A REVIEW OF THE NIGERIA STARTUP ACT 2022
By Temituope Kekema
ABSTRACT
The advancement of digital technology is a contemporary trend of the 21st century. Digital technology entrepreneurship has become a popular line of business both domestically and globally. The Nigeria Startup Act (the Act) was invented to promote digital technology and innovation entrepreneurship in Nigeria. It was passed to provide a legal framework to promote startups and eliminate the clogs in the wheel of their development. This paper reviewed key provisions of the Act and highlighted its contribution to the advancement of Digital technology startups in Nigeria. The Act addressed several issues that directly affect the advancement of startups in Nigeria such as funding, intellectual property rights, regulatory impediment, taxation, talent development and so on. The Act is a timely invention by the government and will serve as a catalyst for the growth and development of digital technology entrepreneurship in Nigeria.
Keywords: Nigeria Startup Act, Labelled startups, digital technology, ecosystem.
Introduction
The Act received the assent of the President of the Federal Republic of Nigeria on the 19th of October 2022. It is a groundbreaking law which was enacted to establish a legal and institutional framework to foster the development of startups in Nigeria. It is a major effort on the part of the Nigerian government in promoting the advancement of digital technology in Nigeria. The Act was enacted to ensure that laws and regulation are clear, well planned and compatible with the tech ecosystem.
Digital technology as mention earlier is an evolving trend of the 21st century. Its use and development remains a contemporary issue in the global tech space. The Act is therefore a timely invention of the Nigerian government in other to ensure the advancement of tech startups in the country in order to enable it compete favorably in the global tech space. It will also promote indigenous participation in the development of digital technology in Nigeria.
Between the period of 2010-2018, Nigeria recorded a 61% startup failure rate which was liked to several factors including aggressive government policies, regulatory bottleneck, over-concentration of startups in certain locations like Lagos State, high cost of running businesses, lack of sufficient funding, talent scarcity amongst others. The Act was therefore invented to address these issues and encourage participation in the establishment and development of startups in Nigeria.
A Startup is defined under the Act as a company in existence for not more than ten years and has objectives which include the creation, innovation, production, development of adoption of a unique digital technology innovative product, service or process. Simply put, a Startup within the meaning of the Act refers to an infant company that into digital technology innovation entrepreneurship. A labelled Startup on the other hand is defined as a startup that has been labelled under the Act and has been issued a digital certificate by the Coordinator for the Startup Portal. A startup label under the Act refers to a certificate issued by the Secretariat to a startup upon the fulfillment of the labeling requirement under the Act.
1.2 Application of the Act
The Act applies to all companies incorporated under the Companies and Allied Matters Act who have obtained the startup label in accordance to the provisions of this Act. It further applies to organizations whose activities influence the establishment and development of labeled startups in Nigeria. The essence of regulating these organizations is to prevent a situation where they impede on the advancement of startup in Nigeria since failure to regulate them may defeat the aim of the Act.
1.3 Establishment of the National Council for Digital Innovation and Entrepreneurship
The Act establishes the National Council for Digital Innovation and Entrepreneurship (the Council) whose general function is to formulate general policy guidelines for the realization of the objectives of the Act. It is further empowered to harmonize, monitor and evaluate the legal and regulatory framework that affects startups in Nigeria. In other words, the Council is put in place to serve as a watchdog of laws, regulations and programs that relate to startups in Nigeria in order to ensure that they do not impede on their development. The Council is also requires to support the development of digital technology in Nigeria through grants to persons and institutions directly involved in the area of science, technology and innovation. This serves a great way of promoting indigenous participation in the development of digital technology from the grassroot. Beneficiaries of such grants however need to be monitored to ensure that the grants are effectively used for the purpose for which they are given.
1.4. Establishment of the National Information Technology Development Agency
The Act also establishes the National Information Technology Development Agency which is meant to serve as the Secretariat of the Council which is to be headed by the Director-General of the Agency. The Secretariat is in charge of the labeling process of Startups and is also responsible for creating online and alternative platforms to provide access to information relating to the establishment and development of a startup. It is further required to engage in other digital technology and innovation promotion activities, serve as an advisor to the Council on issues affecting startups, digital technology innovation entrepreneurship in Nigeria and other related matters as well as carrying out other duties delegated to it by the Council.
The Council is empowered to appoint a council agent for such period as it deems fit, to act on its directions for the effective monitoring and implementation of the provisions of the Act. This council agent is invented to assist the Council and serve as a delegate and watchdog to ensure due compliance with the provisions of the Act. To this effect, the Council agent is to submit quarterly and annual monitoring reports to the Council, on the status of programmes being implemented under the Act.
