Client Update on the Start-Up Act

Nigeria Startup Act, 2022 is part of the concerted efforts by the Federal
Government to promote, harness and provide stability to the 
startup ecosystem in Nigeria. Nigeria’s startup ecosystem was ranked as the top 
three most advanced ecosystems in Africa according to StartupBlink’s Global 
Startup Ecosystem Index 2021. The signing of the Act has been seen as a proactive 
effort to develop Nigeria’s startup ecosystem by putting in place a unique 
regulatory and legal framework to bring it up to speed with the best global 
practices.

 

The Nigerian startup landscape has grown over the last six years. As of September 
2022, at least 481 tech startups were in operation across Nigeria, employing over 
19,000 people between them. 1 Furthermore, we experienced an influx of capital in
the Nigerian tech ecosystem between 2020 and 2021. Out of about $4 billion in 
startup funding raised in Africa in 2021, Nigeria earned the most significant chunk, 
accounting for 35% of the funds raised to the tune of $1.37 billion. 2


The Nigerian regulatory climate has been noted to be volatile, and the clampdown 
of regulatory agencies on startups, particularly fintech startups, has caused much
uneasiness concerning investment in the Nigerian market. According to the Ease 
of Doing Business Index rankings by the World Bank, Nigeria ranks 131 among 190 
economies.3

 

Nonetheless, Nigeria’s startup landscape remains an attractive investment 
destination.

 

2. Key Provisions in the Nigeria Startup Act 2022

 

Startup Labelling/ Licensing Process


The regulatory purview of the Act extends to companies that have been 
incorporated under the Companies and Allied Matters Act, 2020 (as amended) (the 
“CAMA”) and which have been granted the startup label under the Act
(subsequently referred to as “Labelled Startup”). Organisations and 
establishments whose activities affect the creation, support and incubation of 
Labelled Startups in Nigeria also fall within the regulatory ambit of the Act.


A company under the Act can only be referred to as a Labelled Startup if:


a) it has been registered as a limited liability company under the CAMA;
b) it has existed for a period of not more than 10 years from the date of 
incorporation;
c) its objects are innovation, development, production, improvement, and 
commercialisation of a digital technology innovative product or process;
d) it is a holder or repository of a product or process of digital technology or 
the owner or author of a registered software; and
e) it has at least one-third local shareholding held by one or more Nigerians 
as founder or co-founder of the startup, and 
f) in the case of a sole proprietorship or partnership, it satisfies the conditions 
set out in (c, d, and e) above. 4


A company that wishes to become a Labelled Startup under the Act must apply 
through the Startup Support and Engagement Portal (the “Startup Portal”) in the 
prescribed form with supporting documents. Where the Coordinator is satisfied 
that the company has met the specified requirements, he shall, with the approval 
of the Secretariat of the Council (defined below), enter the name and particulars of 
the applicant in the register of startups kept for that purpose and issue a startup
label to the startup. A startup label is a certificate issued by the Secretariat and is 
valid for 10 (ten) years from the date of issuance.

 

The Coordinator could withdraw the startup in the event of default by the Labelled 
Startup of its obligations under the Act. This withdrawal is made after the startup
has failed to rectify the default or breach within 30 days from the date of 
notification.

 

3. Obligations of Labelled Startups

 

Labelled Startup has the following obligations under the Act:


a. comply with all the extant laws governing businesses in Nigeria;
b. provide information annually on the number of human resources, total 
assets and the annual turnover achieved from the period the startup label 
was granted;
c. maintain proper book of accounts in accordance with reporting obligations 
provided under extant laws and regulations;
d. provide an annual report on incentives received and advancement made by 
virtue of the incentives;
e. notify the Coordinator of any change in structure, composition or objects of 
the Labelled Startup within a period of one month from the date of such 
change; and
f. comply with the obligations set out by the Coordinator after issuance of the 
startup label.

