Another Tech Cabal? A Briefer on Nigeria's New Startup Act.

Hello there! Been a while here.

A big welcome to our new subscribers. We are glad to have you here. Been away due to work and some personal constraints.

For now, I’ll be doing quick takes on some regulatory developments before we get back to our long reads. Stay with me.

Today, we are taking a quick look at the ‘relevant’ parts of Nigeria’s Startup Act (the ‘NSA’ or ‘Act’). You can download that here.

What the NSA says and What it Means.

Establishes the National Council for Digital Innovation and Entrepreneurship (looks good on the face of it - members are President, VP, CBN Governor, Minister of Finance, NITDA, and 4 reps from Startup Consultative Forum[private sector]). What do they do? I think the most relevant are - evaluating the regulatory framework to encourage the development of startups in Nigeria, supporting tech developments through grants (don't people already do this?), reviewing policies and directives of Ministries, Departments, and Agencies (MDAs) which may affect the operation, establishment, and investments in a startup...

Establishes a Secretariat of the Council to be supervised by NITDA. There are a lot of cryptic and lofty functions of this Secretariat. I wouldn't put much weight on them until we probably see the political will backing them. One of the interesting functions that stand out to me is the implementation of the National Digital Innovation and Entrepreneurship Policy - Copy of the Draft here.

Mandates the creation of a Startup Support and Engagement Portal - this looks like a potential state capture technique - "which shall serve as a platform through which a startup conducts registration process with relevant MDAs" - What does this mean? if it's what I imagine (startups not being able to deal independently with MDAs on their own, if they choose to, it's potentially bad policy in my estimation.). On the other hand, if it is a plug-and-play kind of platform, it makes a lot of sense as it reduces screen time for startups that have to engage with a lot of MDAs. Even better, if the definition of MDAs covers Federal and State entities.

Establishes the Startup Consultative Forum - made up of reps from labelled startups, venture capitalists, angel investors, incubators & accelerators, and civil society orgs. Think of them as a Mini-NIPC but for startups - most of what they will be doing is providing investor-friendly info about the Nigerian Startup Ecosystem generally, plus representing the interest of the startup community on new policies and regulatory developments.

Startup Labelling - this is a certificate introduced for eligible startups to be issued by the NITDA secretariat. Think of it as a Certificate of Incorporation issued by CAC, but for startups. Is getting this Startup Label compulsory? Or does it mean you won’t be a Startup if you don’t get it? No, I don't think so - which is a relief. However, to get some 'anticipated benefits' under the NSA, a startup must have the label certificate.

One thing that concerns me though is the Local Content requirement tied to being a Startup Label - to qualify for the label, a Startup must have 1/3 local shareholding. Any possible blowbacks from this? What are the typical corporate arrangements for foreign-funded Nigerian startups? More corporate governance headaches for startup boardrooms? We'll find out in due time. In the meantime, I think the fact that the Startup Label is strictly on an OPT-IN basis and not a MUST to operate in Nigeria, should allay some of the concerns I’ve seen from commentators online.

The Startup Label will be valid for 10 years. Generally, being a labelled startup means you are eligible for all incentives under the NSA. Also, you may have to reveal a lot to NITDA if you are a labelled startup - (disclosures include total assets, annual turnover, etc.)

Establishes the Startup Investment Seed Fund (SISF)- N10 billion annually (roughly $22mn). Problems at a glance: the source of the fund is hazy at best (to be determined by the Council), and lack of a political will from the Presidency means we should likely not expect much. Compared to other 3rd party funds managed by the NSIA (PIDF - $1.78bn, DMO - $100mn), the SISF is considerably low, but fingers crossed. BTW, it is good that the NSIA is the one statutorily responsible for managing it - those guys are very efficient.

There are other lofty aims under the NSA aimed at driving training, capacity building, and talent development for the Nigeria Startup Ecosystem.

Tax and Fiscal Incentives - for one, a highlight is that labelled startups operating in sectors covered by Pioneer Status Incentives will be eligible to receive their tax incentives from the NIPC, faster - whatever that means. There are possibilities of a 5-year income tax relief for startups as the NSA provides for arrangements to be had with the Ministry of Finance in this regard. Another possible tax relief is that expenses incurred on research and development done within Nigeria may now be allowed as allowable deductions. Another relief is the exemption from contributing to the Industrial Training Fund where such a Startup provides in-house training for its employees. (Please note that these incentives are available for a Startup with a Label.)

Another thing, there is a possible 30% investment tax credit for investors who put money into a labelled startup. Capital Gains Tax shall not be charged gains that accrue from the disposal of assets - such assets must have been held within Nigeria for a minimum of 24 months.

The NSA also permits the creation of Credit Guarantee Schemes for Startups. We talked about Credit Guarantee Schemes here. I think this may be good, at least for the purpose of opening the startup ecosystem to accessing working capital financing, but who knows?

Inter-Agency Collaboration - the NSA provides that the Secretariat may collaborate with the Corporate Affairs Commission Central Bank of Nigeria, the Securities and Exchange Commission, the National Office for Technology Acquisition and Promotion, the Nigerian Copyright Commission, and the Trademarks, Patent and Design Registries. On this, I honestly don't know what to expect... Nigerian agencies are historically known for not cooperating with each other, even worse when regulatory overlap is involved.

Also, a simpler form of crowdfunding startups is something we may see in the future? The NSA provides for the Secretariat to make recommendations to the SEC on how startups may use crowdfunding to access funding. For context, we talked about the SEC Crowdfunding Rules here.

General comment - Much of the inter-agency collaboration will be driven through the Startup Portal, so I expect that the NSA is aggressively laying the groundwork for a tech-based engagement with public agencies - which is great if implemented well.

There is other stuff in the Act about Accelerators, Incubators, Innovation Parks, Tech hubs, Technology Development Zone, bla bla bla.

What the NSA could mean for Startups and MSMEs in Nigeria.

• Finally, a listening ear at the table. I'd think of the Startup Consultative Forum as a collective lobbying body, which could represent the interests of startups and investors alike if it doesn't end up as a cabal sha.
• Maybe more efficient engagement with public agencies? But I honestly would not hold my breath on this.
• Great proposed tax cuts, but some of the provisions are hazy and FIRS can be funny when it comes to implementation.

On what it means for Investors.

• Again, great tax cuts, per the Capital Gains Tax provisions.
• While the NSA mandates the repatriation of profits in favour of foreign investors, I worry about the overall effectiveness of the provision when huge sectors like Aviation are still struggling with repatriating funds out of Nigeria.

Final Note: Largely, the NSA reaffirms some of the advantages generally available to businesses in Nigeria, while marginally providing some advantages to startups that get themselves a Startup Label. Expectedly, if implemented well, some cohesion in the way regulators and public stakeholders view startup and the disruption trend, should be seen, months from now? A lot of projections about the NSA's effectiveness rest on the amount of political will/weight the Executive (read President) is willing to throw behind it, so I guess the implementers of the Act will be watching the 2023 Presidential elections closely.

Still need more clarity on the NSA? Davidson Oturu and Oswald Osaretin spoke to Kalu Aja about the inspiration behind facilitating the creation of the Startup Act, and how they imagine it will be implemented here. I found it really insightful.

In the meantime, I'm anticipating the launch of the Startup Portal. I think it may look a lot like this Estonia one - https://startupestonia.ee/about

See you soon!

Disclosure: FWIW, the Nigerian Regulations Newsletter is kinda affiliated with some stakeholders who worked on drafting and facilitating NSA. Dunno if that info is relevant but I felt I should disclose it. ?? Also, that fact has in no way coloured NR’s view/critique of the new law.