100k (application fee), N300k (processing fee), N30 million (registration fee), and N100k (for registration of sponsored individuals through the DAX). Other important requirements include the minimum paid-up capital requirement of N500million, and the maintenance of a fidelity bond, which will cover about 25% of the minimum paid capital of the DAX. The rules also provide for generic stuff like documentary requirements, and the governance, rules, risk management and reporting duties the DAX has to make to function in compliance with the SEC rules.
The rules proscribe any DAX Operator from facilitating the trading of virtual/digital assets unless the SEC has issued a ‘no objection’ to the trading. A fine rule to ensure crypto operators in Nigeria answer to the SEC?
Having assessed the basics of what the SEC rules are. My first thought would be that the new SEC rules seem to be a good first step in the direction of cryptocurrency regulation. However, as I’m wont to do, I spoke to a few crypto/blockchain enthusiasts about the new rules. One of the views that intrigued me is the (in)adequacy of the rules in addressing challenges relative to the cryptocurrency industry as we know it today.
For instance, there is no specificity on stablecoins-as-assets and how they are to be regulated. Stablecoins are probably one of the most interesting use cases for trading digital assets that I’ve seen. Another interesting bother is the allocation of assets in the event of a bankruptcy of a DAC, let’s say a Coinbase. Would the bankruptcy of such an institution affect customers’ assets in its custody? Also, would a provision for the insurance of certain deposits being placed on digital assets not make a good alternative for consumer protection, compared to the SEC’s gatekeeping tradition of investor limits for retail investors? I mean, we are not kids anymore, if I want to FOMO my savings, what is the SEC’s business? 😂
While I’m not a crypto/blockchain expert, it seems that the new SEC rules reflect a lack of understanding of blockchain technology/cryptocurrency. The SEC’s lack of understanding is understandable (pun intended). Thing is, the cryptoverse and all that comes with it are still relatively new frontiers - with a veiled promise that we will all understand the utility behind them in due time (an argument I have yet to see merit in) - both in design and how it fits into the regulatory history of traditional finance. So it is understandable that TradFi regulators have a hard time grappling with how to address the liquidity, operational, and monitoring risks that we have seen played out in DeFi land.
Yes, the SEC recognizes dealing in virtual/digital assets. Yet, as we mentioned earlier, the CBN prohibits banks (the conduits of financing from TradFi to DeFi) from facilitating such transactions and has not changed their stance. Question. Did the SEC consult with the CBN in the formation of the SEC Rules? Do the SEC rules indicate a possible change in CBN’s stance on facilitating cryptocurrency transactions in Nigeria in the near future? Or are we setting ourselves up for drags with Emperor Meffy?
Another reaction to the new rules which I find legit is that the SEC is probably just releasing this to ‘show off’ as per “Yeah, we were the first African country to set up rules for the adoption of crypto trading in Africa, bla bla bla” with no intention whatsoever of such an initiative really seeing the light of day… Nigeria’s fiat currency-eNaira, and CBN Sandbox rules, are examples of headline-grabbing announcements that have sort of fizzled out?
In comparative terms, I’ve been unable to answer whether this regulatory framework measured against the Bahrain/Abu Dhabi crypto regulations, would serve its purpose in attracting the big dogs of the crypto-industry such as Coinbase or Binance into Nigeria. Before now, they have offered services to Nigerians out of regulatory purview, so it’s really hard to tell for now if this development would be attractive enough to bring them into the Nigerian market. Does anyone care to ask them?
I guess for now the overall verdict may be that while the recognition for digital assets in Nigeria is great and alladat, we may still not be there yet.
FIRS Directive on Certificate of Acceptance(s)
Sometime this month, the Federal Inland Revenue Service issued a Public Notice, informing taxpaying entities of the need for them to file their Certificate of Acceptance at their respective tax office. See a copy of the notice below:
Essentially, it’s mostly directed at companies that enjoyed some form of capital deductions on their taxable profits.
A little explainer. The FIRS comes every year to charge a ‘corporate income tax’ percentage on whatever profit a company makes (chargeable profit). Most companies expend some amount of money in generating those profits every year.
For instance, an MTN would expend money on setting up masts, and other devices that would facilitate getting network access to new areas. If the FIRS comes at the end of 2021 to charge a corporate income tax on MTN’s N1million profit. MTN is permitted to say, ‘Oh we spent a 100k setting up masts, and so and so in generating the N1million profit. We would like to deduct the 100k and you are free to charge the corporate income tax on the 900k profit, adjusted with the necessary deductions.’ FIRS says fine.
Fine scenario but one more thing, the law understands the susceptibility of humans to look for loopholes. There is the possibility that MTN may decide to inflate what they spent money on, to make sure that their chargeable profits are not more than N500k. In that kind of instance, the FIRS would find itself losing money.
