The recently issued regulatory release titled "Accelerated Regulatory Incubation Program for the Onboarding of Virtual Assets Service Providers (VASPs) and other Digital Investments Service Providers (DISPs)" by the Securities and Exchange Commission (SEC) was released on June 21, 2024. The document outlines a framework aimed at facilitating the regulatory compliance and onboarding process for entities engaging in virtual asset and digital investment services within Nigeria.

Legal Basis

The ARIP framework is rooted in the powers vested in the SEC by the Investments and Securities Act (ISA), 2007. Specifically, Part VI of the ISA, which deals with the Registration and Regulation of Capital Market Operators, mandates that all professionals or experts intending to operate in the Nigerian Capital Market must be registered with the SEC. Sections 38(2) and 38(3) of the ISA empower the SEC to prescribe the conditions for registration, the manner of application, and the associated fees.

The primary objectives of the ARIP framework are:

1. Accelerated Onboarding: To expedite the onboarding process for entities whose applications are pending or are to be filed with the SEC, providing them with provisional approval until full regulatory compliance is achieved.

2. Regulatory Guidance: To offer participating entities guidance on regulatory requirements before they become fully operational, ensuring compliance and understanding of the SEC’s demands.

3. Regulatory Insight: To enable the SEC to better understand digital asset business models, which will aid in refining regulations to address market integrity, investor protection, and anti-money laundering measures.

Definitions and Applicability

Key definitions provided in the framework include:

● Accelerated Regulatory Incubation Program (ARIP): A regulatory framework to facilitate the onboarding of potential capital market operators.

● Virtual Asset Service Provider (VASP): Entities providing services involving digital or virtual assets as defined by SEC Rules and Regulations.

● Digital Investment Services and Platforms: Services and platforms providing investment opportunities through digital channels.

● Approval in Principle: preliminary authorization given to eligible applicants to operate within the confines of the ARIP pending final registration by the Commission.

The ARIP framework applies to:

● VASPs and token issuers operating in Nigeria or offering services to Nigerian consumers.

● Platforms facilitating trading, exchange, custody, and transfer of digital assets.

● Entities involved in the formation, promotion, sale and redemption of initial token offerings.

● Persons providing virtual asset services to Nigerians, regardless of their physical location.

● Foreign or non-residential operators targeting Nigerian investors.

● Unregistered digital investment platforms operating in the Nigerian Capital Market.

● Persons (individual or corporate) whose activities involve any aspect of Distributed Ledger Technology (DLT) and virtual/digital assets services such as transmission and execution of orders on behalf of other persons, dealers on own account, portfolio management, investment advice, custodian or nominee services

Eligibility Criteria

To participate in ARIP, entities must:

● Be incorporated and have an office in Nigeria with the CEO or equivalent residing in Nigeria.

● Be engaged in investments and securities business.

● Have pending applications or seek registration for virtual asset-related activities with the SEC.

Application Process

The ARIP encompasses two main phases:

1. Initial Assessment Phase: Applicants submit an initial assessment form via the SEC ePortal for the Commission to review and determine the applicant’s eligibility status.

2. Application Phase: Upon passing the initial assessment, eligible applicants submit a full application and may receive Approval in Principle (AIP) to operate within the ARIP framework.

Application Requirements

Entities applying for ARIP are expected to do so through a registered Solicitor or Adviser and must provide:

● Sworn undertakings confirming the accuracy of information, financial stability, and compliance with legal and regulatory standards.

● Operational plans, business models, and rules ensuring investor protection, market fairness, and conflict management.

● Documentation including certificates of incorporation, audited accounts, tax clearance, identification of key personnel, and evidence of registration with the Nigerian Financial Intelligence Unit (NFIU).

● Operations fee: Applicants are required to pay a non-refundable processing fee of N2,000,000.00 (Two Million Naira, only), show evidence of required shareholder fund, and hold a Current Fidelity Bond covering at least 25% of the required shareholder fund.

The Commission may at any time impose additional financial requirements for participants commensurate with the nature, operations, and risks posed by the participants’ business operations.

Application documents

i. Form SEC 2 and 2D – (A minimum of 4 Sponsored Individuals who shall be principal officers including Managing Director and Compliance Officers).

ii. Certificate of Incorporation;

iii. Memorandum and Articles of Association

iv. CAC Form(s) showing Statement of Share Capital, Return of Allotment, and particulars of Directors;

v. Latest audited accounts or audited statement of affairs of the company in the case of a new company;

vi. Tax Identification Number and Clearance Certificate;

vii. Valid means of identification (including NIN and BVN) of the sponsored individuals;

viii. A sworn undertaking that the applicant will be able to operate an orderly, fair, and transparent market in relation to the securities that are offered or traded, on or through its platform;

ix. Evidence of registration with the Nigerian Financial Intelligence Unit (NFIU);

x. Sworn undertaking to keep proper records and render returns as may be specified by the Commission from time to time, signed by a director or the company secretary;

xi. Sworn undertaking by a director or the company secretary, to abide by SEC Rules and Regulations and Investments and Securities Act No.29 of 2007 as may be amended from time to time;

Records and Reporting

● Participants are required to maintain proper records, submit periodic trading statistics and financial reports as specified by the SEC.

● The framework also outlines controls, conditions, and restrictions to ensure market integrity and investor protection.

● Participants shall be subject to the Commission’s onsite and off-site inspection, audit, and monitoring and shall make its premises, systems, books, and records readily available to the Commission, its officers or any person appointed

Termination and Transition

The ARIP framework includes provisions for the termination or removal of participants and outlines the transition process to full registration once the Digital Assets Rules become operational. Penalties and sanctions are prescribed for non-compliance, and confidentiality requirements are emphasized.

The Commission may terminate participation in the ARIP if at any time the Participant:

● is found no longer fit to participate in the process;

● has breached any restrictions or conditions imposed on the participant; has breached the ISA, Rules and Regulations of the Commission or other relevant law;

● deviates from its operational plan;

● any other reason the Commission deems fit.

At the expiration of the ARIP period, participants are expected to seamlessly transition to registration.

Penalties/Sanctions

● ARIP participants who fail to comply with any of the stipulated requirements shall be liable to a penalty of not less that N5,000,000 (Five Million Naira, only) at the first instance and further N200,000 (Two Hundred Thousand Naira, only) for every day of default. Other administrative sanctions as provided for in the Commission’s Rules and Regulations may also apply depending on the severity of the violation(s).

● A penalty of not less than N20,000,000 (Twenty Million Naira, only) shall immediately apply to all commercialized VASPs operating trading, offering and custody platforms without due authorization or registration by the Commission.

● A penalty of not less than N10,000,000 (Ten Million Naira, only) shall immediately apply to all other digital investments platforms including crypto brokers/dealers, advisers, market makers etc. operating without due authorization or registration by the Commission.

● Appropriate sanctions including suspension from capital market activities shall apply to entities who fail to comply with the Rules and regulations of the Commission.

Conclusion

The ARIP framework represents a significant step by the SEC to integrate virtual assets and digital investment services into the regulatory landscape of the Nigerian Capital Market. It provides a structured pathway for VASPs and DISPs to achieve compliance while enabling the SEC to refine its regulatory approach based on practical insights. Entities looking to participate should ensure strict adherence to the outlined eligibility criteria and application requirements to leverage the benefits of accelerated onboarding and regulatory guidance. The ARIP framework is not intended and cannot be used as a means to circumvent applicable Rules and Regulatory requirements.