Nigeria has long established itself as a pioneer of the start-up ecosystem on the African continent, leading the way in various sectors and increasingly becoming a focus for investment. According to a Mckinsey report, between 2020 and 2021, the number of tech start-ups in Africa tripled to around 5,200 companies with Nigeria leading the troop. Nigeria’s start-up ecosystem has also grown exponentially over the past five years with exciting potential for even more growth in the coming years. Statista reported in June 2022 that the number of start-ups in Nigeria was estimated at around 3,300 in 2020, the highest number in Africa with South Africa and Kenya coming in at a distant 660 and 600 respectively.
The sector has also attracted considerable amount of investment as it continues to grow. Between January 2015 and August 2022, it was reported that 383 tech start-ups raised a combined US$2,068,709,445 – a higher total than any other country. Nigeria’s dominance is only getting greater in this regard. So far in 2022, 107 Nigerian start-ups have raised funding, accounting for around one third of the continent’s funded start-ups so far this year. The country’s running tally for 2022 stands at US$747,908,000 – closing in on last year’s total of US$793,790,000. It is no wonder that the success of this sector has caught the eye of legislators who have now passed a law to provide a framework for the sector’s regulation.
The new Nigeria Start up Act 2022 which was passed into law on October 19, 2022 is no doubt a welcome development especially as start-ups, particularly those in the technology space in Nigeria have often had to contend with a disjointed regulatory framework. This new law is a step in the right direction as it offers some insight into the much-needed clarity on how start-ups should be regulated in Nigeria. More importantly, it also offers certain administrative, tax and fiscal incentives to start-up companies in one fell swoop. The following are key highlights of the Act.
- Establishment of the National Council for Digital Innovation and Entrepreneurship (“NCDIE”/Council):
The Act establishes the NCDIE whose functions includes the formulation and provision of general policy guidelines for the realisation of the Act’s objectives and ensuring the monitoring and evaluation of the regulatory framework to encourage the development of start-ups in Nigeria among others.
- Start-up Label:
The Act introduces what is referred to as a start-up label, a certificate issued by the Secretariat to a start-up upon the fulfilment of the labelling requirements under the Act. Under the Act, a start-up is eligible for labelling where;
- it is registered as a limited liability company under the Companies and Allied Matters Act, and has been in existence for not more than 10 years;
- its objects are innovation, development, production, improvement and commercialisation of a digital technology innovative product or process;
- it is a holder or repository of a product or process of digital technology, or the owner or author of a registered software;
- it has at least one-third local shareholding held by one or more Nigerians as founder or co-founder of the start-up ; and
- in the case of a sole proprietorship or partnership, it satisfies the conditions set out in in paragraphs (b), (c) and (d).
From the above, it can be gleaned that the Act is mainly targeted towards start-ups in the technology space, thus start-ups that are not involved with technology may not benefit under this Act. The Act also states that it does not apply to an organisation which is a holding company or subsidiary of an existing company which is not registered as a start-up.In addition, sole proprietorships or partnerships are not outrightly granted a start-up label rather the Act provides that they be granted a pre-label status for a period of six months to enable them comply with the requirements set out in Section 13 (2) (a), (b), (c) and (d) of the Act.
A key advantage of being a labelled start-up is that it affords the company access to the incentives provided under the Act.The Act also sets out the procedure for application and issuance of a labelling certificate as well as the obligations required of a labelled start-up, failure of which the start-up label may be withdrawn.
- Start-up Investment Seed Fund
An exciting provision of the Act is the establishment of a Start-up Investment Seed Fund of at least ten (10) billion naira annually to be managed by the Nigeria Sovereign Investment Authority. This Fund is established to provide labelled start-ups with finance and provide relief to technology laboratories and hubs. This is a very important provision as start-ups often struggle with raising funds to further the growth of their businesses.
- Tax and Fiscal Incentives
The Act provides many tax and fiscal incentives for labelled start-ups including:
- Tax reliefs and incentives under the Pioneer Status Incentive (PSI) Scheme for qualified labelled start-ups;
- Entitlement to exemption from the payment of income tax or any other tax chargeable on its income or revenue for a maximum period of 5 years if still within the period of a labelled start-up i.e 10 years.
