Gabriel Eze, Associate and Tobechukwu Ndunagu, Lead Associate
According to Statista’s startup ecosystem index score, Nigeria is the second-leading country for startups after South Africa, with Lagos as one of the leading cities in Africa. By its February 2022 report, between 2017 and 2021, Nigeria reportedly produced 144 fintech startups, bagging some of the highest amounts of unicorns in Africa. Despite these developments, a large number of these unicorns are foreign-owned companies. Consequently, funds will be largely repatriated out of Nigeria. Meanwhile, indigenous startups grapple with lack of adequate funding. Considering this and the unfriendly economic environment in the country, the growth and future of startups in Nigeria do not seem very secure.
To help secure the Nigerian startup ecosystem, the Nigerian government signed the famous Startup Bill, now known as the Nigerian Startup Act 2022 (the “NSA”), into law on 19 October 2022. The NSA covers financial and non-financial support, including capacity-building programs alongside investment opportunities. It is part of the Nigerian Government’s commitment to boosting existing funding efforts, growing nascent indigenous startups, and engendering the ease of doing business in Nigeria. The NSA aims at strengthening Nigeria’s tech ecosystem around talent pool, availability of capital, and providing the institutional framework for startups. The vision is to position Nigeria’s startup ecosystem as the leading digital technology centre in Africa, having excellent innovators with cutting-edge skills and exportable capacity.
The Nigerian Startup Act is not for every business that is just starting up.
A startup literally refers to a business or an enterprise that is just starting up. As defined by Investopedia, the term ‘startup’ refers to “a company in the first stages of operations”. But as far as the NSA is concerned, a business is not a startup solely because it is just starting up or at its initial stages of operations. Generally, such business would probably fall under Micro, Small, Medium Enterprises (MSMEs), regulated by the Small and Medium Scale Enterprises Development Agency of Nigeria (SMEDAN).
Difference between the NSA and SMEDAN
Summarily, the mandate of SMEDAN as contained in the SMEDAN Act includes to stimulate, monitor, and coordinate the development of the MSMEs sub-sector; initiate and articulate policy ideas for small and medium enterprises growth and development; and link MSMEs to internal and external sources of finance, etc. SMEDAN is the voice of MSMEs, intermediating between MSMEs and the Government.
The NSA, on the other hand, caters for technology-enabled startups in Nigeria with the main objective of providing for the creation and development of an enabling environment for them.
The NSA is clear on its scope and objectives. The NSA applies specifically to:
(a) companies incorporated under the Companies and Allied Matters Act (”CAMA”) and granted the startup label, in accordance with the provisions of the NSA; and
(b) organizations and establishments, whose activities affect the creation, support, and incubation of startups in Nigeria.
Although not expressly defined, it seems that what characterizes a startup under the NSA centers on companies whose objects are geared towards innovation and technology generally. To be recognized as a startup under the NSA, you must be labeled as one. This involves certain labeling processes.
The startup labeling process
A startup label under the NSA is a certificate issued by the Secretariat to a startup upon fulfilling the labeling requirements.
A startup is eligible for labeling, where —
(a) it is registered as a limited liability company under CAMA, and has been in existence for a period not more than 10 years from the date of incorporation;
(b) its objects are innovation, development, production, improvement, and commercialization of a digital technology innovative product or process;
(c) it is a holder or repository of a product or process of digital technology, or the owner or author of a registered software;
(d) it has at least one-third local shareholding held by one or more Nigerians as founder or co-founder of the startup; and
(e) in the case of a sole proprietorship or partnership, it satisfies the conditions set out in paragraphs (b), (c) and (d).
Three major points could be deduced from the labeling requirements outlined above. One, a ‘startup’ must be young, innovative, technology-based, product or process-oriented, and ⅓ Nigerian.
Two, the insertion of “and” at the end of paragraph (d) above presupposes that for any business to successfully qualify for startup labeling status, the criteria identified above are to be met conjunctively.
