Introduction

The Startup Act aims to create an environment for startups to thrive whilst ensuring Nigeria leads the continent with respect to digital technology. In the final instalment of our four-part series, we will conclude by highlighting the various financing options available to startups under the Startup Act as well as the incentives for investors which may increase the availability of finance to labelled startups.

Establishment of the Startup Investment Seed Fund (the "Fund")

The Startup Investment Seed Fund is established under the Startup Act as a mode of making finance available to labelled startups. The Fund is expected to receive an annual payment of not less than N10,000,000 (ten billion naira) from sources approved by the National Council for Digital Innovation and Entrepreneurship (the "Council"), which will be managed by the Nigerian Sovereign Investment Authority. Labelled startups will have access to early-stage finance upon the recommendation of the fund manager and subject to the approval of the Council.

Access to Government Funds and the Credit Guarantee Scheme (the "CGS")

The Startup Act establishes the CGS with the primary objective of providing accessible financial support to labelled startups. Under the law, the Secretariat is required to ensure that labelled startups have access to grants and loan facilities administered by the Central Bank of Nigeria ("CBN") and other bodies empowered to assist MSMEs

Crowdfunding

Crowdfunding is one of the major ways in which startups are able to raise capital to operate and ultimately scale up and attain their full potential. The framework for crowdfunding in Nigeria is governed by the Securities and Exchange Commission ("SEC") Crowdfunding Rules 2021 ("The Rules") which outline the eligibility and requirements under which entities will be able to raise funds through a crowdfunding platform. The Rules outline that only MSME's incorporated as companies in Nigeria who meet the following criteria are eligible to raise funds under crowdfunding platforms:

  • operating for a minimum of 2 years; or
  • operating for less than 2 years but has a strong technical partner that has been operating for a minimum of 2 years or has a core investor.1

The Startup Act also permits labelled startups to raise funds through crowdfunding platforms and provides that SEC licensed commodities investment platforms would be available for use by startups on the Startup Portal. Additionally, the Council is empowered to make recommendations to the SEC that consideration be given to rules that fast-track crowdfunding processes for labelled startups.

Listing of a Startup on Exchanges: The Startup Act provides that the Council shall assist labelled startups that seek to list on the relevant board of the Nigerian Exchange Limited ("NGX"), or on silimilar stock and commodity exchanges operating in Nigeria, to meet up with the eligibility requirements for listing, The Council is expected to also encourage and support labelled startups that seek to list on the exchanges and may grant them incentives that aid their growth and development. Interestingly, the NGX recently issued rules for listing on the technology board of the NGX in a bid to encourage investments in indigenous technologically inclined companies, provide greater visibility to these companies and ultimately deepen the Nigerian capital market.

Investor Incentives

To encourage investment in the startup ecosystem, the Startup Act also provides certain incentives to individuals, impact investors, angel investors, companies, venture capitalists, private equity funds, accelerators, or incubators ("relevant stakeholders") that invest in labelled startups. Some of these incentives include:

  1. 30% Investment Tax Credit

    The Companies Income Tax Act ("CITA") mandates that companies pay income taxes at varying rates depending on their annual turnover. The Startup Act provides that the Federal Government in conjunction with the Ministry of Finance and other MDA's will implement a national incentives policy for the aforementioned stakeholders to enjoy tax credits on their investments.

    In line with this policy, relevant stakeholders which invest in labelled startups will be entitled to an investment tax credit worth 30% of the value of their investment, provided that such credit is applied to taxable gains on the investment.
  2. Capital Gains Tax

    Generally, the Capital Gains Tax Act 2004 (as amended) mandates that capital gains will be taxed at a rate of 10%. However, this not will be applicable to the relevant stakeholders listed under the Startup Act. Under the Startup Act, any gains accruing from assets disposed of by relevant stakeholders are not chargeable, provided that the assets have been held in Nigeria for a minimum of 24 months.
  3. Repatriation of Capital and Profits

    The Startup Act also includes incentives that may be applicable to relevant stakeholders that are based outside of Nigeria. It provides that the National Information Technology Development Agency ("NITDA") in its capacity as Secretariat2 , shall collaborate with the CBN to guarantee repatriation of funds with respect to:

    • Dividends or profits, net of all taxes attributable to the foreign investment; and
    • Proceeds obtained in the event of a sale or liquidation of the startup or any interest arising from the foreign investment, net of all taxes and other obligations


    Further, the Startup Act states that such repatriation of funds will be made at the CBN's official foreign exchange rate, provided that the foreign investor can provide a Certificate of Capital Importation ("CCI") in connection with the imported capital. The capital being invested may be in the form of cash or goods such as raw materials, machinery, and equipment. This is in accordance with the CBN Foreign Exchange Manual which provides that foreign investors who have obtained a CCI will be entitled to repatriation of funds with the added benefit of accessing foreign exchange at the CBN rate.
  4. Incentives for Accelerators and Incubators In addition to the above, the Startup Act provides exclusive incentives to accelerators and incubators that are registered with the Secretariat ("registered accelerators and incubators") and actively involved in the provision of goods, services, or finance vital to the operations and growth of startups in Nigeria. Registered accelerators and Incubators will also be entitled to:
    • grants and aids for research, development, training, and expansion; and
    • grants given under the Nigeria Digital Innovation, Entrepreneurship and Startup Policy.
  5. National Policy for Incentives: In addition to the above-highlighted incentives, the Startup Act also provides that the Federal Government shall develop and implement a national policy for incentives for relevant stakeholders who invest in a labelled startup or in the startup ecosystem to enjoy tax credits on their investment.

Conclusion

The financing initiatives such as the Fund, the CGS and the available tax and fiscal incentives are laudable objectives designed to encourage investors and drive investments in startup companies. While the Startup Act is silent on the sources for the Fund, it is hoped that this does not envisage any further levy or tax to be imposed by the Federal Government on startup businesses.

Generally, the public-private feature of the process of designing the Startup Act has yielded a legislation that represents the manifold ideas and demands of the Startup sector. It will be useful for the government to keep the inclusive spirit of the process alive through regular meetings with the startup ecosystem in order to get feedback from the community and position Nigeria as a leading country for startup investments.

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.