 

4. Establishment of the National Council for Digital Innovation and 
Entrepreneurship (the “Council”)


The Council has the following powers and functions, among others: 


a) formulate and provide general policy guidelines for the realisation of the 
objectives of the Act; 
b) give overall directions for the harmonisation of laws and regulations that 
affect a startup;
c) ensure the monitoring and evaluation of the regulatory framework to 
encourage the development of startups in Nigeria; and
d) support digital technological development through grants to persons,
research institutions, and universities pursuing postgraduate programmes 
in the areas of science, technology, and innovation5 etc.

 

As part of the operational framework of the Council, the National Information 
Technology Development Agency (the “NITDA”) is the Secretariat of the Council. 
The Secretariat has several powers outlined in section 9 of the Act.

 

5. Startup Support and Engagement Portal


As part of the objectives of the government to promote the ease of doing business 
in Nigeria, the Secretariat has been mandated under the Act to establish and 
maintain the Startup Portal subject to the approval of the Council.6 The Startup 
Portal is the platform through which a startup can conduct registration processes with relevant Ministries, Departments and Agencies (“MDAs”) and interact with the 
Government, private institutions, angel investors, venture capitalists, incubators, 
accelerators and other relevant institutions. For the efficient management of the 
Startup Portal, the Act provides that the Secretariat shall with the approval of the 
Council appoint a Coordinator for the Startup Portal who shall have at least 10 
years’ experience in technology and entrepreneurship. 

 

The Act has also provided elaborately the unique features and functions of the 
Portal outlined in section 10(2).

 

6. Establishment of the Startup Investment Seed Fund and Credit Guarantee 
Scheme


The government has shown willingness to combine its efforts with private finance 
and venture capitalist firms to provide funding and finance for startups in the 
ecosystem by establishing the Startup Investment Seed Fund (the “Fund”), which 
shall be managed by the Nigeria Sovereign Investment Authority (the “Fund 
Manager”) as prescribed under the Act for the overall management and operations 
of the Fund.7


The minimum threshold that shall be paid into this Fund annually is 
₦10,000,000,000 (ten billion Naira) from sources approved by the Council. The Fund 
shall be applied to provide early-stage finance for Labelled Startups on the 
recommendation of the Fund Manager, subject to the approval of the Council and 
provide relief to technology laboratories, accelerators, incubators and hubs. The 
Fund would also be applied to provide Labelled Startups with capital. 


Other than meeting the criteria stated in paragraph 2.1.2 above, the Act does not 
mention additional criteria that Labelled Startups must meet to qualify for financing 
under this Fund. The Act does not also provide whether the government will have 
equity interest in the startups that the Fund has financed.

 

The Secretariat is required to establish a Credit Guarantee Scheme to provide 
accessible financial support and create a framework for credit guarantee to 
Labelled Startups. It will also provide financial and credit information and financial 
management capacity building programmes to startups.8

 

7. Tax and Fiscal Incentives under the Act

 

Some of the tax and fiscal incentives provided under the Act include:
-   a Labelled Startup which qualifies under the Pioneer Status Incentives Scheme may 
upon application to the Secretariat receive expeditious approval from the Nigerian Investment Promotion Commission for the grant of tax reliefs and incentives. Some 
of such incentives include the exemption of dividends paid by the Labelled Startup 
from withholding tax, deferral of the claim of capital allowances on assets until after 
the pioneer status period has elapsed, and the right to carry forward tax losses 
incurred during the tax-free period, indefinitely, even after the tax-free period;

-   a Labelled Startup, when granted the pioneer status incentive, may be entitled to 
the exemption from companies income tax as provided under the provisions of the 
Industrial Development (Income Tax Relief) Act 9 for a period of 3 (three) years and 
an additional 2 (two) years; 10
-   a Labelled Startup on a similar note could be entitled to a full deduction of any 
expenses on research and development wholly incurred in Nigeria and the 
restrictions placed by the Companies Income Tax Act shall not apply to a Labelled 
Startup;
-   non-resident companies that provide technical, consulting, professional or 
management services to a Labelled Startup shall be subjected to a reduced 
withholding tax rate of 5% (five percent), from the generally applicable rate of 10%,
on income derived from the provision of such services, which shall be the final tax
to be paid by such non-resident companies;

