Insights Into The SEC Accelerated Regulatory Incubation Program Framework

Introduction

The Securities and Exchange Commission (SEC) on June 28 2024, released the Framework on Accelerated Regulatory Incubation Program (ARIP) for the onboarding of Virtual Assets Service Providers (VASPs) and other Digital Investments Service Providers (DISPs). The ARIP Framework (the "Framework") aims to streamline the onboarding process for current and potential entities seeking registration as VASPs by the SEC, and overall, to enhance compliance with the SEC's regulatory standards.

This article answers key questions regarding the ARIP Framework and provides relevant guidance for entities seeking to participate in the ARIP.

1. What is the Objective of the ARIP?

In addition to fast-tracking the onboarding of entities applying to the SEC and potential applicants seeking registration, participation in the ARIP grants entities preliminary approval to operate as VASPs pending the implementation of the Digital Assets Rules which regulate VASPs and other DISPs.

The ARIP provides participants with the opportunity to gain guidance on the SEC's regulatory requirements before becoming fully operational in the capital market. Conversely, it will allow the SEC gain deeper insights into digital asset business models and through this understanding, enhance its regulations to ensure they effectively address market integrity, investor protection, and anti-money laundering concerns.

The ARIP is designed to foster innovation within the virtual assets space while ensuring robust regulatory oversight from the SEC. Through the ARIP, the SEC will be able to work closely with VASPs, facilitate their compliance with existing regulations, and promote best practices.

2. Who is Eligible For the ARIP?

The scope of the ARIP is broad and applies to VASPs and other DISPs seeking or having approached the SEC for registration. In particular, the Framework covers:

1. VASPs, platforms, token issuers operating in Nigeria or offering services to Nigerian consumers, regardless of their physical location.
2. Individuals or entities involved in initial token offerings and unregistered digital investment platforms operating in the Nigerian capital market.
3. Entities involved in Distributed Ledger Technology (DLT)-related services such as order execution, portfolio management, and custodian services.
4. Foreign or non-residential issuers or sponsors of digital assets, including foreign operators targeting Nigerian investors through promotions, publications, or direct communication.

Entities who fall under the scope of the ARIP must be incorporated and have an office in Nigeria with its Chief Executive Officer/Managing Director resident in Nigeria. In addition, eligible entities must be performing investments and securities business and seeking registration or have pending virtual asset related applications with the SEC.

3. What are the Application Steps and Requirements for the ARIP?

Applying for the ARIP involves several steps:

1. Initial Expression of Interest: Qualified entities must submit an initial expression of interest to the SEC via its online portal.
2. Detailed Application: Where the SEC approves the initial expression of interest, a detailed application must be submitted consisting of a sworn undertaking, an ARIP operational plan and business model, the rules of the entity, a letter of no objection (if regulated by another sectoral agency), company documents, evidence of registration with the Nigerian Financial Intelligence Unit (NFIU), and other documents as required under the SEC Rules.
3. Issuance of Approval in Principle (AIP): The SEC will assess the application and if cleared, will issue an AIP to the entity. The entity will be required to operate in line with the Investment and Securities Act (ISA), 2007 and the SEC's Rules. Approved entities will operate within the ARIP for a period yet to be determined by the SEC.

4. What Happens After the ARIP Period?

Upon the expiration of the ARIP period, participants are expected to be registered formally by the SEC. The SEC may take one of several actions:

1. grant successful participants formal registration approval to operate in the Nigerian capital market, subject to compliance with all existing rules and regulations;
2. adopt new regulations, guidelines, or notices based on insights gained from the ARIP;
3. or deny permission for the participant to operate in Nigeria under the SEC Rules.

In granting registration status, the SEC may also organize training and examinations for sponsored individuals, with successful candidates interviewed prior to registration. It is important to note that the ARIP framework is not intended to circumvent existing rules and regulatory requirements.

5. Can SEC Terminate or Remove Entities From the ARIP?

The SEC reserves the right to terminate participation in the ARIP if a participant is deemed unfit, breaches any imposed conditions, violates the ISA, SEC Rules, or other relevant laws, deviates from its operational plan, or for any other reason the SEC finds appropriate.

Additionally, the SEC may withdraw or suspend approval to participate in the ARIP at any time if the participant fails to implement required safety measures, submits false or misleading information, contravenes any applicable law, undergoes liquidation, breaches data security and confidentiality requirements, operates in a manner detrimental to customers or the public, or fails to address defects leading to service disruptions or fraud incidents.

6. What Fees and Penalties Are Associated with the ARIP?

1. ARIP applicants must pay a non-refundable processing fee of N2,000,000 (Two Million Naira). They must also provide evidence of the required shareholder funds and maintain a current Fidelity Bond covering at least 25% of the required shareholder funds.* In addition, the SEC may impose additional financial requirements based on the nature, operations, and risks of the participant's business.
2. Participants who fail to comply with the stipulated requirements in the Framework face a penalty of at least N5,000,000 (Five Million Naira) initially, plus an additional N200,000 (Two Hundred Thousand Naira) for each day of default. Further administrative sanctions stated in the SEC Rules may apply depending on the severity of the violation.
3. Commercialized VASPs operating trading, offering, and custody platforms without proper authorization or registration by the SEC will incur a penalty of at least N20,000,000 (Twenty Million Naira). Other digital investment platforms, including crypto brokers, dealers, advisers, and market makers operating without due authorization, will face a penalty of at least N10,000,000 (Ten Million Naira).
4. Entities failing to comply with SEC rules and regulations may also face suspension from capital market activities.

Conclusion

The ARIP is a welcome development and a step forward in the advancement of the regulation of digital assets and services in Nigeria. By providing a structured pathway for VASPs and DISPs to gain preliminary approval and align with regulatory standards, the SEC, through the Framework, is signaling to investors and other stakeholders that it promotes innovation while safeguarding market integrity and investor protection.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.