Introduction
In the past years, the Nigeria’s Startup ecosystem has experienced numerous challenges in the pursuit for conducive business environment, despite the country’s rich human and natural resources. The challenges ranges from lack of funding, poor electricity, challenging environment, inconsistency with the policies of the government and limitation to high speed of internet etc.
Based on report compiled by fDi (Foreign Direct Investment) Intelligence; a specialist division of the Financial Times, on its inaugural African Tech Ecosystem of the future rankings for 2021/2022, in collaboration with research company; Briter Bridges which aims to “map the continent’s nascent tech ecosystems and explore their potential moving forward’’, it was reported that South Africa out of the seventeen (17) countries that were selected for evaluation, ranked the overall first place for economic potential, Startup Status and Business Friendliness in the most competitive tech ecosystem. This as reported was reflected by the country’s relatively advanced start-up scene; South Africa is home to one of the most developed VC (Venture capital) networks such as “Naspers” (one of the world’s largest investors in tech companies) and the oldest start-up incubator on the continent, the Cape Innovation and Technology Initiative,” the report states. “The incubator is credited with supporting more than 3,000 entrepreneurs in its two-decade history. With ready access to VC funds, government grants, incubators and tech talent, South Africa is a vision of what other tech ecosystems could become.”
Furthermore, it was reported that following behind South Africa, Kenya took the second place, while Nigeria came up as the sixth place. Despite South Africa and Kenya’s tech prowess, Nigeria topped all locations for number of start-ups, with many of them operating within the fintech sector, taking advantage of the under-provision of banking services in the country. Although Lagos is renowned for its start-up ecosystem, there is a significant disconnect between the city’s tech ecosystem, its surroundings and the wider country, which suffers from chronically poor infrastructure and education, and recurring political instability and security issues. This challenging environment prevents Nigeria from excelling in any category of the fDi Tech Ecosystem of the future ranking.
This highlights the frustrating state of conducting business in Nigeria; countries such as Morocco and Tunisia were praised for enacting reforms that have supported startup growth. Morocco won out in connectivity for its plans to improve the country’s digital infrastructure. Tunisia’s 2018 startup act, which positioned science and technology at the heart of its goals for economic transformation, was praised for inspiring similar acts in other Africa countries.
In a bid to create a more stable regulatory environment as well as provide the resources needed for startups to thrive in the country, The Nigerian Government enacted the Nigerian Startup Act 2022, this Act is an aftermath of the collaboration between the Nigerian government and key stakeholders.
The Bill was first proposed in May 2021 and a first draft was produced in June 2021, barely a year after, in July 2022, the Bill was passed by the National Assembly.
The Nigerian Startup Act, 2022 sought to establish a legal and institutional framework for Tech Startups in Nigeria and also to position Nigeria’s startup ecosystem as the leading digital technology hub in Africa.
The Act is divided into Eleven (11) parts which comprises of 48 sections. The summary of the parts and the sections of the Act are briefly enumerated below
SUMMARY OF THE ACT
Establishment of the Council
The Act created a council known as the National Council for Digital Innovation and Entrepreneurship (The Council)with the President of the Federal Republic of Nigeria as the Chairman and other members constituting the representatives of the Federal Executive Arm of government and stakeholders, namely; Minister of communication and digital economy, Minister of finance and budget and national planning, The Director General of the National Information Technology Development Agency (as the secretary), The Governor of the Central Bank of Nigeriaetc. The Act also carved out the functions and powers of the Council which are all embodied in Part Two (section7). Some of the functions and powers of the Council include:
- To formulate and provide general policy guidelines for the realization of the Objectives of this Act.
- To give overall direction for the harmonization of laws and regulations that affects a startup.
- To approve the programs of the Secretariat established under this Act.
- To ensure the monitoring and evaluation of the regulatory framework to encourage the development of startups in Nigeria.
- To monitor and ensure the implementation of the policies and programs of the Secretariat.
- To support digital technological development through grants to persons, research institutions, and universities pursuing postgraduate programs in the areas of science, technology and innovation.
- To make, alter or revoke rules and regulations for carrying out the functions of the Secretariat, subject to the provisions of the Act.