Three, a holding company or subsidiary of an existing company which is not registered as a startup is disqualified. To join a beehive, you must be a honey bee.
Pre-status for Sole Proprietorships and Partnerships
The NSA makes room for sole proprietorship or partnership to be granted a pre-status for a period of six months. This is to enable the sole proprietorship or partnership to comply with the requirements set out in subsection (2)(a), (b), (c), and (d) above. A sole proprietorship or partnership which fails to comply with the conditions for pre-status above shall lose the pre-status granted to it.
Applying for a startup label under the NSA
A startup that desires a labeling status under the NSA shall submit an application on the Startup Support and Engagement Portal (the “Startup Portal”). The application must be supported by documents prescribed by the Secretariat. If the Coordinator is satisfied with the application, it will, in conjunction with the Secretariat, grant approval to enter the name and particulars of the applicant in the register of startups. A startup label will be valid for a period of 10 years from the date it is issued.
Obligations of a labeled startup
Labeled startups are not without obligations under the NSA. They are mandated to—
(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 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 within a period of one month from the date of such change; and
(f) comply with the obligations set out by the Coordinator after the startup certificate is issued.
Note that the startup label could be withdrawn when a startup fails to regularize a default after being notified by the Secretariat. Likewise, where a startup rectifies the default, it may apply to the Secretariat for the label to be reissued.
Prospects for Startups in Nigeria
Labeled startups have access to the incentives and opportunities provided under the NSA. The benefits are in four senses: investment seed funds, training, capacity-building and talent development, tax incentives and reliefs, and collaboration.
- Startup Investment Seed Fund
The NSA has established the Startup Investment Seed Fund (“the Fund”). The Fund is established for the purpose of attracting funding and providing early-stage finance for labeled startups. The goal includes providing relief to accelerators, hubs, incubators, and technology laboratories. The Fund is to be managed by the Nigerian Sovereign Investment Authority (the “Fund Manager”). Accordingly, a sum not less than Ten Billion Naira (N10,000,000,000) is expected to be paid into the Fund on an annual basis, from sources to be approved by the Council.
- Training, Capacity Building, and Talent Development
Capacity is critical to securing the Nigerian startup ecosystem. If Nigeria will ever become the leading digital technology centre in Africa, Nigerian startups must build capacity. This is where training comes in. The NSA mandates the Secretariat to design and implement a training and capacity building program for startups. A startup may access training facilitated by the Industrial Training Fund (the “ITF”) and any other organization, in partnership with the Secretariat, for training entrepreneurs and their employees.
One of the innovations in the NSA is providing what many have considered the missing bridge between innovation and research & development in the country. The NSA mandates the Secretariat to collaborate with the National Universities Commission (the “NUC”), National Board for Technical Education (the “NBTE”), and other tertiary-institution regulatory bodies within Nigeria. This is aimed at developing modules, programs, and holding workshops towards impacting knowledge necessary for the successful establishment and running of a startup in Nigeria.
The Secretariat is to develop a framework that will help to develop and establish accelerators, hubs, incubators, and technology laboratories in all six geopolitical zones in Nigeria.
The National Information Development Agency (the “NITDA”) serves as the Secretariat under the NSA, and the Director-General of NITDA serves as its Head. The NSA also mandates the Secretariat to establish centres for acquiring digital technology in the six geopolitical zones of Nigeria in order to promote digital technology utilization, and strengthen digital technology management capability and information systems. The Secretariat may issue a framework for talent development and collaborate with relevant MDAs and the private sector to establish digital technology innovation parks and hubs in universities, polytechnics, and other institutions of higher learning.
