STO Registration Procedures in Nigeria | Nairalaw

By Alexander Savinkin

Boulevard A. Aladetoyinbo^[1], Esq., Partner at Lex
Futurus Group LLC, an international boutique law firm providing
blockchain and decentralized ledger legal advisory services.

What are the main regulations
that exist in your region if you’d like to launch
an STO/ICO?

The extant securities rules
and regulations that would apply, albeit indirectly, and in the
finest capital market traditions and relevant legal fundamentals,
to an initial coin offering (ICO), initial exchange offering(IEO),
or any token generation event (TGE) in Nigeria, or stricto sensu,
an STO, are Investment and Securities Act (2007), SEC Rules and
Regulations (2013), Rules on Securitization, Green Bond Rules,
Scripless Securities Settlement System (Business Rules and
Guidelines) (S4) (the S4 is a rule on dematerialized securities
transaction settlement, which the crypto securities improved upon
greatly).

The question is, are new
rules and regulations required, as the extant rules and regulations
did not expressly have these new market investment products,
services, architecture, and infrastructure in mind? The answer is
yes, new rules and regulations are required. On November 2018, The
Securities and Exchange Commission (SEC) inaugurated at its third
Capital Market Committee (CMC) meeting a Fintech Roadmap Committee
with the mandate to come up with recommendations preparatory to its
financial technology market activities regulation i. e. virtual
financial assets, initial coin offering, and other subject areas
such as consumer protection, security and privacy, etc. This
attempt is non-comprehensive and a half-measure when one considers
the ICO, IEO, STO, TGE regulatory approach, step-by-step strategy,
and especially industry-wide consultations, holding statements,
guides, rules, laws and guidelines tailor-made for ICOs in
particular, and across jurisdictions. There are short-term,
mid-term, and long-term actions always involved. To thread with
caution, it is too early in the day to judge, as the process has
only just begun.

In the Federal Republic of
Nigeria, there are no specific rules and regulations directly
applicable to ICOs as a cryptocurrency capital market investment
product at the moment, though the existing legacy securities
regulations are applicable, depending on the facts, circumstances,
characteristics, and economic realities intrinsic to each
distributed ledger technology (DLT)/blockchain token offering or
product.

One of the reasons for the
lack of direct regulation as of yet, I surmise, is because the ICO
phenomenon presents a very controversial question from the cradle;
whether the token in an ICO is a cryptocurrency investment market
product or just a pure utility token that offers access to goods
and services on a platform, and nothing more. From the experience
so far in the space, or specifically according to the most active
national securities regulators like the SEC (USA), the token from
an ICO is a regulated cryptocurrency capital market investment
product. This situation in the United States would definitely
affect the legislative compass and regulatory framework, attitude,
and approach in Nigeria as the space grows. To wrap up, the extant
regulations in Nigeria apply to any entity that is desirous of
launching an STO/ICO.

What are the main reasons for a
project team to choose one or another type of regulation? (type of
project, softcap/hardcap, marketing strategy, product
specifics).

ICOs, STOs, or any token
generation event would have to consider the legal compliance in any
of the jurisdictions where the entity is affected, whether or not
there are bespoke laws and regulations, as the extant structure
takes care of business somewhat.

Last year, Lex Futurus Group
LLC., our global blockchain and decentralized ledger training,
consultancy services, and legal advisory law office, with lawyers
from across jurisdictions as the United Kingdom (UK), Nigeria,
United States of America (USA), Malaysia and Russian Federation,
was retained as the legal advisor to the genEOS project, for whom
we drafted a securities regulation multi-jurisdictional legal
opinion. The project had sought to raise in a SAFT-type PPM STO,
USD2m to execute its fourth-generation blockchain project
(Blockchain 4.0). Unfortunately, it could not reach its soft cap on
December 23, 2018 and had to return contributions to the
participants via the Ethereum token smart contract address on the
26th, 27th, and 28th of December that year. Barring any conflict of
interest statement, this was both a credible and honorable project,
whose cause of failure, according to post-mortem reviews, was that
it did not maximize its marketing resources and advertising
potentials.

Are there any examples of
ICO/STO projects that have already complied with regulations? Do
you consider their pick to be appropriate or not? (This particular
question will serve as the key portion of the whole
article.)

In Nigeria, the jurisdiction
where I am duly qualified to practice as an Advocate and Solicitor
of the Supreme Court, and where I have been practicing as a
certified DLT/blockchain lawyer for years now, I am not aware of
any ICO, STO, security token exchange/crypto securities exchange,
stablecoin project, or any DLT project whatsoever, that has
complied with extant regulations where indirectly applicable.

There is Nairacoin, a
stablecoin project, which is planning an STO in Nigeria at the
moment, with probably no intention for securities regulation
compliance whatsoever. There are many Nigerian projects in this
mode, who would rather take investors’ money and care nothing for
them because these projects labor under the wrong impression that
there are no regulations yet, and thus they are free to rumble in
the crypto jungle with no consequences coming for them. We have
seen projects raise millions of dollars, and some ongoing ones aim
for such astronomical raises. Kora raised USD 12 million, while
SureRemit raised USD 7 million. These were Nigerian ICO projects.
The non-compliance of these projects poses serious business risks
and could even result in jail time where the imposed penalties
would be insufficient, especially if anything goes wrong.

