Nigerian Tech Start-ups: The Meaning And Compliance Requirements -By Oyetola Muyiwa Atoyebi & Chikezie M. Iwu

INTRODUCTION

Since its enactment in 2022, the Nigerian Startup Act has served to establish a legal and institutional framework for the advancement of labelled startups in Nigeria, as well as to foster an environment that encourages the formation, growth, and operation of startups in Nigeria. More so, the Act seeks to foster the growth of tech-related skills and place the Nigerian startup ecosystem as the foremost digital technology hub in the African continent and with popular examples such as Rise Vest, Flutterwave, Cowrywise, Kuda Bank revolutionizing everyday activities, traditional non-tech based companies are beginning to leverage on technology for things like e-commerce, digital marketing, etc.

However, it is pertinent to note that prior to incorporation under the Corporate Affairs Commission (CAC), a start-up must consider issues such as corporate structure, funding, partnership agreements, shareholder agreements, and employment agreements. This is because the compliance requirements for each business structure differ and the structure chosen has an impact on its compliance requirements.

This article will explain the meaning of a tech startup, companies considered startups under the Act and highlighting some of the basic legal compliance that Tech Startups in Nigeria need to comply with.

WHAT IS A TECH STARTUP?

A tech startup is a business that develops new technologies or products to solve challenges in the market[1].

The main distinction between a tech startup and a non-tech startup, despite the similarities, is that a tech startup independently develops technological advancements while a non-tech startup does not.

STARTUP LABELLINGUNDER THE ACT

By section 2 of the Act, the Act is applicable to companies incorporated under the Companies and Allied Matters Act that are granted the startup label.[2]

A startup is eligible for labeling if:

1. It is registered as a limited liability company in Nigeria and has been in existence for a period not more than ten years from the date of incorporation;
2. Its objects are innovation, development, production, improvement, and commercialization of digital technology innovative products or processes;
3. It is a holder or repository of a product or process of digital technology or the owner or author of a registered software; and
4. The founder or co-founder of the startup is Nigerian and holds at least one-third of its shareholding.[3]

This label (certificate) is valid for ten years and will be prima facie evidence that the startup has complied with all the requirements for labelling and has been labelled according to the Act.[4]

BASIC LEGAL COMPLIANCE FOR TECH START-UPS

Formal compliance of companies with legal regulations is important to avoid defaults or penalties in the hands of authorities. This means Tech startups must check with their compliance advisors to confirm whether their businesses fall under a regulated industry that has a minimum share capital requirement before incorporation with the Corporate Affairs Commission (CAC),so as to be able to meet up with legal compliance expected of them.

Here are some compliance requirements under some legislations for Tech Startups in Nigeria:

1. COMPANIES AND ALLIED MATTERS ACT (CAMA) 2020:

The Corporate Affairs Commission (CAC) is a regulatory body, established to regulate the incorporation, running and winding up of companies, business names and incorporated trustees, in accordance with the provisions of CAMA, 2020.Companies are required to make and file annual returns[5] and audited financial statements[6] with the Corporate Affairs Commission. However, a newly registered company is not required to file annual returns in the year of its incorporation or the following year if it’s first annual general meeting (AGM) is held within 18 months of its incorporation and subsequently on a yearly basis. Failure to comply with this would leave the company open to penalties and the possibility of it being struck off the CAC database or register.

1. TAX REGULATIONS:

A start-up is required to register with the Federal Inland Revenue Service (FIRS) or the State Inland Revenue Service, as the case may be, for the remittance of its Companies Income Tax and Value Added Tax (VAT) within 6 months of incorporation. The company will also be issued a tax identification number (TIN) which is a unique identification for all registered taxpayers in Nigeria. This TIN must be inserted on all company invoices and used at the point of filing tax returns

Where the company fails to register with the FIRS or the State Tax Service for tax purposes, it will not be able to withhold tax from its foreign partners, investors and clients; it will not be able to file tax returns and obtain Tax Clearance Certificates (TCC) and; will be liable to pay penalty for its failure to register with the tax collection authorities and for non-compliance with filing requirements within the stipulated timeline[7].

