Introduction
Nigerian entrepreneurs have long been harmed by adverse regulatory conditions that make it more difficult to launch, build, and scale an innovative enterprise. According to a 2020 report from World Bank[1] on doing business, Nigeria was ranked low in the ease of doing business ranking as it was ranked 131 out of 190 countries that made the list. Nigeria’s low ranking in this report did not come as a surprise because the nation’s business ecosystem with specific emphasis on the tech space contends with frustrating and stifling policies from the government and a number of other challenges. A number of promising tech startups in Nigeria with the potential to immensely drive profit of the Nation’s economy stopped operation because of the government’s approach to policies that relate to tech support. To remedy this situation plaguing the Nation’s business environment, the Nigerian Startup Bill was forwarded to the senate on March 1, 2021. On October 19, 2022, President Muhammadu Buhari signed the Nigerian Startup Bill into law. As such, the nation for the first time has a unifying law to regulate its startup ecosystem; The Nigerian Startup Act (“the Act”).
Prior to the Nigerian Startup Act, the laws that govern Startups and SMEs were found in different legislations, which made for proliferation of taxes to be paid to numerous agencies. These legislations also provide for the payment of tax to different regulatory agencies. Some of these legislations includes The Companies and Allied Matters Act, 2020, The Investment and Securities Act, The Companies Income Tax Act and The Personal Income Tax Act.
The introduction of the Nigerian Startup Act (the “Act”) is an innovative development that aims to improve the business environment for startups in Nigeria. The major objective of the Act is to create an enabling environment for startups by providing a legal and institutional framework for the development of startups, creating incentives for the development and growth of technology related talents, removing regulatory constraints, and positioning Nigeria’s startup ecosystem as the leading digital technology centre in Africa. The bill eradicates the legal uncertainties that have trailed the startup industry in the past. It provides for what qualifies a company to register and obtain startup status. This article aims at giving a brief overview of the salient provisions of the Act which embodies 51 Sections, and one Schedule.
Salient Provisions of the Nigerian Startup Act 2022
Definition of Startups under the Act
Startups are defined under the Act as a company in existence for not more than 10 years, with its objectives being the creation, innovation, production, development, or adoption of a unique digital technology innovative product, service, or process.[2]
According to this definition, the Act will be applicable to tech-enabled startups, which are businesses that use current, cutting-edge technical advancements to address operational problems or enhance consumer experience. Small and medium enterprises (SMEs) that are not tech related would consequently not be covered by it.
Startup Labelling
The Act provides that before a company can be labelled a startup, it must obtain a certificate known as the startup label. This means that only companies with the startup label will be recognized as startups. By virtue of section 13(2) ; a startup will be granted a startup label where it is registered as a limited liability company under the Companies and Allied Matters Act for a period not more than ten years, with its objects being innovation, development, production, improvement and commercialization of a digital technology innovative product or process; to be regarded as a startup by virtue of section 13(2), such company must have at least one Nigerian as a founder or Co-founder of the startup, provided that the Nigerian founder or co-founder will share from profit or revenue from the sale of shares and at least 51% of its shares should be held by Nigerians. Companies whose foreign participation exceeds 49% will still qualify where the ultimate beneficial owners of its foreign corporate shareholders are Nigerian citizens. Companies issued with a startup label are required by the Act to adhere to the requirements stated above and failure to comply with these obligations can revoke their startup label.[3]
The Act mandates that a Startup Support and Engagement Portal should be established to facilitate the issuance of the startup label and also bridge the gap between regulators and startups. The Startup portal shall also be responsible for creating opportunities for startups to participate in challenges and programs that would enhance financing, innovation and provision of incentives among others.[4]
The Startup Consultative Forum
The Act established a Startup Consultative Forum (the “Forum”)[5], which will be made up of industry stakeholders and representatives, to prevent onerous regulatory policies. The Forum provides stakeholders with a constant channel of communication with the Nigerian government for the advancement of the startup ecosystem. The Act also mandates the National Digital Innovation, Entrepreneurship, and Startup Policy’s implementation in order to foster the growth of the startup ecosystem. The introduction of aggressive government measures that impede the ecosystem’s growth is expected to be reduced to a minimum by the execution of the Policy and ongoing engagement with stakeholders.
Establishment of the Council for Digital Innovation and Entrepreneurship
The Act establishes a council known as the national council for digital innovation and entrepreneurship.[6] The council has the duty to ensure the realisation of the objectives of the Bill, harmonise laws that regulate startups and ensure the development of digital technology through grants to persons and institutions involved in research and technology.[7] The council shall also have the power to examine the regulations and directives of Ministries, Departments and Agencies that directly affect the functioning, funding and operations of startups in Nigeria.[8] The National Information Technology Development Agency shall serve as the Secretariat of the Council (“the Secretariat”)[9], and shall be in charge of managing the labelling process of a startup, providing access to information and performing such other duties as required by the bill.
Establishment of Startup Investment Seed Fund
The Act establishes a fund known as Startup Investment Seed Fund to be managed by the Nigeria Sovereign Investment Authority otherwise known as the fund manager.[10] The startup investment seed fund by virtue of section 19 aims to provide special seed funds to startups. The fund will provide finance and tech reliefs to startups. This will undoubtedly increase access to funding for startups and improve the startup ecosystem in Nigeria.
