Nigerian start-ups are attracting more and more investment. In 2020, start-ups raised about $120.6m, with $85.8m of that coming from foreign investors. Statistics also indicate that in the first quarter of 2021 alone, Nigerian tech start-ups raised $219m, which tripled the combined amount raised in the corresponding quarters for 2018, 2019, and 2020 respectively.
However, despite the encouraging statistics of start-up investment in Nigeria, many challenges still threaten the growth of start-ups in the country, making it difficult for them to scale.
The Nigeria Start-up Bill 2021 (“the Bill”) transmitted to the National Assembly in October 2021, is a joint initiative by Nigeria’s tech start-up ecosystem and the Federal Government to unlock the potential of the Nigerian digital economy.
The National Assembly passed the Bill on July 27, 2022. The Bill is now headed to the desk of the President, and it is expected to be assented to given that the bill is a joint initiative of the Federal Government and the private sector.
This article will discuss the notable provisions of the Bill and juxtapose them with the position in other jurisdictions.
*Notable provisions in the bill for start-ups
The notable provisions of the Bill are the following:
1. Establishment of the National Council for Digital Innovation and Entrepreneurship (The Council): The Council is established as a corporate body with the right to sue and be sued. It is headed by the President but also has a strong coalition of the Ministers of Communication, Finance, Industry and Trade and Science and Technology, the Governor of the Central Bank of Nigeria (CBN), representatives from the Start-up Consultative Forum, and the Nigeria Computer Society and finally the Director-General of the National Information Technology Development Agency (NITDA) (Secretariat of the Council). The functions of the Council are among others to formulate and provide general policy guidelines for achieving the development of start-ups and provide overall guidance on the harmonisation of laws and regulations that affect start-ups.
2. Establishment of the Start-up Support and Engagement Portal: The Portal is to be set up by the secretariat with the approval of the Council to provide start-ups with a one-stop window to apply for the relevant permits with the relevant Ministries, Departments, and Agencies (MDAs). The Portal primarily serves as intermediaries between start-ups and the Federal Government, private institutions, angel investors, venture capitalists, incubators, accelerators, and other relevant institutions. The Portal also facilitates the issuance of a permit or licence to labelled start-ups and provides start-ups with opportunities, information, and access to the global market.
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3. Start-up Labelling: To access the incentives under the Bill and the Portal, a start-up can apply to obtain the start-up label (the Label), a certificate issued by the secretariat to a start-up. To obtain this certificate, a start-up registered as a company (within 10 years of incorporation), sole proprietorship, or partnership, must fulfil the following conditions:
* the objects of the entity should be innovation, development, production, improvement, and commercialisation 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 registered software.
* it has at least 51 per cent of its shares held by one or more Nigerians
The label will not be granted to an organisation that is a holding company or subsidiary of an existing company that is not registered as a start-up. An application for the label shall be made on the start-up portal and approved by the secretariat.
4. Establishment of the Start-up Investment Seed Fund: The Bill sets up the Start-up Investment Seed Fund (the Fund) to be managed by the Nigeria Sovereign Investment Authority (the Fund Manager) which will be funded by sums from sources to be approved by the Council. The fund will be utilized to:
* provide a labelled start-up with finance.
* provide early-stage finance for a labelled start-up on the recommendation of the Fund Manager subject to the approval of the Council; and
* provide relief to technology laboratories, accelerators, incubators, and hubs.
5. Tax and Fiscal Incentives for the development of Start-ups: The Bill provides for various incentives to aid the growth and development of start-ups in Nigeria including:
* Pioneer Status Incentive Scheme
This incentive was created by the Industrial Development (Income Tax Relief) Act for critical industries. Start-ups may apply under the extant Pioneer Status Incentives (PSI) Scheme to the Nigerian Investment Promotion Commission (NIPC) for the grant of tax reliefs and incentives.
* Percentage-based tax relief for a labelled start-up
A labelled start-up (with a minimum of ten employees, 60 per cent of which are without any form of work experience and graduated within three years from school or any vocation) is entitled to relief from income tax of five per cent of its assessable profits for a maximum period of five years.
* Incentives and reliefs for investors investing in a labelled start-up
Investors in start-ups are entitled to a 30 per cent investment tax credit and relief from capital gains tax in respect of the disposal of an asset related to a start-up. The Federal Ministry for Finance and other MDAs are empowered to develop and implement a national policy for incentives for investors in a labelled start-up or the start-up ecosystem.
*Tax incentives for employees of a labelled start-up
An eligible employee of a labelled start-up (to be determined by NITDA and the Joint Tax Board) is entitled to a 35 per cent personal income tax exemption on income for two years from the date of engagement by a labelled start-up.
*The Nigerian Start-up Bill vis-à-vis other jurisdictions
The enactment of Start-up Laws is not novel or exclusive to Nigeria as Italy became the first country to enact a Start-up Act in 2012. The success of start-up laws in the economy of Countries is also widely acknowledged. For example, following the enactment of the Start-up Act in Tunisia in 2018, start-ups were given start-up labels. As of August 2020, 327 start-ups had received the start-up label making them eligible for the benefits given to start-ups. Statistics also show that $18.5M has been raised by the start-ups combined.
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The Nigerian Start-up Bill complies with the best standards compared to that of Senegal, Tunisia, Ethiopia, and Kenya, and addresses many of the issues faced by start-ups in one legislation. Also, compared to other laws, the Bill contains comprehensive provisions regarding tax reliefs, loans and credit facilities, investment funding from both the public and private sectors, and grant issuance.
The various Start-up laws in these countries also establish a regulatory and supervisory body to aid start-ups. In Nigeria, the National Information Technology Development Agency (NITDA) and the Council oversee the implementation of the Bill. The Bill however goes ahead of the other jurisdictions to create the Start-up Consultative Forum.
As a general observation, the enactment of start-up laws helps to ease the creation and development of start-ups. In 2018, Nigeria ranked 101 out of 137 countries on the Global Entrepreneurship Index (GEI) with a 19.7 GEI score, making the country 12th in Africa. Whereas, following the passage of the Start-up Act in Tunisia, Tunisia ranked first in 2018 and second in 2019 in Africa on the GEI
*Conclusion
Although, various legislations already exist that support the growth of start-ups in the country such as the Venture Capital Incentives Act (which provides tax exemptions for equity investments made by venture capital companies in a start-up in Nigeria), the Nigerian Start-up Bill is crucial due to the potential for start-ups to contribute to the economy.
The Bill resolves the regulatory, financial, and structural constraints that have plagued the Nigerian tech start-up ecosystems over the years. It is hoped that the bill will create an enabling environment that allows start-ups to thrive for the betterment of the Nigerian economy.
Omoruyi Edoigiawerie is the Founder and Lead Partner at Edoigiawerie & Company LP, a full-service law firm offering bespoke legal services with a focus on start-ups, established businesses, and upscale private clients in Nigeria. The article was first published in the Nigerian Bar Association Section on Business Law Newsletter. It is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances. His firm can be reached by email at hello@uyilaw.com
