Startup, Funding, Nigeria startup Act.
By Femi Matthew.
If anyone bothered to run the numbers for startup successes in Nigeria, they would quickly discover that they’ve not been very successful. In fact, you could say they have been generally, very unsuccessful. It’s the same story all over the world, but the case of Nigeria is bad – strikingly bad. Yes, every so often, it is reported that a start-up have been able to raise ‘XXX’ amount of funding and thus went on to do great things. But, the number of these successful start-ups will pale when compared to their peers who fail. From the Startups whose ideas never experienced the enabling power of investor funding – to those who experienced funding and were yet crushed by the harsh socio-economic reality of being a startup in Nigeria – one thing remained constant: Startups in Nigeria needed help.
Following this need, the conversation on enacting a legislation that will address the unique challenges of start-ups in Nigeria, have long been in the works. The main argument for it has been that, not having a specific legislation for Startups was killing an area of the economy that could have a transformative impact on every life, if allowed to thrive. This Act is thus, a win for innovation and innovators; a win for development advocates and Change agents and a win for common sense. This article will consequently, carry out a review of the Act to highlight some of its eye-catching provisions to note the major changes to be expected with the implementation of the Act.
A. The Organizational Structure for the Implementation of the Act
1. The Council
So, the Act like most Acts starts out by setting up the organizational structure of its principal administrative body. This body is termed in short, “the Council”. But, in full, it is called National Council for Digital Innovation and Entrepreneurship. Section 1 – 8 of the Act handles the details of this organizational structure: Membership, tenure of office, powers and functions of the Council etc. Some of the more noteworthy provisions here are: The president serves as chairman of the council, the vice president serves as the vice chairman, and other ministers of the federation constituting the council serve as ex - officio members. The Council is also comprised of non-ex-officio members serving on it with a fixed tenure.
2. The Secretariat
The Secretariat is the operational bulwark of the Council. It is does the heavy lifting with respect to administering the Act. The National Information Technology Development Agency (NITDA) serves as the secretariat to the Council under this Act. Section 9(2) list out 18 functions of the Secretariat. From managing processes, policy implementation, to entering into partnerships, providing support, council advisory amongst other things – it is safe to say the Secretariat has its hands dipped in every pie. This will become even more apparent as the details of the Act is further discussed.
B. The Startup Portal and Label
One of the most crucial innovations of the Startup Act is the creation of a process for businesses to get labelled as Startups. A business getting labelled as a “Startup” by this process is an introduction into a world full of incentives for businesses under the Act. The first step to this process is the formation of a Startup portal.
1. The portal
The Act empowers the Secretariat with the approval of the Council to create a platform through which Startups can obtain a Startup label and also get registered with other government Ministries, Departments and Agencies (MDAs). This platform is called the “Startup support and engagement portal” – aka “The Startup Portal”. A Coordinator is also to be appointed by Secretariat to oversee the operations of the Startup portal or “the portal”, for short.
2. The Startup label
As have been previously mentioned, getting labelled as startup is potentially a game-changer for businesses. This article will go on to provide details on how the startup label can be obtained:
Only registered limited liability companies are eligible for the Startup label. In addition, the company must be less than 10 years since registration to apply. Now, not all companies less than 10 years since registration can apply to be labelled a startup, certain other criteria must be met: (a) the Companies business object must involve the development, production or commercialization of a digital technology product or process; (b) it has to have a registered software or hold the repository of a digital technology product.; and (c) One-third (1/3) of its total shareholding must be held by Nigerians as founders.
Where these criteria have been met, the company would be eligible for a startup label; provided the business is not a subsidiary or holding company of another entity that isn’t registered as a startup.
b. Startup label obligations
The labelling of a company as a startup comes with a myriad of benefits which are discussed below. However, there are obligations which a labelled startup must also satisfy. Section 16 lists six (6) of them. Summarily, some of the obligations are; it must obey extant laws, it must keep proper books of account, it must provide an annual report of incentives it received during a calendar year, it must comply with subsequent directives issued by the Startup portal coordinator after the license have been issued etc. If a startup defaults on these obligations, it can have its startup label withdrawn and potentially, all the benefits that comes with the label.
C. The Incentives
The following are some of the prominent incentives available for businesses labeled as Startup.
1. Start-up Seed Fund
The Act establishes a start-up seed fund for the provision of financing and early stage funding for Start-ups, amongst other things. This fund shall be replenished with a sum, not less than 10 billion naira on an annual basis. (Section 19)
2. Income Tax exemption under the Pioneer Status Scheme
The Act entitles a labelled startup to exemption from the payment of income tax or any other tax chargeable on its revenue or income for three (3) years. This would depend however, on if the business qualifies under the Pioneer Status Scheme (PIS). This tax relief is extendable by a further period of two (2) years, if the business is still within the timeframe for a labelled start up (not more than 10 years). (Section 25(2))
3. Access to Government grants and loans
The Act provides that labelled Startups are to be given access to loans and grants administered by CBN, Bank of Industry and other bodies empowered to give loans to SMEs. (Section 27)
4. Access to Export Incentives
A labelled startup in the business of exportation shall have access to export incentives and funding support from the export development fund, export expansion grant etc. (Section 26)
D. Other benefits of a labelled Startup
1. Intellectual Property Protection
The Act ensures that it creates a seamless process for the protection of the intellectual property for the holders of intellectual property rights. It also provides support in internationalizing and commercializing these rights. To accomplish this, the secretariat is to collaborate with the Nigerian Copyright Commission and the Nigerian Trademark Patents and Design registry to designate a separate portal on their platform to ensure ease of protection of these rights domestically and internationally.
Labelled Startups will be allowed to raise finance from SEC licensed crowdfunding platforms and commodities investment platforms. Not only are Startups permitted to raise funding in this way, also, the Council is directed to collaborate with the Securities and Exchange commission to fast-track the process.
3. Fintech License Acquisition
Companies with the Startup label are provided with a seamless process for Fintech license acquisition. This is done by a collaboration between the Council and the CBN and SEC to create a designated section in the startup portal for providing Fintech licenses.
4. Listing on NGX
The Council shall provide support to labelled Startups intending to list on the Nigerian exchange limited (NGX) with compliance with listing requirements in order to facilitate the process.
E. Accelerators and Incubators
Accelerators are fixed term, cohort-based programs that provide startups with mentorship and support to aid its growth. An incubator, on the other hand, is an organization existing as company, an NGO, a limited liability partnership established for the principal purpose of supporting the establishment and development of startups and innovation by offering dedicated physical spaces and activities.
The Act commits to providing new accelerator and incubator programs to startups, as well as providing incentives to organization already serving as existing accelerators and incubators to startups. One of these incentives for existing accelerators and incubators is the collaboration of the council with Nigerian Export processing Zone Authority (NEPZA) to grant Startups, Accelerators and Incubators operating under its zone licenses and the incentives that comes with carrying on an approved within a Zone.
Without doubt, the enactment of Startup specific legislation is the first of many important steps needed to transform the Nigerian startup ecosystem – a step in the right direction. It is imperative thereafter that the implementation of the provisions of the act is swift, purposeful and efficient.
Originally published by Femi Matthew on LinkedIn
Reach Femi Matthew on LinkedIn.