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The Nigeria Startup Act 2022: Implications For Technology Startups In Nigeria – New Technology



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Introduction

Startups in Nigeria have grown exponentially. According to
research conducted by Statista, in 2020, Nigeria recorded over
3,300 startups. This is the highest number in Africa. Coming a
distant second is South Africa with 660 startups and Kenya with
600. Technology startups in Nigeria seem to be leading the pack of
emerging startups in Nigeria and indeed across Africa with leading
lights such as Flutterwave, Paystack and Piggyvest.

Nigeria has seen increasing funding especially for technology
startups over the years. The most recent and indeed the biggest
round of funding in Africa was the Series D round of USD250million
raised by Flutterwave in February 2022. Other noteworthy
investments according to a report published by Nairametrics1, are
funding raised by Moove for USD135million, Bamboo for USD15million
etc. In total, it is estimated that Nigerian tech startups have
raised well over $2billion in funding over the last seven years
– this is according to a report published by Disrupt Africa
titled “The Nigerian Startup Ecosystem Report 2022”.

The Nigeria government has also supported startups by making
fiscal policy reforms that are specifically targeted at growing
this very fragile but extremely important sector of the economy.
Some of these reforms include income tax exemptions for companies
with revenue below NGN25million, exemption from VAT compliance
obligation for companies with revenue below NGN25million in a
fiscal year etc.

While these fiscal reforms are beneficial to the growth of
startups, Nigeria still recognizes the need for more deliberate and
targeted policy reforms. Hence the promulgation of the Nigeria
Startup Act 2022 (or “the Act”) on the 19th of
October 2022 signed into law by his Excellency, President Muhammadu
Buhari.

In this article, we will discuss the implications of this Act to
Nigerian technology startups as well as key takeaways from this
Act.

The Nigeria Startup Act 2022: Implications for technology
startups

Startups in Nigeria are impacted by a lot of macro and
microeconomic factors. Key among them is access to finance. It is
said that a lot of startups globally and indeed in Nigeria, fail
because of the unavailability or inadequacy of finance. Other
factors impacting the growth of startups in Nigeria include, but
are not limited to, access to resources, incubators or
accelerators, government interventions etc. The Act has tried to
cushion the impact of these economic factors by focusing on
strategic areas such as access to finance, fiscal incentives,
collaboration and cluster hubs/innovation parks/accelerators and
incubators.

It is instructive to note that the concessions in the Act are
not automatic to all startups in Nigeria. In fact, the Act only
permits “labelled startups” from benefitting from these
concessions. For a startup to be designated a “labelled
startup”, it needs to meet the following criteria:

  1. It must be a registered company under the CAMA and has been so
    registered for a period less than 10 years;

  2. Its objects are innovation, development, production,
    improvement, and commercialization of a digital technology
    innovative product or process;

  3. it is a holder or repository of a product or process of digital
    technology or the owner or author of a registered software;

  4. it has at least one-third local shareholding held by one or
    more Nigerians as founder or co-founder of the startup;

  5. in the case of a sole proprietorship or partnership, it
    satisfies the conditions set out in paragraphs (b), (c) and
    (d).

  6. In the case of a sole proprietorship or partnership, a
    pre-label status is granted for a period of six months to enable
    the sole proprietorship or partnership comply with the conditions
    in (a) to (d)

We are going to discuss the impact of this Act on technology
startups under four categories: Access to Finance, Fiscal
Incentives, Collaboration as well as Cluster Hubs/Innovation
Parks/Accelerators and Incubators.

  1. Access to Finance

  • The Act provides for different sources of funding for
    technology startups. We have enumerated these sources below:

  • A Startup investment seed fund which shall be managed by the
    Nigeria Sovereign Investment Authority, and into which, an amount
    not less than NGN10billion shall be paid on a yearly basis. The
    source of the fund will be determined by the National Council for
    Digital Innovation and Entrepreneurship (or “the
    Council”) and the fund will be used to finance the needs of
    the startup amongst other uses.

  • 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.

  • Access to a credit guarantee scheme which shall be set up for
    the development and growth of a labelled startup.

  • Startups may also raise funds through crowdfunding
    intermediaries and commodities investment platforms duly licensed
    by the Securities and Exchange Commission (SEC).

  • Although these financing choices are commendable, it is
    important that clarity is provided sooner than later on the source
    of the funding for some of the financing options. For example, what
    will be the source of the Startup investment seed fund? Will it
    come from the Consolidated Revenue Fund or from taxes or
    public-private partnerships (PPP) etc?

  1. Fiscal Incentives

  • There are quite a number of incentives available to labelled
    startups in the Act. These are listed below:

  1. Expeditious approval of pioneer status incentive (PSI) for
    labelled startups that fall within industries captured under the
    extant Pioneers status Incentive Scheme. Consequently, labelled
    startups that have been approved for the PSI will enjoy a tax
    holiday for three years and an additional period of two years if
    still within the labelled startup period;

  2. Full deduction of expenses on research and development for the
    purpose of determining the company’s corporate tax
    liability;

  3. 5% withholding tax for non-resident companies that provide
    technical, consulting, professional or management services which
    shall be the final tax for such non-residents;

  4. Exemption from contribution to the Industrial Training Fund
    where it provides in-house training to its employees for the period
    it is designated a labelled startup;

  5. Access to export incentives and financial assistance from the
    export development fund, export expansion grant and export
    adjustment scheme fund;

  6. Access to loans administered by the Central Bank of Nigeria,
    Bank of Industry or other bodies that support small and medium
    scale enterprises;

  7. Investment tax credit equivalent to 30% of the investment in
    the startup. This shall be available to investors, venture
    capitalists etc.

