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:
- It must be a registered company under the CAMA and has been so registered for a period less than 10 years;
- Its objects are innovation, development, production, improvement, and commercialization 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 startup;
- in the case of a sole proprietorship or partnership, it satisfies the conditions set out in paragraphs (b), (c) and (d).
- 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.
- 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?
- Fiscal Incentives
- There are quite a number of incentives available to labelled startups in the Act. These are listed below:
- 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;
- Full deduction of expenses on research and development for the purpose of determining the company's corporate tax liability;
- 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;
- 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;
- Access to export incentives and financial assistance from the export development fund, export expansion grant and export adjustment scheme fund;
- Access to loans administered by the Central Bank of Nigeria, Bank of Industry or other bodies that support small and medium scale enterprises;
- Investment tax credit equivalent to 30% of the investment in the startup. This shall be available to investors, venture capitalists etc.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
- 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.
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.