As of late, a prospective
client planning an STO approached LF Nigeria — the boutique law
firm of Lex Futurus Group LLC., which is legally compliant in
Nigeria — and requested for consultancy and legal advisory
services. If the client pulls this off, it would be the first
regulation-compliant STO in Nigeria to date under the Investment
and Securities Act (2007), SEC Rules and Regulations (2013), Rules
on Securitization, and the rest. The first STO approved by the
Spanish Financial Authority (SFA) would be conducted in the spring
of this year, even as the largest Spanish stock exchange, Bolsa de
Madrid (BME), plans to start an issuance process for collateral
pledge certificates on blockchain technology.

What are the recommended legal
arrangements (legal structure) for pre-sale (private sale)
investment deals (ST buyout, SAFT,
options, etc.)?

There are many recommended
legal arrangements suitable for a token generation event leveraging
a distributed ledger technology as an Internet-based, cross-border
capital formation strategy. These range from stiftung foundation,
venture capital fund, equity crowdfunding, mutual fund, hedge fund,
pension fund, a collective investment scheme (CIS), private equity,
etc., which are all ideal for a pre-sale investment deal or even a
public sale investment deal. In the Nigerian capital marketplace,
these areas remain virtually an uncultivated, lush forest of
investment capital market opportunities in the distributed ledger
technology space.

The quest to foster
credibility on the cross-border, Internet-based blockchain token
offering space led to the collaboration for the specialized legal
document framework known as Simple Agreement for Future Tokens
(SAFT), which was devised in 2017 by Marco Santori of Cooley LLP
and Protocol Labs. It is an investment vehicle to enable the
conduct of regulation-compliant ICOs. The Filecoin ICO, a
decentralized file storage project raised USD257m, Polymath
Network, a security token issuance platform raised USD59m etc. They
all utilized the SAFT framework. STOs have been using the SAFT
framework investment model document, and it has found significant
traction overtime, though it has seen unabashed criticisms and
staunch disapproval, as some believe that it does not solve any
extant securities regulation issue, and that it has not been tested
by the fire of judicial interpretation through case law
jurisprudence under US federal securities laws. Nonetheless, these
same issues would crop up under the Nigerian securities regulation
and case-law as time goes on.

What are the main liabilities of
an STO team to the ST holders and who is in control over the
fulfillment of this obligation?

Both a public company and a
private company can tokenize all sorts of claims and interests in a
company, from which liabilities, rights, and obligations may
legally arise. This tokenization can be done on the blockchain or
on any other distributed ledger technology platform with the
implementation of any particular, suitable smart contract token
standard. The liabilities of the STO team to the security token
holders are the liabilities of an incorporated entity to its
members, as the security token holders are nothing more than
shareholders in the company, according to the Nigerian corporate
governance general rules.

The liabilities are the same
as the liabilities of a public company filing under private
placement rules. Section 339 of the Nigeria SEC Rules and
Regulations (2013) defines private placement as securities issuance
by a public company to select persons. Such is exempt, and thus
unregistered, where the STO process is conducted as a private sale
and offering of securities and is therefore not made available and
accessible to members of the public on a national securities
exchange. But these STO team liabilities/company liabilities to its
security token holders, shareholders, members, or whatever name
they’re called, depend largely on the forensic niceties and
cosmetic nuances of the various securities regulations of any
relevant jurisdiction involved in the final analysis.

The question of liabilities
of the STO team are expected to be fully exhibited in the STO
documents as the case may be. Such documents where required are its
Private Placement Memorandum (PPM), or additionally its white
paper, the SAFT, and any other relevant documents or agreements
connected to the offering, which spell out liabilities arising from
the lack of full disclosure to misleading statements and
representation, as though it is a prospectus offering under an
initial public offering (IPO), where filing and due registration
statement are prerequisites.

In Section 22 of the
Companies and Allied Matters Act (CAMA) Laws of the Federation of
Nigeria (LFN) 2004 for instance, a private company is obligated to
put a share transfer restriction clause in its Articles of
Association and set a membership limit at 50. According to Section
23 of the CAMA, consequences of the breach by a private company of
the subsections (1) and (2) of Section 22 of the CAMA are loss of
privileges and exemptions (from security offering registration),
which private companies enjoy, while the CAMA would automatically
continue to apply to private company as if it were not a private
company. What this directly means is that the private company would
become a public company both de facto and de jure. Relief is only granted to
such a company by a court of competent jurisdiction on grounds of
accident and inadvertence, where sufficient cause exists, or upon
equity, good conscience, and fairness.

The STO team, issuer/founder,
co-founder, smart contract developer, and advisory board, who
control(s) the heart of the private placement security token sale
exercise are in control over the fulfillment of relevant
obligations, as stated in the company documents as the case may be.
This is notwithstanding whether the principal and directing mind(s)
of the company running the STO are called board of directors (BoDs)
or directors. Fundamentally, in the case that an STO project fails
or turns out to be a scam, the STO process fund contributors are
entitled to refund from the directing mind(s) of the project, as
was the case with our client, genEOS, who refunded the contributors
when their STO could not reach the USD 2 million soft cap
milestone. This is the professional industry minimum standard.