  8. Exemption from capital gains tax on the disposal of assets by
    investors in the labelled startup as long as those investments have
    been held for a period not less than 24 months.

  9. Repatriation of investments by a foreign investor in freely
    convertible currencies, net of taxes and upon provision of a
    Certificate of Capital Importation (CCI) as evidence that initial
    investment was injected through the proper channel.

  • These incentives are very commendable and when fully
    implemented, will provide the startup with some leverage to grow
    its business and compete with other top players in the
    industry.

  1. Collaboration

  • The Act recognizes the importance of collaboration especially
    for and amongst startups. Collaboration with government agencies,
    industry experts, investors etc. Therefore, the following
    collaborative efforts have been legislated in the Act.

  1. Collaboration between the Corporate Affairs Commission and the
    National Information Technology Development Agency (or the
    Secretariat) to ensure the processes and transactions carried out
    by startups at the Commission are seamless and expedited.

  2. Collaboration between the Secretariat and the Nigerian
    Copyright Commission and the Trademarks, Patent and Design
    Registries to ensure ease of registration of intellectual property
    for labelled startups, facilitating the application for grant or
    revocation of patents and institution of legal action for
    infringement of any intellectual property rights etc.

  3. Collaboration between the Secretariat and the National Office
    for Technology Acquisition and Promotion (NOTAP) to ease technology
    transfer registration for labelled startups, provide a discount on
    all applicable fees for technology transfer registration and
    provide technical assistance to labelled startups to enable them to
    commercialize their research result.

  4. The Secretariat shall in conjunction with the CBN and the SEC,
    ease the licensing procedures for labelled startups to operate as
    financial technology companies (or fintech startups). Also, this
    collaborative effort will ensure fintech startups are duly notified
    of new rules and regulations that affect the industry etc.

  5. The Council shall assist labelled startups who seek to list on
    the relevant board of the Nigerian Exchange Limited (NGX), or on
    similar stock and commodity exchanges operating in Nigeria to meet
    up with the eligibility requirements for listing.

  • It is important to note that these collaborative efforts shall
    be consummated through a Startup Support and Engagement Portal (or
    “the Portal”) which shall amongst other things serve as a
    platform through which a startup conducts the registration process
    with relevant Ministries, Departments and Agencies of the
    government.

  1. Cluster hubs/innovation parks/accelerators and incubators

  • Just like the Silicon Valley in the United States or the
    technology hubs in London, this Act seeks to establish a technology
    ecosystem in Nigeria. For example, the Act seeks to develop a
    national accelerator and incubator policy for the establishment and
    development of accelerators and incubators. These accelerators and
    incubators shall in collaboration with the Secretariat, develop
    programs targeted at startups.

  • These accelerators and incubators registered with the
    Secretariat are entitled to incentives as may be provided by the
    Federal Government through a regulation(s).

  • Also, the Act provides for the establishment of the startup
    innovation clusters, hubs, and physical and virtual innovation
    parks in each state of the Federation to aid the activities of the
    startups.

  • The Act also makes clear that the Secretariat shall collaborate
    with the Nigerian Export Processing Zones Authority to establish a
    Technology Development Zone. This is to spur the growth and
    development of startups, accelerators and incubators.

Key Takeaways/Conclusion

  • With the passage of the Nigeria Startup Act 2022, it is
    envisaged that with proper implementation, Nigeria should
    experience an increased growth in the number of Startups in the
    country. Also, with the growth in the number of startups, there
    should naturally be a growth in the number of jobs available for
    Nigerians. Hence, this Act is expected to impact positively, the
    country’s current unemployment rate of 33.3%.

  • The fiscal incentives legislated in the Act should provide
    leverage for tech Startups to grow their revenue and compete with
    larger players in the industry. The implementation of the Act will
    also relieve tech Startups in Nigeria of some of the bottlenecks
    experienced before now, particularly in dealing with regulators in
    Nigeria as well as access to funds.

  • This Act is also expected to boost investor participation in
    the Nigerian technology space. The myriads of incentives available
    to both investors and investee companies as well as
    government’s deliberate effort in growing the technology space,
    should encourage investors who before now, have been unsure about
    playing in the Nigerian technology space.

  • Although the Act and the provisions therein have been
    commendable, there are areas which still require clarity. For
    example, how will the Startup Investment Seed Fund be financed?
    Will companies be tasked with this responsibility through
    additional taxes? Will it come from the government’s purse via
    deductions from the CRF or will this be done via a PPP etc. This
    question needs to be answered timeously as it forms the basis for
    startups, investors and other stakeholders to participate in this
    initiative.

  • Also, another pertinent question or concern is the requirement
    for sole proprietors or partnerships to transit to corporatization
    in order to enjoy the concessions under the Act. Will this
    requirement not impoverish the states who before now had been the
    body responsible for collecting taxes from these entities? Will
    this requirement also not diminish the relevance of partnerships as
    a vehicle for investments in Nigeria? Perhaps these points need to
    be considered when the regulation pursuant to the Act is
    drafted.

Footnote

1. Corporate Deals Book report for H1
2022

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

POPULAR ARTICLES ON: Technology from Nigeria

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The fintech ecosystem in Nigeria is largely comprised of businesses focused on mobile payments, digital banking, merchant solutions and personal finance, including wealthtech.



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