-   a Labelled Startup shall be exempted from contributing 1% of its annual payroll 
cost to the Industrial Training Fund as required under the Industrial Training Fund 
Act (as amended) where it provides in-house training to its employees for the 
period where it is designated as a Labelled Startup; 
- Labelled Startups engaged in the exportation of products and services and eligible 
under the Export (Incentives and Miscellaneous Provisions) Act11 are entitled to 
receive export incentives and financial assistance from the Export Development 
Fund, Export Expansion Grant, and the Export Adjustment Scheme Fund;
-   access to grants and loan facilities administered by the Central Bank of Nigeria (the 
"CBN"), the Bank of Industry or other bodies statutorily empowered to assist small 
and medium scale enterprises and entrepreneurs; and
-   startups may raise funds through crowdfunding intermediaries and commodities 
investment platforms duly licensed by the Securities and Exchange Commission 
(the “SEC”) through the Startup Portal.

 

8. Collaborative Initiative Framework under the Act


The Act establishes a collaborative framework of various relevant agencies to 
ensure the proper regulation and administration of the startup ecosystem. The 
Startup Portal, through the following proposed features would serve as an 
electronic one stop centre to aid the seamless and expedited registration of 
startups with MDAs within the ecosystem and ease the processes for:


(a) Labelled Startups to conduct transactions at the Corporate Affairs 
Commission (the “CAC”). 12.
(b) registration of intellectual property for Labelled Startups in collaboration 
with the Nigerian Copyright Commission and the Trademarks, Patent, and 
Design Registries13;
(c) technology transfer registration for Labelled Startups in collaboration with 
National Office for Technology Acquisition and Promotion (the “NOTAP”) 14; and
(d) licensing of Labelled Startups that operate as financial technology 
companies (fintech startups) in collaboration with the CBN and the SEC.


Also, the Council is to collaborate with the SEC to consider rules that fast-track 
crowdfunding processes for Labelled Startups.


Labelled Startups can participate in the CBN’s regulatory sandbox, SEC’s regulatory 
incubation programmes, or any other regulatory sandbox programmes set up by 
other regulators by applying a fast-track process available through the Startup 
Portal.


The repatriation of capital and profits from investments made in a Labelled Startup
is recognised under the Act. The Secretariat has been mandated to collaborate with 
the CBN to guarantee the repatriation of investment by a foreign investor through 
the CBN’s authorised dealer in freely convertible currency provided that the foreign 
investor can present a certificate of capital importation as evidence that the initial 
investment fund was injected through the proper channel.

 

9. Accelerator and Incubator Programmes, and Clusters, Hubs, Innovation Parks 
and Technology Development Zones

 

The Act proposes establishing accelerator and incubator programmes for startups
to develop standards and guidelines to regulate the relationships between 
accelerators, incubators and startups.

 

The Council is mandated to issue a framework for establishing and operating 
startup innovation clusters, hubs, and physical and virtual innovation parks in each 
state of the Federation. This innovation aims to foster the business relationship 
between startups and large companies, collating expertise and ideas and providing 
a startup with access to resources and professional services.

 

10. Conclusion
The coming into force of the Act has brought about varying reactions. Nigerian 
startups could potentially reap the benefits of the Government’s concerted efforts
in participating actively in investments in startups. Furthermore, the tax breaks 
provided under the Act would ease the financial burden experienced by startup
founders. 


The Act, however, comes with tighter regulation of startups. In addition to the 
current requirements to register with the CAC, CBN, SEC and other regulatory 
agencies, startups will need to apply for a startup label certificate using the Startup 
Portal to enjoy the incentives and benefits provided under the Act.

 

It is also not clear how the collaborative framework of the Act would solve the long-standing scepticism that the CBN and SEC have shown towards online trading and 
foreign exchange platforms. The Nigeria Startup Act comes with an intention of 
bringing Nigeria’s startup ecosystem to a global standard, however, the 
implementation of its provisions will determine if this standard would be met in the 
long term.

 

 

 

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Read the original publication at Udo Udoma & Belo Osagie. 

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