What is the timeframe when going
through the registration process (by stages)?

Incorporating a company in
Nigeria takes one to two weeks. In the event that a planned project
seeks to carry out an STO process under the extant securities
regulation in Nigeria, it would have to first incorporate as a
legal entity under the Companies and Allied Matters Act (CAMA) 2004
as a private or public company limited by shares, depending on the
kind of legal structure to imbue it with corporate personhood. It
may also secure legal compliance as a non-profit.

To conduct an STO process, an
incorporated entity may utilize the Private Placement Memorandum
(PPM) as the offering document to the selected private investors,
and the company would be bound to observe a disclosure obligation
to the investors and file for exemption at the Securities and
Exchange Commission (SEC) Nigeria, which is the national securities
regulator, having its jurisdiction embedded in Section 13 of the
Investment and Securities Act (2007).

What are the documents that need
to be prepared for the registration process?

The more established,
popular, and global industry practice is that private companies
conduct an Internet-based blockchain smart contract security token
offering as a private placement securities offering. In Nigeria, we
have not yet had an STO conducted by either a private company or a
public company. I’m not aware of one, at least, to the extent of my
research on this subject, and close interaction with the Securities
and Exchange Commission Nigeria, before whom I have once made a
presentation on legal issues in distributed ledger asset
tokenization and crypto securities regulation. Until then, the
necessary legacy legal documentation in both private placement and
an initial public offering would be required to form the legal
basis for compliance with the extant securities regulation; then
proceed to adopt and thus implement the STO smart contract
mechanism.

Who will have regulatory control
over exempt securities that cannot be traded within a
given time?

The Securities and Exchange
Commission Nigeria, which is the national securities regulator,
retains regulatory control over securities that are exempt from
registration, and are thus not tradeable within a lock-up period.
As stated previously, this jurisdiction is derived from Section 13
of the Investment and Securities Act (2007).

What is the cost structure of
the STO registration process?

The STO registration cost
structure depends on a number of factors, which include a legal
service charge and a filing process charge. This remains largely a
variable cost structure too, as different legal service providers
or securities/crypto securities lawyers would charge differently,
coupled with the actual STO registration cost structure.

What tax residency is allowed
for project founders? (Do you need to be a Nigerian citizen if you
want to raise money in Nigeria?)

As already said, there is no
bespoke cryptocurrency investment capital market product regulation
in Nigeria at the moment, so the question of tax residency has not
been considered as of yet. Nonetheless, the extant of taxation laws
may be applicable to cryptocurrency-based, tax-worthy financial
events. A good illustrative case is the United States v. Coinbase
Inc., where the tax authority, the Internal Revenue Service (IRS)
sought a tax obligation enforcement against Coinbase, a convertible
virtual currency exchange and custodial service provider.

Are there any additional
regulations that must be complied with if a project raises capital
from non-Nigerian investors?

Under the Nigerian
securities regulation? Yes. These are generally know your customer
(KYC), anti-money laundering (AML), and counter-financing of
terrorism (CFT) compliance, which are due diligence measures
prerequisites for non-Nigerian investors.

Is there any special territory
in your country that is a tax haven or has other beneficial
regulations for cryptocurrencies and blockchain
startups?

There is no tax haven in
Nigeria, but the extant regulations can definitely be beneficial to
cryptocurrency and blockchain startups, depending on their finances
and startup capital. The Central Bank of Nigeria (CBN) has
guidelines for financial technology companies wishing to set up
shop in Nigeria.

What is the legal status of
cryptocurrencies in your country?

The existing legal tender
laws in Nigeria do not recognize and categorize cryptocurrencies as
currencies, or money. Therefore, cryptocurrencies remain de facto
commodities, or even securities, where the intrinsic fact and
circumstances reveal that they have been financialized and packaged
into a capital market investment product.

Can you describe general/
special taxation schemes for cryptocurrency owners and
token issuers?

At the moment, there are no
general/special taxation schemes for cryptocurrency owners and
token issuers in Nigeria. In fact, it has hardly ever crossed the
mind of Federal Inland Revenue Services (FIRS), the country’s tax
authority, to take an official taxation action or enforcement
action concerning cryptocurrency transactions within Nigeria, as
the government continues to lose potential taxation revenues. To
the best of my knowledge, neither has the FIRS really taken its
time to train its members to understand the socio-economic
implications, opportunities, and possibilities of cryptocurrency
technology.

Editors
Note;  Written
by Alexander Savinkin and originally published in GeekForge
Academy^[2]

DISCLAIMER
This is meant only for general informational purposes in regard to
regulation, or the lack thereof, within the present Nigerian legal
order, while offering a bit of international perspective. This is
not to be taken as legal advice. Consult a savvy crypto lawyer in
the space to help you out if that’s what you need.

Questions asked by Alex Savinkin
Former number cruncher in investment funds & strategy
consulting. One of Geekforge Founding Fathers. Blockchain and
technical singularity true believer.