1.5 Protection of Intellectual Property Rights of Startups
The Act recognizes the need for the protection of intellectual property (IP) rights of startups in Nigeria in order to aid their growth and development and makes provision for it under Section 31. The Secretariat plays as key role in the protection of these rights. It is required to encourage startup to exploit these rights and assist them commercializing it at the international level. The Secretariat can do these by providing IP consultation for startups. It can also publish periodic IP-related articles to create awareness of the role and benefits of IP rights to startups in Nigeria.
The Secretariat is also required to collaborate with the core IP agencies in Nigeria which are the Nigerian Copyright Commission and the Trademarks, Patent and Design Registries to ease the process of registration of IP for labeled startups at the local and international level and to facilitate the speedy grant or revocation of patents as well as providing assistance to labeled startups in taking legal action to remedy infringement of IP rights. The essence of this provision to remove he bottlenecks that prevent labelled startups from fully harnessing the benefits of their IP rights.
Funding of Startups
The Act invents the Startup Investment Seed Fund (the Fund) to be managed by the Nigeria Sovereign Investment Authority. It is created to serve as a major source of funding to labelled startups generally. It is further meant to provide early stage financing for infant startups in order to provide a solid pedestal for their growth and development. A sum of not less than N10,000,000,000 (ten billion naira) is required to be paid into the Fund on an annual basis from sources approved by the Council. This annual inflow of cash will ensure that funds are regularly available to assist infant and financially distressed labelled startups in order to enhance their chances of survival.
The Act further requires the Secretariat to establish a Credit Guarantee Scheme (the Scheme) to provide financial support and to create a framework for credit guarantee for labelled startups. The Scheme is further required to provide financial and credit information to startups as well as financial management capacity building programmes. A Credit guarantee Scheme is an arrangement that provides third-party credit risk mitigation to lenders by taking up a portion of the lenders losses on loans granted to startups where they fail to meet up with their repayment obligations. It serves as a form of government intervention where a startup is unable to meet up with its debt obligation. The scheme provides a safe haven for startups in debt crisis and it invention is an applaudable effort of the Act to prevent a situation where many startups are swallowed by debt-related crisis thereby preserving their life-span.
Section 27 of the Act requires the Secretariat to ensure that a labelled startup has access to grants and credit facilities from the Central Bank of Nigeria, Bank of Industry or other institutions statutorily empowered to assist small and medium scale enterprises and entrepreneurs. This provides an alternative and cheaper source of funding than commercial banks since loans from government institutions are usually more flexible and have lower interest rates.
Labelled Startups are permitted to raise funds through crowdfunding intermediaries and commodities investment platforms duly licensed by the Securities and Exchange Commission (SEC) which will have the platforms available for the use of Startups on the Startup Portal. The Council is further required to collaborate with SEC in order to expedite the crowdfunding process for labelled startups.
Crowdfunding is one of the contemporary, quickest and easiest means of raising funds from the public for business activities. This provision of the Act is therefore a good initiative to expedite the funding of labelled startups so as to facilitate their growth and expansion. Crowdfunding however comes with its inherent risk since the investing public will lose their funds where labelled startups fail and this will reduce public confidence in the digital technology industry. Startups therefore need to be monitored by the Council to ensure that they have a good business plan and alternative strategies in place before embarking on raising funds from the public through crowdfunding platforms.
The Act makes ample provisions for the funding of labelled startups. Its provisions reflect its recognition of the fact that funding is one of the most crucial elements necessary for the survival and sustenance of startups in Nigeria.
Tax Incentives for Startups
In order to reduce the financial burden imposed on startups by taxation, the Act introduces tax incentives. Taxation though favorable to the Nigerian economy is a significant killer of small and medium enterprises which is why the Act found it imperative to grant certain tax incentives to labelled startups so as to enhance their chances of survival. For instance, a labelled startup is entitled to exemption from the payment of income tax for a period of three years and an additional period of two years making it five years if still within the period of a labelled startup provided that the commencement date of the task relief shall be the date of the issuance of the startup label. A labelled startup is further entitled to full deductions of any expenses on research and development which is wholly incurred in Nigeria it is also excluded from the restrictions placed by the Companies Income Tax Act. A labelled Startup is also exempted from contributions to the Industrial Training Fund where it provides in-house training for its employees during the period it is designated as a labelled startup.
Tax incentives are further granted to foreign companies which provide technical, consulting, professional or management services to a labelled startup. The main essence of the tax incentives to foreign companies is to promote foreign investment in labelled startups and digital technology in Nigeria generally. A labelled startup which falls under the extant Pioneer Status Incentives (PSI) Scheme may apply though the Secretariat to receive expeditious approval from the Nigerian Investment Promotion Commission for the grant of tax reliefs and incentives under the PSI Scheme.
Regulatory Intervention for Startups
The Act in a bid to mitigate regulatory bottlenecks introduced the Startup Support and Engagement Portal (the Startup Portal) to serve as a platform through which startups can conduct registration process and other transactions with government ministries, departments and agencies. It also serves as a platform to foster the exchange of information and other resources among various stakeholders in the Nigerian startup ecosystem and promotes access to finance, innovation and the global market.