- To appoint a council agent to carry out such functions as the Council may require; and carryout such other functions as are necessary or expedient to ensure the efficient performance of the functions of the Secretariat and other bodies established under the Act.
- To review policies and directives of Ministries, Departments and Agencies (MDAs), which may affect the operation, establishment and investments in a startup.
- To regulate its proceedings and make standing orders with respect to the holding of its meetings, notices to be given, the keeping of minutes of its proceedings and such other matters as the Council may, from time to time, determine.
Establishment of the secretariat
Part 3, Section 9 provides for the operational structure of the Council (The Secretariat). The National Information Technology Development Agency is tasked with the responsibility of acting as the Secretariat of the Council and the Director-General of the Ministry shall serve as the Head of the Secretariat. The Secretariat is tasked with the following duties, to wit;
- To manage the process of labelling a startup.
- To establish public online platforms and other platforms to provide access to information on matters pertaining to the establishment and development of a startup, incubation, acceleration and venture building programs, and access to fiscal and non-fiscal support
- To collaborate with relevant Ministries, Departments, Agencies and other relevant stakeholders to promote innovation in digital technology, and enterprise development for a startup in Nigeria.
- To ensure that the Secretariat’s National Digital Innovation, Entrepreneurship and Startup Policy (NDIESP) is implemented for the development of the startup ecosystem.
- To enter into partnerships with local and international business incubators, accelerators and digital innovation hubs to promote the establishment and growth of a startup in Nigeria, subject to the approval of the Council.
- To maintain a directory of startups, incubators, and accelerators.
- To support research and development activities relating to digital technology innovation undertaken by a startup.
- To support the growth and expansion of private sector-led incubator and accelerator programs.
- To support the growth and promote the commercialization of local research and development on digital Innovation by startups.
- To develop mechanisms for pre-incubation of entities and, provide training and capacity building programs for a startup.
- To develop, establish, support and incentivize digital technology innovation hubs, digital technology parks and community enterprise hubs in Nigeria.
- To develop, implement, and monitor guidelines for setting up digital technology innovation hubs, digital technology parks and community enterprise hubs in Nigeria.
- Tofoster synergy between startups and angel investors, venture capitalists, private equity frets, private investors, development finance Institutions, global asset management firms, financial institutions, research institutions and other related institutions at the national and international level.
- To enter into partnerships to promote startup development with angel investors, venture capitalist firms, private equity firms development financial institutions, and other relevant funding organizations.
- To review proposals, policies and programs addressed to the Council.
- To collaborate with the National Universities Commission to provide adequate facilities for research, and promote multi-disciplinary collaboration among universities, polytechnics, and research institutions.
- To advise the Council on issues affecting startups and digital technology innovation entrepreneurship in Nigeria, and matters connected with the implementation of this Act.
- To perform such other duties, as may be required by the Council.
The startup portal and the Forum
To facilitate the duties of the council, the Act provides for the creation of a Startup Support and Engagement Portal (Startup Portal). The purpose of the portal is to serve as a platform through which a startup conducts registration process withvarious relevant Ministries, Departments and Agencies (”MDAs”) and obtain information and relevant tools that will facilitate the rapid growth of the Startup.
The Act also provides for the establishment of a consultative body known as the startup consultative forum (the Forum) on the Startup Portal to provide a platform for information sharing and collaboration in the Nigerian startup ecosystem with regards to the relevant incentives that apply to startups, information on available local capabilities, information on a startup which qualifies to be labeled under this Act, nomination of ecosystem representatives to the Council, etc.
It is a significant observation to note that in a bid to ensure that the objective of the forum is achieved, the Act made provisions for the forum (consultive form) to comprise of industry stakeholders and representatives who are registered on the startup portal, this includes; venture capitalists, angel investors, labelled start up, incubators, accelerators etc.
Conditions to obtaining a startup label
It is pertinent to note that in accordance with the Act, not all companies or organizations are qualified as a startup. For the purpose of the Act, a startup can be defined 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. Additionally, for a startup to be considered, the Act clearly states that it must be an entity which has completed all necessary registrations and has obtained a certificate from the Secretariat known as Start-up label.