Under the Startup Act, start-ups like tech startups are provided various tax incentives upon registration such as pioneer status, incentives for employees etc.[8]

1. DATA PROTECTION REGULATION; NIGERIA DATA PROTECTION REGULATION 2019 AND THE CYBERCRIMES (PROHIBITION, PREVENTION, ETC.) ACT:

A major tool of operation for all tech companies is data. It is the source that the company builds on in developing its customer database and facilitates its publicity, to name but a few.  A few regulations are prescribed below:

1. The National Information and Technology Agency Act empowers the National Information and Technology Agency (NITDA) to issue guidelines to cater to electronic governance and monitoring of the use of electronic data exchange. This necessitated the development of the Nigeria Data Protection Regulation 2019 issued by the NITDA.

2. The Cybercrimes (Prohibition, Prevention, etc.) Act also criminalizes data privacy breaches. It prescribes that anyone or service provider in possession of any person’s personal data shall take appropriate measures to safeguard such data. It imposes an obligation on tech companies, particularly mobile networks; computer and communications service providers, to store and retain subscriber information for a period of two years.

Tech companies need to stay abreast with the developments of the various agencies and regulations to remain in compliance and avoid their licenses being revoked.[9]

1. NATIONAL OFFICE FOR TECHNOLOGY ACQUISITION AND PROMOTION (NOTAP) ACT:

National Office for Technology Acquisition and Promotion (NOTAP) is tasked with the responsibility of ensuring that all contracts and agreements entered into for the transfer of foreign technology to Nigerians are registered and in line with the acceptable purposes provided for in the National Office for Technology Acquisition and Promotion Act.

Where the company fails to register an agreement for technology transfer or fails to make or makes false returns in contravention of the NOTAP Act, every director, manager, secretary, or other similar officers of the company, or person concerned in the management of the affairs of the company, or person purporting to act in such capacity will be severally guilty of an offence and liable to be prosecuted against personally, except it is proven that the act or omission constituting the offence took place without due knowledge.

1. NIPC Registration:

The Nigeria Investment Promotion Commission (NIPC) is a government agency established to encourage, promote and coordinate investments in Nigeria. In Nigeria, obtaining a certificate of registration from the (NIPC) is a requirement for every tech startup with foreign participation (foreign investors).

CONCLUSION

A violation of a compliance regulation could result in the revocation of the tech start-up’s license. A startup is required to pay close attention to the regulations and requirements of the sector in which they operate. Lastly, engaging a dedicated legal team to provide these constant updates, particularly those who are well-informed about the workings of the industry, is an important step to retaining and scaling the growth of a startup.

SNIPPET:

Tech startups must check with their compliance advisors to confirm whether their businesses fall under a regulated industry that has a minimum share capital requirement before incorporation with the Corporate Affairs Commission (CAC) so as to be able to meet up with legal compliance expected of them.

KEYWORDS:

tech startups, legal compliance, start-ups, digital marketing, start-up compliance.

AUTHOR: Oyetola Muyiwa Atoyebi, SAN

Mr Oyetola Muyiwa Atoyebi, SAN is the Managing Partner of O. M. Atoyebi, S.A.N & Partners (OMAPLEX Law Firm).

Mr. Atoyebi has expertise in and vast knowledge of Technology Law and this has seen him advise and represent his vast clientele in a myriad of high-level transactions.  He holds the honour of being the youngest lawyer in Nigeria’s history to be conferred with the rank of Senior Advocate of Nigeria.

He can be reached at atoyebi@omaplex.com.ng

CONTRIBUTOR: Chikezie M. Iwu

Chikezieis a member of the Dispute Resolution Team at OMAPLEX Law Firm. He also holds commendable legal expertise inTechnology Law.

He can be reached at chikezie.iwu@omaplex.com.ng

[1] Stixe: What Is a Tech Startup: The Dos, Don’ts, and Essential Tips to Launch Your Own!(2) What Is a Tech Startup: The Dos, Don’ts, and Essential Tips to Launch Your Own! | LinkedIn accessed on 26/07/2023

[2]Sec 2(a) Startup Act 2022

[3]Sec 13 (2) Startup Act 2022

[4] Sec 15 Startup Act 2022.

[5] Sec 417 CAMA 2020

[6] Sec 388 CAMA 2020

[7]Sec 80 (3) CITA Cap C21, LFN 2004 (as amended)

[8]Duale Ovia & Alex-Adedipe: Legal Compliance for Tech Start-ups in Nigeria

[9]Marcus-Okoko& Co: Nigeria: Compliance Requirements For Tech Start-Ups In Nigeria