- Tax And Fiscal Incentives
The NSA provides tax reliefs which are available to labeled startups as follows:
(a) Pioneer Status Incentive (PSI) scheme: to be granted by the Nigerian Investments Promotion Council (the “NIPC”) for the grant of tax reliefs and incentives;
(b) Income Tax Relief: exemption from the payment of income tax or any other tax chargeable on its income or revenue for a period of three years and an additional two years if still within the period of a labeled startup;
(c) ITF Tax Exemption: exempted from contributions to the ITF where it provides in-house training to its employees for the period where it is designated as a labeled startup;
(d) Export Incentives;
(e) Access to government grants, loans, and facilities administered by the Central Bank of Nigeria (the “CBN”), the Bank of Industry (the “BoI”), or other bodies statutorily empowered to assist SMEs and entrepreneurs.
(f) Credit Guarantee Scheme: for the development and growth of labeled startups.
(g) Incentives and reliefs for investors investing in a labeled startup, which includes tax credits on their investments equivalent to 30% of the investment in the labeled startup. But such credits must be applied on any gains on investment which are subject to tax, etc.
- Collaboration with MDAs
Collaboration, linkages, support, and enablement seem to be hallmarks that the NSA seeks to achieve within the Nigerian startup ecosystem especially amongst the various MDAs, and between MDAs and startup players and stakeholders. Government agencies, as highlighted below, are expected to play significant roles in making the NSA a reality:
(a) Corporate Affairs Commission (the “CAC”)
The Secretariat will collaborate with the CAC to designate a separate section on the Startup Portal to ease the processes for labeled startups that conduct transactions at the Commission.
(b) Nigerian Copyright Commission (the “NCC”), Trademark and Patent Registry
The Secretariat will collaborate with the NCC and the Trademarks, Patent and Design Registry to assist labeled startups exploit their rights. They will also take steps towards assisting labeled startups in internationalizing and commercializing their rights. This is to ensure that registration and protection of intellectual property of labeled startups is expedited and seamless.
(c) Crowdfunding under the Securities and Exchange Commission (the “SEC”)
Startups may raise funds through crowdfunding intermediaries and commodities investment platforms (“platforms”) duly licensed by the SEC. These licensed platforms are expected to be accessible to startups on the Startup Portal.
(d) Transfer of Foreign Technology under the National Office for Technology Acquisition and Promotion (“NOTAP”)
The Secretariat, in conjunction with NOTAP, is required to designate a separate section on the Startup Portal to ease technology-transfer registration for labeled startups. Also, startups will be provided a discount on all applicable fees for technology-transfer registrations. Apart from registration and discounts, technical assistance will be provided to labeled startups in order to enable them to commercialize their research results.
(e) Obtaining licenses for a financial technology startup under the CBN and the SEC
The CBN and the SEC are two major regulators in Nigeria’s fintech industry. The Secretariat, in conjunction with the CBN and SEC, shall designate a separate section on the Startup Portal to ease the licensing procedures for labeled startups that operate as financial technology companies (fintech startups). Both regulatory agencies will engender participation of labeled startups seeking to list on in regulatory sandboxes, or in the relevant board of the Nigerian Exchange Limited (NGX), or on similar stock and commodity exchanges operating in Nigeria.
(f) Repatriation of capital and profits (CBN)
The Secretariat will also collaborate with the CBN to guarantee repatriation of investment by a foreign investor through the CBN’s authorized dealer in freely convertible currency of dividends or profits, net of all taxes, attributable to the foreign investor’s investments and proceeds, net of all taxes and other obligations in the event of a sale or liquidation of the startup or any interest attributable to the foreign investor’s investments. The repatriation of investments in a labeled startup shall be carried out at the CBN’s official foreign exchange rate, provided that the foreign investor can present a Certificate of Capital Importation (CCI) as evidence that the initial investment fund was injected through the proper channel.
(f) Establishment of clusters, hubs, innovation parks, and technology development zones.
The Council shall issue a framework for the establishment and operation of startup innovation clusters, hubs, physical and virtual parks in each state of the Federation.