A startup label is a status given to companies that would benefit from the Nigerian startup Act and such companies are also issued a digital certificate by the Coordinator.
To be eligible for a startup label, the entity must submit an application on the startup portal in the prescribed form and attach the documents as prescribed by the secretariat and make the necessary payments. The Startup label is valid for a period of ten (10) years.
The requirements needed for an entity to be considered for a startup label are:
- Must be registered as a limited liability company under the Companies and Allied Matters Act 2020.
- Must have been in existence for not more than 10years from the dateof incorporation.
- Must have at least one Nigerian as co-founder.
- Its business objects must include Innovation, Development, Production, Improvement, and Commercialization of a digital technology innovative product or process.
Where the Coordinator is satisfied that an applicant has complied with the requirements for labelling under this Act, the Coordinator shall with the approval of the Secretariat enter the name and particulars of the applicant in the register of startups kept for that purpose and issue to the startup, a startup label. The certificate issued shall, be conclusive evidence that the startup has complied with all the requirements for labeling specified under this Act.
After the label has been issued to a startup, the startup must comply with all the extant laws governing business in Nigeria, provide information annually on the number of human resources, total assets, and the annual turnover achieved from the period of obtaining the label, maintain proper book of accounts, provide annual report on incentives received, etc.
It is worthy to mention that a default in any of the obligations or failure to meet the eligibility criteria for startup labeling under the Act requires that the coordinator notifies the said startup of such default and within 30 days of such default, the startup is expected to take steps to rectify. In the event that the startup does not rectify the default, the startup label would be withdrawn from the startup, and notification of this withdrawal would be sent to all relevant MDAs or investors that may have granted incentives to such labelled startup. However, if the startup rectifies the default after the withdrawal of its labeling, it can apply for re-issuance of the startup label.
It is also notable to state that the Nigerian startup Act does not apply to a holding or a subsidiary organisation of an existing company which are not registered as a startup.
Furthermore, A sole proprietorship or partnership organization can only be granted a pre-label status which is valid for a period of six (6) months pending the compliance with the requirements for grant of a startup label and such organizations which fail to comply with the setout provisions of the Act shall forfeitits pre-label status.
Establishment of a Startup Investment Seed Fund
The seed fund is to be managed by the Nigeria Sovereign Investment Authority (which shall be referred to as the “Fund Manager”)for the purpose of assisting labelled startups with the necessary relief funds, early-stage labelled startup with finance on the recommendation of the Fund Manager and of which the said recommendation is subject to the approval of the Council and also provide relief to technological machineries.
The Act provides for the sum of not less than ₦10,000,000,000.00 (Ten Billion Naira) to be paid annually from sources which are approved by the Council
Training, Capacity Building and Talent Development
The Secretariat is also tasked with designing and implementing a training and capacity building program for start-ups and shall make use of the startup portal to disseminate useful information. A startup may have access to the training facilitated by the Industrial Training Fund (ITF) and any organization, which partners with the Secretariat, for the training of entrepreneurs and their employees.
The Secretariat shall also liaise with the National Universities Commission, universities, and polytechnics within Nigeria to develop modules, programs and hold workshops aimed at impacting knowledge necessary for the establishment and running of a startup in Nigeria.
The Secretariat shall establish centers for the acquisition of digital technology in the six geopolitical zones of Nigeria for the promotion of digital technology utilization, strengthening of digital technology management capability and information systems.
The Secretariat is also tasked with supporting the activities of an academic research institution to the development of a startup by creating linkages between a research institution, the private sector, the Federal Government and other stakeholders in the startup ecosystem so as to foster the rapid development of the startups and other human resources.
The Secretariat shall also compile and maintain a national database of research and innovation, and promote the commercialization of the result of local research and the development through startup incubation.
Tax and Fiscal Incentives
Part 7 of the Act make provisions as to certain tax incentives labelled startups may be entitled to. For instance, Section 24 states that a labelled startup which fall within the industries captured under the extant Pioneer Status Incentives (PSI) Scheme, may upon application through the Secretariat receive expeditious approval from Nigerian Investment Promotion Commission (NIPC) for the grant of the tax reliefs and incentives under the PSI Scheme.
