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.