President Buhari signed the long-awaited Nigeria Startup Bill into law on October 19, 2022. The Nigerian Startup Act (the Act) intends to foster the growth of the startup business by lowering market obstacles relating to compliance and financing.
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Contents
Why was the Nigerian Startup Act required?
The progress in innovation, technology, and startup opportunities, in general, necessitated the Nigerian Startup Act. Nigeria, for example, has the most startups in Africa as of June 2022. Nigerian startups received more than 25% of startup market funding in Africa.
Despite these successes, the Nigerian startup sector has been plagued by an escalating failure rate of more than 60% of all general businesses. A number of factors have been linked to the startup industry’s high failure rates.
The most prominent of these are;
- An overly bureaucratic approach to complying with government regulations
- Unfavorable government policies
- Barriers to obtaining funding
- A hostile business environment
- An increase in the cost of doing business, and
- A concentration of startups in one region of the country.
The challenges that startups faced showed that government assistance was required to avert future losses. Relevant industry stakeholders persuaded the government to pass the Startup Act in order to prevent the frequent failures of startups.
In this post, we’ll look at the fundamental lessons from the Act and how they relate to businesses in general.
Key details in the Nigerian Startup Act
Here are some key things that you need to know:
Startup Definition under the Act
According to the Act, a “startup” is a business with the primary goal of developing, producing, innovating, adapting, and commercializing a distinct digital innovative product, service, or process. Such a business must have been in operation for 10 years or less.
The Act’s startup definition is remarkably inclusive. Stakeholders applauded the Act’s requirement that startups be 10 years old or younger. In most countries, the requirement for startup status is set at five years or less. Some nations have lowered the threshold to three years or less.
However, the Act was unable to clearly define what was meant by “digital innovative product, service, or process.” According to experts, this needs to be contextualized because it is ambiguously broad.
The establishment of the secretariat and the council
By the provisions of the Act, the National Council for Digital Innovation and Entrepreneurship (the National Council) was established. The National Council consists of the following:
- The President of the Federal Republic of Nigeria.
- The Vice President of the Federal Republic of Nigeria.
- The Minister for Communications and Digital Economy; and
- The Minister for Finance; and
- The Governor of the Central Bank of Nigeria.
The primary responsibility of the National Council is to formulate policies and directives for the general implementation of the Act and its objectives.
The National Information Technology Development Agency (NITDA) is recognized by the Act as the National Council’s secretariat. The NITDA manages the Act’s daily application as the National Council’s secretariat. The head of the NITDA secretariat is the organization’s director general.
Startup labeling and Startup support and engagement
The Act established the requirement that startups obtain labels before becoming eligible for startup status under the Act.
The Act provides that for a business to be labeled a “startup,” it must:
I. Be registered as a limited liability company under the Companies and Allied Matters Act 2020.
II. Have as its object the innovation, production, development, improvement, and commercialization of an innovative digital technology process or product.
III. It holds a digital technology product or process or is the original owner or author of digital software
IV. At least a quarter of its shares are owned by Nigerians as founders or co-founders
V. For partnerships and a sole proprietorship, the startup satisfies the requirements under II, III, and the Act further grants a 6-month pre-labeling consent to sole proprietors and partnerships, subject to their compliance with the requirements of II, III, and IV.
Businesses should proceed to the startup portal for registration after fulfilling the aforementioned eligibility requirements. Upon labeling, the business would receive the status of a startup. Upon labeling, a startup label certificate is issued to the company. This certificate is subject to various legislative compliance requirements by the startup and is valid for 10 years after labeling.
The Act also establishes a portal for startup support and engagement. Startups can interact with all governmental agencies, ministries, and departments for registration purposes through the Portal. This serves as a combined registration and compliance go-to place. The stress of having to coordinate with numerous agencies is avoided thanks to this innovation.
Funding, Crowd Funding, and tax incentives
These are possibly the most well-known innovations of the Act. In terms of financing, the Act offers several options for labeled startups. The Act recommends that loans from the Central Bank be used to access funding by labeled startups. It also establishes the startup investment seed fund. This is to be funded with at least ten billion naira from sources approved by the National Council. The National Sovereign Investment Authority oversees the seed fund for startup investments.
Also, startups can raise funds through the Securities and Exchange Commission-licensed crowdfunding platforms on the start-up portal.
Regarding tax incentives, the Act stipulates that start-ups dealing in items eligible for pioneer status incentives under the Industrial Development (Income Tax Relief) Act can have their applications for the incentives expedited by the National Investment Promotion Commission (NIPC).
Additionally, labeled start-ups are exempt from paying income tax and other chargeable taxes on income and revenue for three years. They have the option of an additional two years.
The Act also mandates that the federal government establish guidelines and rules that venture capitalists and angel investors would follow to invest in start-ups with a designated label. These guidelines and rules are to be developed by the Finance Ministry and other federal agencies.
The Act also exempts capital gains tax from being applied to investor profits obtained from asset disposals in a labeled start-up, so long as the asset was located in Nigeria for at least 24 months. Investors who invest in labeled start-ups are also eligible for tax incentives of up to 30% on their investments.
Intellectual property protection and the start-up consultative forum
With the National Council’s approval, the Secretariat must set up the start-up consultative forum. This is where start-ups can exchange knowledge about the availability of local content, incentives, and other topics.
Through several programs supported by the Industrial Training Fund, the Secretariat is also expected to increase the capacity of start-ups through training.
Concerning intellectual property rights, the Act protects start-ups’ intellectual property. The Secretariat is to work with the Nigerian Copyright Commission and the Registry of Trademarks, Patents, and Designs to further this goal.
The Act also mandates that the National Council create a framework for the establishment and operation of innovation hubs and clusters, with virtual and physical innovation parks, in each of the federation’s 36 states to support the ongoing growth of start-up innovation. These innovation parks are designed to offer start-ups a variety of services, including free or inexpensive workspace.
Conclusion
With promises to improve the overall practice in Nigeria’s tech-innovation space, there are general expectations key players expect to occur with the coming of the Act.
According to a Gross Domestic Product (GDP) report by Premium Times in September 2022, technology accounted for 18.44% of Nigeria’s contribution to the country’s GDP in the second quarter of 2022. The 18.44% tech contribution was larger than the general contribution of 7.34% from the petroleum sector; that quarter was the first in several years that a non-oil sector would be Nigeria’s largest revenue contributor.
This success and many more were the initial push that convinced the government to enact legislation to make the sector appealing for investments.