Potential Pitfalls of the NSA
It is noteworthy that applying to be granted a startup label status is not compulsory under the NSA. Players in the startup ecosystem who meet the stipulated threshold have the discretion to apply or to not apply. Rather than serve as a regulatory instrument, the NSA has been enacted to provide the necessary policy support needed for startups in Nigeria to thrive.
The introduction of the NSA by the Federal Government is commendable. But it is not without some shortcomings and potential pitfalls. If these shortcomings and potential pitfalls are inadequately addressed, it may portend a serious threat to the success of the NSA.
- Absence of a compliance mechanism
At the time of writing, there is yet to be any compliance mechanism for the NSA. The Secretariat, with the approval of the Council, is required to establish a Startup Portal to serve as the platform where registration processes for startups with relevant MDAs are to be conducted. There is yet to be any deployment of the Startup Portal. Before the massive goodwill the NSA enjoys, particularly amongst young people who primarily lead and drive the Nigerian startup ecosystem, is completely lost, the Secretariat (i.e. NITDA) needs to introduce the Startup Portal soonest.
- The composition of the Council membership and its impracticality
The NSA provides for the establishment of the National Council for Digital Innovation and Entrepreneurship (the “Council”). The Council has been created to formulate and provide general policy guidelines, direct the harmonization of laws and regulations, approve the programs, monitor and ensure the implementation of the policies and programs, and support digital technological development of startups. Surprisingly, the President and Vice President of Nigeria are to sit as Chairman and Vice-Chairman respectively. In the absence of the President and Vice President, the Minister for Communications and Digital Economy presides.
While it can be argued that the membership of the Presidency implies rapid interventions on behalf of startups in Nigeria, it is not unlikely for unnecessary bureaucracy to creep in and cripple efficiency and speed. More so, the enormous responsibilities on the Presidency may make its active membership and effective dispensation of its functions in the Council nearly impracticable. This common challenge has been observed with other legislation with similar membership compositions.
- Conflicting stance on the validity of startup label
There is a conflicting stance on the validity of the startup label in the provisions of the NSA which could be subjected to multiple interpretations. Specifically, under section 13(2)(a) of the NSA, it is required that before a company could be labeled a startup it must be incorporated as a limited liability company under the CAMA, and must have been in existence for a period not more than 10 years from the date of incorporation. On the other hand, section 15(3) of the NSA provides that a startup label (certificate) shall be valid for a period of 10 years from the date of issuance.
Let’s paint a scenario. TushiX is a startup incorporated as a limited liability company under the CAMA. After 6 years of incorporation, TushiX applies for and is granted the startup label. Meanwhile, the startup label is valid for 10 years. Will TushiX’s certificate be withdrawn when TushiX clocks 10 years or will TushiX be allowed to use up the 10-year lifespan of the label from the date the label was issued by which time TushiX would be marking its 16th anniversary? Apparently, the latter would conflict with the provisions of section 13 of the NSA regarding the 10-year restriction for applicants.
Perhaps this is an aspect that will be clarified when the relevant supportive policies and directives are rolled out eventually. In the absence of any clarifying amendments, it will be reasonable to uphold the position that TushiX (in our scenario) should be allowed to use up the 10-year lifespan of the startup label notwithstanding that the company would have been in existence for more than 10 years at the time of expiration of the label.
The NSA is a welcome development. It has the potential to firmly position Nigeria as the leading digital innovation hub of Africa. But it requires clear, efficient, and timely implementation. Considering the number of public agencies and regulators involved in the NSA framework, the success of the NSA would largely depend on the level of inter-agency collaboration amongst multiple agencies and regulators. Inter-agency collaboration is therefore critical. NITDA, the NSA Secretariat, also needs to introduce the application mechanism by making the Startup Portal available soon. We cannot afford to have another policy paper without effective implementation in an area Nigeria badly needs to globally compete. Meanwhile, startups who wish to take maximum advantage of the benefits and opportunities provided by virtue of the NSA should consult their lawyers for guidance.
Thank you for addressing startup labeling and the validity of startup label. This is an area I had long been looking forward to.