The Securities and Exchange Commission (SEC) has released new rules for digital assets as part of its efforts to regulate digital/virtual assets such as Bitcoins and NFTs.
This is contained in a recently published document titled “New Rules on Issuance, Offering Platforms and Custody of Digital Assets” eessentially legalizing digital assets such as cryptocurrencies in Nigeria.
Recall when Nairametrics reported the SEC Managing Director’s statement in September 2021 that a department had been created to investigate the crypto market.
Digital Asset Players will now include Digital Asset Offering Platforms (DAOPs), Digital Asset Custodians (DACs), Virtual Asset Service Providers (VASPs) and Asset Exchange digital (DAX).
The Rules apply to all platforms that support the trading, exchange and transfer of virtual assets; all issuers and sponsors of virtual/digital assets, including international and non-residential issuers and sponsors; and any operator that aggressively targets Nigerian investors.
The new regulations create roles for different players in the digital asset space, each playing a key role in the new sector.
- The new regulations essentially classify digital assets as securities providing other regulators such as the Central Bank of Nigeria.
- The CBN had in February 2021 banned cryptocurrencies stating that it had “no comfort in cryptocurrencies at the moment and will continue to do everything in its regulatory power to educate Nigerians to give up their use and to protect our financial system from the activities of fraudsters.
- The Securities and Exchange Commission (SEC) responded that it “has disclosed that there is no policy conflict between the Supreme Capital Market Regulator and the Central Bank of Nigeria (CBN) regarding the ban imposed to cryptocurrency transactions in the banking sector”.
- The SEC also said: “Regarding our recent policy statement, it is important to clarify that the CBN Circular of February 5, 2021 did not impose any new restrictions on cryptocurrencies, given that all banks in the country had previously been banned, by through the CBN circular dated January 12. 2017, not to use, hold, exchange and/or carry out transactions in crypto-currencies“,
- The SEC defines “digital assets” as “a digital token that represents assets such as a claim or claim on the issuer”.
- The SEC also defines the token offering of securities – Securities Token Offering (STO)” means any offering and selling of digital tokens which are deemed to be securities.
- The SEC has defined the Digital Asset Offering (DAO) platform as an electronic platform controlled by a DAO operator that hosts a DAO.
- Whereas a digital asset custodian is defined as a business that provides custody, storage, holding or maintenance of virtual/digital assets on behalf of another person.
When filing the initial application
- All promoters, entities or companies proposing to conduct Initial Offerings of Digital Assets in Nigeria or targeting Nigerians must submit the Assessment Form and Draft White Paper.
- White papers should include disclaimers stating the following in bold and capital letters “THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THESE TOKENS OR DETERMINED WHETHER THE TOKENS ARE SECURITIES AND THEREFORE MUST BE REGISTERED, OR THAT THE CONTENTS OF THE WHITE PAPER ARE ACCURATE AND COMPLETE. ANY FALSE OR MISREPRESENTATION IS A CRIMINAL OFFENSE AND MUST BE REPORTED IMMEDIATELY TO THE SECURITIES AND EXCHANGE COMMISSION”
- The commission will examine the applications within 30 days and will give its written opinion within 5 days of the examination.
- Once the SEC has determined that the digital asset is a security, the issuer will apply for registration.
- The registration document will include the name of the tokens, the ticker, the price, the amount and the number of tokens.
- They will also have to provide legal opinions and information on corporate governance.
- There will also need to be an escrow agreement with an independent custodian/trustee registered with the Commission.
On the moratorium on participations
- The SEC also includes a provision that ensures that the directors and senior management of the issuer own, in aggregate, at least a 50% ownership interest in the issuer on the date the digital assets are issued.
- This essentially commits ICO sponsors to owning half of the entity issuing the security.
- On the Post show, it also states that “the directors and senior management of the issuer may sell, transfer or assign not more than 50%; provided that the amount of equity sold, transferred or disposed of does not exceed 50% of their respective holdings until completion of the initial digital asset offering project.
Limitation to funds collected
- The regulations provide that issuers can only raise funds within the limit of 10 billion naira. However, it indicates that the SEC may increase or decrease the cap from time to time.
- “An issuer may raise funds only subject to the following limit: twenty times the issuer’s shareholder funds, i.e. the maximum amount of funds that may be raised in a continuous period of 12 months, subject to a cap of N10 billion or such other cap as the Commission may determine from time to time.
- The SEC also states that if the increase does not reach its soft cap (defined as the minimum increase), it “will refund all monies collected from tokenholders within five (5) business days from the date closing of the offer”.
- The SEC rulebook also stated the maximum amount that retail investors can invest in the digital asset offering.
- For qualified and wealthy institutional investors, no restriction on the amount of investment;
- For retail investors, a maximum of N200,000 per issuer with a total investment limit not exceeding N2 million in any 12 month period
- For Digital Asset Offering Platforms (DAOPs) seeking to operate in the market, the SEC requires them to file and pay an application fee of N100k, a processing fee of N300k and a recording of N30 million.
- There is also an individual sponsored fee of N100k
- They will also be required to have a minimum paid-up capital of N500 million and will be required to provide a current “loyalty bond” covering 25% of the minimum paid-up capital, as stipulated by the rules and regulations of the Commission.
Download the rules here.
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