Also, Section 25(2) states that a labelled startup may be entitled to exemption from the payment of income tax or any other tax chargeable on its income or revenue for period of three years and an additional two years commencing from the date of the issuance of the startup label.
Section 25(3) also states that a Labelled startups shall enjoy a full deduction of any expenses on research and development which are wholly incurred in Nigeria and the restrictions placed by the Companies Income Tax Act shall not apply to them.
In addition, a labeled 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 labeled startup is entitled to benefit from this tax relief for a maximum period of five years.
The Act went further to make provisions for access to export facilities, access to government grants, loans and other facilities, access to credit guarantee scheme, incentives for investors willing to invest in a labelled startup, incentives for external service providers.
The Secretariat shall ensure that a labelled startup has access to grants and loan facilities administered by the CBN, the Bank of Industry or other bodies statutorily empowered to assist small and medium scale enterprises and entrepreneurs.
Support with regulators, protection of intellectual property and miscellaneous
The Act made provisions for the secretariat to provide support with regulators by collaborating with the Corporate Affairs Commission to ease the processes for labeled startups that conduct transactions with the commission.
It also provided for the protection and commercialization of Intellectual property rights. The Act provides that the secretariat will collaborate with the Nigerian Copyright Commission and the Trademarks, Patent and Design Registries to ensure the facilitation of the protection of the intellectual property rights of labeled startups.
The Secretariat is to collaborate with the CBN and SEC to facilitate licensing for financial technology companies (fintech startups). The Act also states that startups may raise funds through crowdfunding, intermediaries and investment platforms duly licenced by the SEC. The Council shall collaborate with the SEC to consider rules that fast-track crowdfunding processes for labelled startups.
The Act also provided for the transfer of foreign technology through collaboration between the secretariat and the National office for Technology Acquisition and Promotion (NOTAP).
In addition, provisions were also made for the creation of accelerators, incubators, clusters, hubs, innovation parks and technology development zones, among other provisions.
Conclusion and Recommendation
Without any contradiction, the Nigerian Startup Act in comparison to its counterpart from other African countries such as Kenya, and Senegal, appears to address the major challenges facing Startup companies in Africa and if properly harnessed and executed, will be a turning point for startups industry in Nigeria. There are a lot of provisions which seeks to benefit startups. This is the first of its kind, there have not been any statute before now which seems to promote the development of tech startups in Nigeria. The ripple effect of this Act if properly harnessed will be a boost in the economy of Nigeria.
However, one major problem that may hinder the implementation of this Act or reduce its accomplishment will be the proposed 2021 National industrial telecommunications Development Agency Bill which sought to repeal the NITDA Act 2007, and is aimed at creating a regulatory framework for the development of the Nigerian IT sector and digital economy.This bill contains some crucial amendments which is important to the advancement of the Nigeria’s technology economy sector and if passed into law it is uncertain how the bill will coexist with the Startup Act; as there could be what is termed regulatory overlap.
Furthermore, the concentration of too much of functions on the secretariat could raise an issue of implementation. Almost all of the practical functions of the Act are designated to the secretariat for implementation, meanwhile, the secretariat (The National Information Technology Development Agency) under the NITDA Act already have some functions it has been carrying out prior to the enactment of the Startup Act. Hence, the question; how would the secretariat merge these functions and ensure effective implementation? Is there any provision to employ more professionals? These questions and more have to be answered before we can conclude on the effectiveness of this robust legislation.
In Nigeria, one major problem has always been implementation of law, the National Assembly probably did not avert its mind to the bulk of work this legislation may create for the Secretariat given that it has other assigned functions. Hence, there is need for a review of the Startup Act in this light. In a way of suggestion, If the National Information Technology Development Agency (NITDA) is charged with acting as the secretariat, then room should be given for the creation of an independent body within the Agency to carry out such assigned functions as contained in the Startup Act, or more resources should be allocated to NITDA to enable the recruitment of more capable hands.
Nevertheless, we must commend the effort of the federal government in making this enactment a reality as it serves as a turning point for the startup industry in Nigeria.
Written by:
Etido Essien,
Chdiebere Nwachukwu,
Tosin Oyeleke
Edwin Eboigbe