The Secretariat is required to collaborate with the Corporate Affairs Commission (CAC) to create a separate section on the Startup Portal to make it easier for labelled startups to conduct transactions with the Commission. A labelled startup interested in participating in the CBN’s regulatory sandbox, SEC’s regulatory incubation programmes or any other regulatory sandbox programs set up by other regulators, are entitled to submit an application through a fast track process available through the Startup Portal. This provision is necessary to facilitate easier access to regulatory sandbox programs. The Council is further required to assist labelled startups who wish to be listed on the relevant board of the Nigerian Exchange Limited or on similar stock and commodity exchanges operating in Nigeria, to meet up with the eligibility criteria for listing.
The Startup Consultative Forum
The Act introduces the Startup Consultative Forum (The Forum) to be set up by the Secretariat with the approval of the council on the Startup Portal to provide a medium to facilitate information sharing and collaboration in the Nigerian Startup Ecosystem. The forum will comprise of industry stakeholders and representatives registered on the startup portal from labelled startups; venture capitalist; angel investors; incubators, accelerators and innovation hubs and two civil society organizations involved in the advancement of technology and innovation. The Forum further presents a recurring opportunity for stakeholders to liaise with the government in relations to the promotion of the startup ecosystem. This innovation of the Act reflects its recognition of the role of information sharing and collaboration among stakeholders in the industry in the advancement of digital technology and innovation in Nigeria.
Talent Development and Establishment of Hubs
The Act makes provisions for talent development in the digital technology and innovation space. The Secretariat is to create and implement training and capacity building programmes for startups and such trainings are to be facilitated by the Industrial Training Fund and any other organizations who wishes to partner with the Secretariat in training digital technology entrepreneurs and their employees. The Secretariat is further permitted to collaborate with National Universities Commission, National Board of Technical Education and other regulatory bodies for tertiary institutions in Nigeria to develop modules, programmes and hold workshops with the goal of educating students on the establishment and running on startups in Nigeria. The Secretariat is also required to collaborate with relevant Ministries, Department and Agencies as well as the private sector to establish digital technology parks and hubs in tertiary institutions.
Through this collaboration and training of students in tertiary institutions, awareness will be created on the importance of digital technology and innovation in Nigeria and its role in National development. It will also warm up the interest of students in digital technology entrepreneurship and participation in the development of the ecosystem. It will also provide students with foundational knowledge and guidance on the establishment and running of startups in Nigeria so as reduce the risk of failure of future startups in the country.
The Secretariat is further required to establish centers for the acquisition of digital technology in the six geopolitical zones of Nigeria to promote digital technology utilization and strengthening of management capabilities and information systems. The establishment of these centers across Nigeria will promote accessibility to digital technology related support for startups in the country.
The Council is empowered to create a framework for the establishment and operation of startup innovation clusters, hubs, physical and virtual innovation parks in each state of the Federation. The purposes of these innovation clusters, hubs and parks are to connect and foster collaboration and the generating of business between a startup and a large company; collate expertise, ideas and perspectives; provide startups with access to resources and professional services and promote collaboration and innovation between startups.
These collaborations creates a win-win package for both parties since it contributes to their respective development and expansion. The Act also invents virtual innovation park the essence of which is to enable digital technology entrepreneurs collaborate and enjoy the benefits of the innovation parks from the comfort their locations. The innovation clusters, hubs and parks are to provide a dedicated team, help desk and contact to render support and assistance to startups in the running of their business. They therefore complement the efforts of the centers for the acquisition of digital technology across the country in providing support and assistance to startups.
Accelerator and Incubator Programmes for Startups
The Secretariat is empowered under the Act to establish accelerator and incubator programmes for startups while the Council is empowered to develop a national accelerator and incubator policy for the establishment and development of accelerators and incubators. The purpose of these programmes is to assist startups in navigating problems that arise in the running of their businesses so as to ensure their survival and stability. The accelerators and incubators therefore serve as business development agents to ensure the survival of startups in the midst of economic, financial and other business related challenges.
The Secretariat is to develop standards and guidelines to regulate the relationship between accelerators, incubators and startups; encourage and collaborate with existing accelerator and incubator programmes put in place by private organizations and provide information on existing programmes on the Startup Portal.
2.2 Conclusion
The Act is a timely invention and a visible effort of the government to foster digital technology innovation entrepreneurship in Nigeria. It is well drafted and makes adequate provisions to address specific issues that affect the advancement of startups such as funding, regulatory impediments, taxation, intellectual property rights and so on. The tone of the Act is geared towards facilitating digital technology entrepreneurship in Nigeria. The Council and Secretariat however needs to be headed and administered by qualified and credible personnel to see to the effective implementation of the provisions of the Act in order to achieve its goals and objectives.