- Full deduction of any expenses on research and development which are wholly incurred in Nigeria and the restrictions placed by the Companies Income Tax Act shall not apply to a labelled start-up.
- Non-resident companies that provide technical, consulting, professional or management services to a labelled start-up shall be subjected to a five (5) percent withholding tax on income derived from the provision of such services, provided that the payment of the withholding tax, shall be the final tax to be paid by such non –resident companies.
- Exemption from contributions to the Industrial Training Fund where it provides in-house training to its employees for the period where it is designated as a labelled start-up.
- Access to export facilities.
- Access to grants and loan facilities administered by the Central Bank of Nigeria (“CBN”), the Bank of Industry or other bodies statutorily empowered to assist small and medium scale enterprises and entrepreneurs.
- Credit Guarantee Scheme
The Act establishes a Credit Guarantee Scheme which serves the purpose of providing accessible financial support to labelled start-ups and the creation of a framework for credit guarantee for labelled start-ups.
Under the Act, start-ups are empowered to raise funds through crowdfunding intermediaries and commodities investment platforms (“platforms”) duly licensed by the Securities and Exchange Commission (“SEC”) that would have their platforms available for use by start-ups on the Start-up Portal.
- Start-up Investors Incentives
Start-up investors are not excluded from incentives.. Under the Act, the Ministry of Finance and other Ministries, Departments and Agencies (MDAs) are charged to implement a policy for incentives for investors in a labelled start up to enjoy tax credits on their investment. An investor who invests in a labelled start up shall be entitled to an investment tax credit of 30% of the investment in the labelled start-up provided that the tax credit will be applied on the gains of the investment which are subject to tax. In addition, capital gains tax shall not be charged on gains that accrue from the disposal of assets by an investor with respect to a labelled start-up provided the assets have been held in Nigeria for a minimum of twenty-four (24) months.
- Expedition of Administrative processes
The Act provides for expedition of administrative processes, facilitated by the Council at different MDAs including the Corporate Affairs Commission (CAC), Nigerian Copyright Commission (NCC) and National Office for Technology Acquisition and Promotion (NOTAP) for start-ups.Section 34 specifically addresses the procedure for obtaining licenses for fintech companies with the Council Secretariat acting as a liaison to ensure the fast track of the process.
- Regulatory Sandbox
The Act entitles a labelled start up to participate in regulatory sandboxes by the CBN, SEC or other MDA through a fast-track application on the Start-up Portal provided it meets the requirements for such application. Labelled start-ups may also be listed on the Nigeria Exchange Limited with the assistance of the Council.
- Repatriation of profits
The Act also empowers the Secretariat to collaborate with the CBN to guarantee repatriation of investment by a foreign investor in a labelled start-up through the CBN’s authorised dealer in freely convertible currency.
- Creation of Clusters, Hubs, Innovation parks and Technology Development Zones
The Act proposes establishing accelerator and incubator programmes for start-ups to develop standards and guidelines to regulate the relationships between accelerators, incubators and start-ups.
The Nigeria Start Up Act 2022 no doubt is a welcome attempt by the legislators to provide a regulatory framework for the start-up ecosystem in Nigeria and somewhat harmonise the regulations already in place in respect of the sector. However, the Act seems to only focus on start-ups in the technology space. Although, majority of start-ups in Nigeria are technology focused, there are other start-ups in for example the art, fashion, manufacturing and design space which are not covered under the Act. In addition, the Act’s MDAs collaboration scheme may be counterproductive as often times, each agency has its own laid down procedure which may be cumbersome thereby slowing down the application mechanism for the grant of the label and the many incentives the label provides to its holder.
In addition, the Act does not make provision for how the ten (10) billion naira Start-up Investment Seed Fund would be funded or the procedure for its disbursement, thereby raising concerns about how realistic it would be to raise that amount of funding. Nevertheless, the objectives of the Act itself is laudable and a good step in the direction of providing regulatory support to the start-up industry. One can only hope that its implementation will be just as laudable.
Author: Tosin Grey