Background

It is now common knowledge that Nigeria is a veritable breeding ground for startups. In recent times, startups in Nigeria have grown in an unimaginable proportion. Notwithstanding this increase in growth, only a handful of them have been able to withstand the storm. A lot of other startups are usually washed off the shores of Nigeria, largely due to lack of funding, proper planning and enabling environment to thrive. 

In the same vein, Nigerian startups have over the years witnessed tremendous funding especially in areas of technology startups. Some of the most visible funding advanced towards the growth of startups in Nigeria include Series D round of USD250 million raised by Flutterwave in February 2022, USD135 million for Moove, Bamboo for USD15million etc.

According to a report published by Disrupt Africa titled “The Nigerian Startup Ecosystem Report 2022“, it is estimated that Nigerian startups have attracted more than USD2 billion funding. This, and with the increasing attention of Government to sustain the consistent growth of startups would further strengthen Nigeria’s economy.

The Start-up Act, 2022

Startups are defined under Section 50 of the Nigeria Startup 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.“

Interestingly, the Nigeria Startup Act, 2022 (or “the Act”) as recently signed into law by his Excellency, President Muhammadu Buhari on the 19^th of October 2022 has greatly opened new frontiers for startups in Nigeria. 

We shall copiously examine some of the key provisions of this Act against the following background:

Startup Labelling

By Section 50 of the Act, “labelled startup” means a startup labelled under this Act and issued a digital certificate by the Coordinator.

Eligibility for Grant of a Startup Label

Section 13 (1) provides that a Startup Label under the Act is a certificate issued by the Secretariat to a startup upon the fulfillment of the labeling requirements under the Act. 

Section 13 (2) is to the effect that;

A startup is eligible for labeling under the Act, where –

1. It is registered as a limited liability company under the Companies and Allied Matters Act 2020;
2. It has been in existence for a period of not more than 10 years from the date of incorporation;
3. Its objects are innovation, development, production, improvement, and commercialisation of a digital technology innovative product or process; 
4. It is a holder or repository of a product or process of digital technology, or the owner or author of a registered software; 
5. It has 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 
6. In the case of a sole proprietorship or partnership, it satisfies the conditions set out in in paragraphs (b), (c) and (d) of this sub-section.

Note the following:

→The Act shall not apply to an organisation which is a holding company or subsidiary of an existing company which is not registered as a startup.

→A sole proprietorship or partnership referred to in sub-section (2)(e) of this section shall be granted a pre-label status for a period of six months to enable the sole proprietorship or partnership comply with the requirements set out in subsection (1) (b), (c) and (d) of this section.

→A sole proprietorship or partnership, which fails to comply with the provisions of subsection (4) of this section shall lose the pre-label status granted to it. 

→A labelled startup shall be granted access to the incentives provided under this Act.

For the purposes of approving a company as a startup label, the following apply:

→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.

Obligations of a Labelled Startup

Section 16 of the Act provides to the effect that a labelled startup under the Act shall:

1. Comply with all the extant laws governing businesses in Nigeria; 
2. Provide information annually on the number of human resources, total assets and the annual turnover achieved from the period the startup label was granted;
3. Maintain proper book of accounts in accordance with reporting obligations provided under extant laws and regulations; 
4. Provide an annual report on incentives received and advancement made by virtue of the incentives; 
5. Notify the Coordinator of any change in structure, composition or objects within a period of one month from the date of such change; and 
6. Comply with the obligations set out by the Coordinator after issuance of the startup label.

Where a labelled startup defaults in any of the obligations, or fails to meet the eligibility criteria under the Act, the Coordinator shall notify the said startup of the default, and within 30 days of the notification, the startup shall take steps to rectify the default. 

It is important to know that under Section 17 of the Act, withdrawal of Startup Label where a labelled startup fails to regularize the default after being notified, the Secretariat shall withdraw the startup label and notify the relevant MDAs or investors that may have granted incentives to the startup. And by Section 18, Where a startup, whose startup label was withdrawn under Section 17 of this Act, rectifies the default, it may apply to the Secretariat far a re-issuance of the startup label.

Startup Investment Seed Fund

This remains one of the interesting initiatives of the Government in the instant Act. The establishment of a fund which shall be known as Startup Investment Seed Fund (“the Fund”) to be managed by the Nigeria Sovereign Investment Authority (”the Fund Manager”) pursuant to Section 19 of the Act seeks to ensure that startups are not starved of funds.

The Fund, as shall be provided for shall be applied to – 

1. Provide a labelled startup with finance; 
2. Provide early-stage finance for a labelled startup on the recommendation of the Fund Manager, subject to the approval of the Council; and
3. Provide relief to technology laboratories, accelerators, incubators and hubs.

The Startup Investment Seed Fund Manager shall, among other things do the following:

1. Create an innovation grant budget and management framework to support research and development projects, and
2. Issue a framework which shall set out modalities to fund, manage, and access the Fund.

Crowdfunding

By virtue of Section 35 of the Act, Startups may 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 startups on the Startup Portal.

It is a form of relief to startups. Again, with SEC beaming its searchlight on the process it confers some form of legitimacy on the process and builds confidence on the people. It is indeed, a step in the right direction for the growth and success of startups.

Listing of a Startup on Exchanges

The Council shall assist labelled startups that 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. The Council shall also encourage and support labelled startups that seek to list on the exchanges and may grant them incentives that aid their growth and development.