Training, Capacity Building, and Talent Development
The Act introduces a program that will enhance the training[11] and development of talents[12] in the Nigerian startup ecosystem. It provides support for academic research institutions geared towards startup development[13]. The implication of this is that startups and their employees will have access to educational programs that will empower them with the right skills and enhance their competitiveness in the industry.
The Act empowers the secretariat to collaborate with the National Universities Commission, universities, and polytechnics within Nigeria to develop modules, programs and hold workshops aimed at impacting knowledge necessary for the establishment and running of a startup in Nigeria. The Secretariat shall establish centres for the acquisition of digital technology in the six geopolitical zones of Nigeria for the promotion of digital technology utilisation, strengthening of digital technology management capability, and information systems. The Secretariat shall also support the activities of an academic research institution to the development of a startup.
Introduction of Tax and Fiscal Incentives
Companies labelled as startups will benefit from some tax reliefs and incentives under the Act. These labelled startups are eligible for pioneer status incentives and other tax reliefs[14]. Labelled startups with at least ten employees where 60% of the employees have no prior work experience within three years of graduation or any vocational program have access to percentage-based tax relief of 5% on income tax[15]. Labelled Startups under the Act will also be eligible for export incentives and financial assistance from the Export Development Fund, Export Expansion grant and the Export Adjustment Scheme Fund.[16]
The Act further provides for access to government grants, loans and financial support through a credit guarantee scheme.[17]
The Act encourages investment in startups by providing tax incentives and reliefs for investors investing in a labelled startup.[18] Tax incentives are also provided to employees and external service provides for labelled startups.[19] By virtue of section 31, an eligible employee of a labelled Startup shall be entitled to personal income tax exemption of 35% on the income of the employee for a period of two years from the date of engagement by the labelled Startup. The criteria for eligibility of an employee will be determined by the Secretariat and the Joint Tax Board.
Provision of Regulatory Support
The Act enhances regulatory support for startups. It provides for collaboration with regulatory bodies to facilitate seamless processes for labelled startups. The provision for regulatory support applies to bodies like the Corporate Affairs Commission[20], Nigerian Copyright Commission, and Trademarks, Patent and Design Registries,[21] Securities and Exchange Commission,[22] National Office for Technology Acquisition and Promotion,[23] Central Bank of Nigeria,[24] and Nigerian Exchange Limited.[25]
Introduction of Incubation and Accelerator Programs
The Act also provides for the establishment of accelerator and incubator programs that will grow the startup ecosystem. The Act seeks to create a policy that will aid the establishment and development of accelerators and incubators, it also aims to regulate the relationship and promote collaboration between accelerators, incubators and startups.[26]
These incubators will help startups solve operational issues they are bound to encounter in running their business.
Shortcomings of the Act.
Despite the several innovations introduced by the startup act, it is not devoid of certain shortcomings.
One major shortcoming of the Act is the proliferation of laws and regulators, although the act is in line with international standards, it introduces additional bodies and regulations to enterprises that will typically fall within the ambit of CAMA, thus resulting in the proliferation of laws. Similarly the introduction of more administrative bodies would add an extra hurdle in the operation of startup companies.
Conclusion
The introduction of the Act is truly a step in the right direction in creating an enabling environment for Startups to thrive in Nigeria. It seeks to reduce regulatory hurdles currently faced by Startups and relevant regulators including the Corporate Affair Commission and the Securities and Exchange Commission in controlling the startup ecosystem in Nigeria. However, like with previous laws, there is no certainty that the Nigerian government will put the provisions of the Act into practice, but the new law, in the opinion of Oswald Osaretin Guobadia, Senior Special Assistant to the President on Innovation, leaves room for business owners to take the initiative.
The Act seeks to leverage the growing digital economy in the country. A regulatory framework like this will improve the ecosystem for startups as well as encourage investors to invest in startups which will in effect create more employment and improve the economy of the nation.
AOC Solicitors
Adedunmade Onibokun & Co.
[1] World Bank “Doing Business 2020” available at https://openknowledge.worldbank.org/bitstream/handle/10986/32436/9781464814402.pdf?sequence=24&isAllowed=y (Accessed 20 October 2022)
[2] Section 13(2) of the Nigerian Startup Act 2022
[3] Section 17 of the Act, withdrawal of a Startup Label
[4] Section 10(1) and (2) of the Act.
[5] Section 12 0f the Act
[6] Section 3(1) of the Act
[7] Section 7(1) of the Act
[8] Section 7(2) of the Act
[9] Section 9 of the Act
[10] Section 19 of the Act
[11] Section 21 of the Act
[12] Section 22 of the Act
[13] Section 23 of the Act
[14] Section 24 of the Act
[15] Section 26 of the Act
[16] Secton 27 of the Act
[17] Section 29 of the Act
[18] Section 30 of the Act
[19] Section 31 of the Act
[20] Section 33 of the Act
[21] Section 34 of the Act
[22] Section 35 of the Act
[23] Section 36 of the Act
[24] Section 37 of the Act
[25] Section 39 of the Act
[26] Section 41 of the Act
Originally published by AOC.