Well, Nigerian law designed something for that loophole - the Industrial Inspectorate Division - an arm of the Federal Ministry of Trade and Investment. The IID’s basic objective is to inspect and confirm the cost of such expenditures. So, see them as ‘Estate Surveyors’ but for capital expenditures of companies. So they verify how much an MTN (or companies generally) has spent in purchasing masts (or other items used in generating profits). After verification, they issue a Certificate of Acceptance. The advantage of having a CoA from the IID is that the FIRS is mandated by law to accept whatever the IID signs off on. So if an MTN has a CoA saying it spent even up to N900k in generating profits, FIRS chops their L and can only charge CIT on the N100k. However, the catch is, that when a company does not collect its CoA from the IID, it cannot exactly prove that it has made those expenses. Therefore, your tax officer at the FIRS is allowed to say “Sorry 🤷🏼♂️”:
Anyhoo, the basic gist of the FIRS public notice says:
If you have enjoyed capital allowance (read deductions on your chargeable profits) from the FIRS between 2016 and 2021, get the CoA to cover the deductions you enjoyed over that period from the IID and file them in your tax offices.
Failure to do so? Well, the FIRS is allowed to charge a corporate income tax on all the allowances you may have enjoyed. At least that’s what they said in their public notice.
Honestly, I wonder why they seem to be chasing CoAs at this point. I mean, it seems the way it was designed, the tax officer is supposed to see the CoA before FIRS actually grants you a tax allowance? Seems the FIRS ‘slept on it’ and having woken up have decided to go on a time machine to recover possible lost revenues to companies that have gamed the system? Idk.
NUPRC Kills Seplat-Exxon Deal?
Some months ago, we talked about the Seplat-Exxon deal and how it seemed the NNPC was trying to take a piss in the river where Seplat and Exxon were swimming.
In that article, I said:
The basic gist of it is that NNPC and MNPU are parties to a JOA in respect of the operatorship of some OML assets (oil mining lease - the lease granted over oil wells to mine crude oil) with MPNU acting as operator. MPNU, the Exxon-owned Nigerian oil and gas company has a percentage stake in the OML assets in Nigeria’s Upstream sector.
We also agreed(?) that under the circumstances, the NNPC was looking at things the wrong way, based on the Right of First Refusal argument they were making:
We know that NNPC cannot exercise its right over the sale of shares under the circumstances. What NNPC’s right is limited to is when such a company decides it wants to dispose of its participating stake in the OML.
However, we only glossed over the consent powers of the Nigerian Upstream Petroleum Regulatory Commission/Minister and the influence it wields over deals in Nigeria’s oil and gas sector:
The share sale v. asset sale debate featured as part of the argument in a 2012 case, Moni Pulo v. Brass & Ors. In summary, that case addressed briefly the question of whether an asset sale could be equated to a corporate sale. On that, the Court said Yes. It was also clear that such a transaction, asset, or corporate sale requires the consent of the Minister of Petroleum. But that’s not our issue, in this case, I assume the Seplat-Exxon deal will follow the process of obtaining the Minister’s consent as provided for here.
The Petroleum Industry Act, 2021, empowers the NUPRC to administer guidelines regulating transactions involving the transfer of interests in oil and gas assets in the upstream sector. Under the 2021 Consent Guidelines, the Minister of Petroleum has the power to approve assignments that occur by way of exchange or transfer of shares. Section 3.1.1 of the Guidelines basically describes the Seplat-Exxon deal.
It is elementary law that the power to approve also implies the power to disapprove.
And well, some 7 days ago, it was reported that the Minister for Petroleum had withdrawn consent to the $USD1.6 billion deal, citing overall national interest, non-compliance, yadi yada.
Ooofff.
ThisDay also cites a 13th May letter from the NUPRC’s Director to the deal’s parties where a quote reads:
“We also note that MPNU failed to follow the procedure for assignments laid down in the Guidelines by not providing the requisite notices to the Commission at all relevant stages of the transaction. Even if the transaction has been between Seplat Energy Offshore Limited and the MPNU shareholders, responsibility to ensure compliance with Nigerian laws, rules and regulations always remain that of MPNU, the entity that was awarded the assets.
As someone I know would say, ‘K’.
From my limited POV, there was already an agreement in principle between the Seplat-Exxon to divest/acquire interests. That agreement must have somehow gotten some form of greenlight from regulators before the deal was announced (these are top level dealmakers, advised by top energy lawyers, fgs). The agreement was still subject to certain regulatory approvals. That agreement was contested by the NNPC (who wanted the pie and had a big uncle to call on to get it). The greenlight given before has been somehow withdrawn, successfully scuttling the deal.
Although, it has also been reported that NNPC might be offering northwards of USD$1.6bn (close to USD$2bn) as a counter-offer so Mobil shareholders may be having their ‘Tears-inside-a-Ferrari > > > > Tears-inside-a-Camry moment’.
I guess the clarity I would want is, does the scuttling of the deal validate the argument of ROFR being exercisable by the NNPC on such transaction structures? I think not. Again, this is mostly a case of the buck on oil deals stopping with the Minister/NUPRC and NNPC being former blood sisters of the NURC would always enjoy these privileges.
Overall, the way the Seplat-Exxon deal has played out is disappointing, seeing the kind of precedence the NUPRC/NNPC is setting.
Where potential dealmakers sense that the government can withdraw consent on certain transactions to favor its national corporation, maybe we should stop wondering why Nigeria is finding it hard to attract the inflow of organic foreign investors/investments into Nigeria.
Editor’s Note: There is quite a lot to talk about in the coming days. Please read, like, subscribe, and invite your friends and colleagues to subscribe. No, I haven’t forgotten your merch.