Repatriation of Capital and Profits

The Secretariat shall collaborate with the Central Bank of Nigeria (CBN) to guarantee repatriation of investment by a foreign investor through the CBN’s authorized dealer in freely convertible currency of – 

1. Dividends or profits, net of all taxes, attributable to the foreign investor’s investments; and
2. 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.

One of the challenges of foreign investors in Nigeria is repatriation of their funds as and when due. With this being taken care of, foreign investors will be keen to invest in startups in Nigeria, thus, making available enough funds for the stabilization of their businesses.

Establishment of Clusters, Hubs and Innovation Parks

The Council shall issue a framework for the establishment and operation of startup innovation clusters, hubs, physical and virtual innovation parks in each state of the Federation. The role of the innovation clusters, hubs and parks shall include – 

1. connecting, fostering collaboration and generating businesses between a startup and a large company; 
2. collate expertise, ideas, and perspectives; 
3. provide a startup with access to resources and professional services; and 
4. promote collaboration and innovation between startups. 

Functions of Clusters, Hubs and Innovation Parks

Startup innovation clusters, hubs, physical and virtual innovation parks shall provide – 

1. dedicated team, help desk and contact to provide support to a startup; 
2. assistance for a startup to understand the regulatory framework and its applicability; 
3. assistance in registration, and application for authorisation;
4. assistance and facilitation for the expansion of a startup into foreign markets; 
5. works paces free or at a subsidised rate; and
6. all other functions incidental to the attainment of the functions provided in paragraphs (a)-(e) of this section,

Instead of this being a free for all, with the above in place startups are mentored into success. The adequate knowledge needed to stabilize and apply any fund available will be at their beck and call. It is a worthy initiative. 

Tax Reliefs/ Incentives

Incentives are things that excite or incite one to take a particular decision. They are the interesting things that make whatever decision on a subject seem interesting and easy. Introducing these incentives make it easier for startups not to be challenged at the inception of its business. 

Pursuant to Section 24 of the Act, a labelled startup, which falls within industries captured under the extant Pioneer Status Incentives (PSI) Scheme may apply to the Nigerian Investment Promotion Commission (NIPC) for the grant of the tax reliefs and incentives under the PSI Scheme. 

Examples of Tax Reliefs/ Incentives

Some of the tax reliefs/incentives include:

→Exemption from the payment of income tax or any other tax chargeable on its income or revenue for period of four years, provided that the commencement date of the tax relief shall be the date of the issuance of the startup label. 

→A labelled startup with a minimum of ten employees, 60% of which are employees without any form of work experience, and within three years of graduating from school or any vocation within the assessment period, shall enjoy tax relief from income tax of 5% of its assessable profits in the year of assessment in which the profits were generated.

→A labelled startup shall be entitled to benefit from the tax relief referred to in subsection (1) of this section for a maximum period of five years. 

→A labeled startup involved in the exportation of products and services, which are deemed eligible under the Export (Incentives and Miscellaneous Provisions) Act, is entitled to export incentives and financial assistance from the Export Development Fund, Export Expansion grant and the Export Adjustment Scheme Fund. 

→Access to Government grants, loans and facilities: The Secretariat shall ensure that a labeled startup has 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 Secretariat shall establish a Credit Guarantee Scheme for the development and growth of a labeled startup under this Act. The Credit Guarantee shall have the following objectives:

1. The provision of accessible financial support to a labelled startup; 
2. Creation of a framework for credit guarantee for a labelled startup;
3. Provision of financial and credit information to startups; and
4. Provision of financial management capacity building programmes to startups.

→Incentives and reliefs for investors investing in a labelled startup: The Federal Government, through the Federal Ministry responsible for Finance and other MDAs, shall develop and implement a national policy for incentives for individuals, impact investors, angel investors, companies, venture capitalists, private equity funds, accelerators or Incubators which invest in a labelled startup or in the startup ecosystem to enjoy tax credits on their investment. 

→Notwithstanding the provisions of the Companies Income Tax Act, an angel investor, venture capitalist, private equity fund, accelerators or incubators which invests in a labelled startup shall be entitled to an investment tax credit equivalent to 30% of the investment in the labelled startup.

→Capital gains tax shall not be charged on gains that accrue from the disposal of assets by an angel investor, venture capitalist, private equity fund, accelerators or incubators with respect to a labelled startup. 

→Tax incentives for employees of a labelled Startup: 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 a labelled startup. The Secretariat and the Joint Tax Board shall determine the criteria for eligibility of the employee and consideration shall be given to – 

1. A minimum salary threshold; 
2. The level of technical skills and expertise; and 
3. Compliance with registration formalities as may be required by the Secretariat, from time to time. 

→Tax incentives for external service providers: Notwithstanding the provisions of any other law, foreign entities which provide technical, consulting, professional or management services to a labeled startup shall be subjected to a five percent withholding tax on income derived from the provision of such services, provided that the payment of the withholding tax, shall qualify as the final tax to be paid by a company not registered in Nigeria.

Conclusion

Startups, if properly managed open up a Country’s economy and diversify their sources of wealth. Instead of allowing the startups suffocate under unregulated environment, Government paying key attention to its affairs is deserving. The few highlighted provisions have clearly demonstrated that Government wants startups to succeed. It is for those who wish to take advantage of this great initiative to fire up, especially in ensuring that they comply with the specific provisions of the Act to entitle them these relief and incentives. 

Written by Gabriel C. Eze