Legal compliance is the process by which a company adheres to rules, laws, and policies that regulate business practices in a particular jurisdiction. It involves ensuring that a business fulfills all the necessary requirements and is in compliance at all times.[i]

A startup has been defined as companies whose main business is the production of digital or technological services. Under the Nigerian Startup Act, for any company to be labeled a startup, it must be a limited liability company not more than 10 years and has at least one-third of its shareholding owned by a Nigerian as a founder or co-founder with the objective of creating, innovating, producing, developing or adopting a unique digital technology innovative product, service or process. Additionally, it may be a holder or repository of a digital product or process or an author of registered software.

The Nigerian Startup Act was signed into law on October 19, 2022, by President Muhammadu Buhari to enhance the development and growth of the Startup sector. This was done in order to encourage innovation and entrepreneurship for startups. Under the Nigerian Startup Act, once a company or business meets the above definition, it will be issued a certificate as a labeled startup. The startup label will be valid for 10 (ten) years from the date of issuance.

LEGAL COMPLIANCE NECESSARY FOR A STARTUP

1. Corporate Affairs Commission: A start-up is required to be incorporated with the Corporates Affair Commission by virtue of the Companies and Allied Matter Act. There is a need to file annual returns within 18 months of the incorporation of the company in Nigeria[ii]

2. Taxes and Accounting: Filing of tax returns is mandatory for every business in Nigeria. Startups are required to file Companies Income Tax within 18 months of incorporation and subsequently on or before June 30 of every other year and remit VAT monthly to FIRS on or before the 21^st day of every month.

3. Data Protection: The National Information Technology Development Agency (NITDA) mandates startups that process data of up to 1,000 data subjects within 6 months to file those data not later than the 15^th day of March of every year

4. Employment matters: Startups are required to contribute 1% of their employee monthly payroll to Nigeria Social Trust Fund within 2 years of commencement of its operations, and subsequently every year.

5. Compliance with relevant laws: The following laws are paramount to both financial and non-financial companies to wit; Anti-money laundering compliance (AML), Federal Competition and Consumer Protection Act (FCCPA), and Know Your Customer (KYC). Some startups are required to have Special Control Unit Against Money Laundering (SCUML) Certificate from the Economic and Financial Crimes Commission. Some licenses are required to operate in the fintech sector, such as digital crowdfunding intermediary licenses, digital banking licenses, and switching and processing license. The license to be obtained depends on the fintech service to be provided by the startup.[iii]

IMPORTANCE OF LEGAL COMPLIANCE FOR STARTUPS

A labeled startup enjoys some advantages under the Act, such as:

1. Regulatory Support:

 The Act aims to ease administrative and compliance processes for labeled startups, by designing separate sections for relevant regulators in the portal. The Startup portal now serves as a one-stop-shop shop that eases access to other regulators. Specifically, labeled startups will benefit from a designated section in the portal that eases licensing procedures and regulatory interfaces.[iv] A labeled startup has easy access and an expeditious application process with regulatory bodies such as Corporate Affairs Commission, Securities and Exchange Commission, and National Office for Technology Acquisition and Promotion (NOTAP).

2.  Training, Building, and Talent Development: Labelled Startups also have access to training and capacity-building programs designed and implemented by the Secretariat for startup entrepreneurs and their employees[v]. Startups would be entitled to full deduction of any expenses wholly incurred on research and development in Nigeria[vi]. In this regard, the Secretariat is obliged to support the activities of academic institutions focused on the development of startups in Nigeria by providing financial support for the establishment of research facilities. [vii]

3. Access to financing: The Act has put different structures in place to enhance labeled startups’ access to funds

• The Act establishes the Startup Seed Investment Fund to be managed by the Nigerian Sovereign Authority for a labeled startup. The purpose of the fund is to ameliorate the challenges faced by labeled startups with regard to access to funding to facilitate the growth of the tech ecosystem. A sum of not less than N10,000,000 (ten billion nairas) is to be paid annually from sources approved by the Council for labeled startups.
• Access to Credit Guarantee Scheme.
• Grant and loan facilities administered by the Central Bank of Nigeria, Bank of Industry, or other statutory bodies empowered to assist SMEs and entrepreneurs[viii]
• Export incentives and financial assistance from the Export Development Fund, Export Expansion Grant, and the Export Adjustment Scheme Fund for startups involved in the exportation of products and services deemed eligible under the Export (Incentives and Miscellaneous Provisions) Act[ix]

4. Tax Relief

• Labeled startups will enjoy expeditious approval by the Nigerian Investment Promotion Commission of pioneer status. This status exempts companies from the payment of the company’s income tax for a period of 3-5 years.
• Eligibility for the exemption from payment of income tax or any other tax chargeable on its income or revenue for a period of up to 5 years under the Industrial Development (Income Tax Relief)
• The Act further provides that the Federal Government, through the Federal Ministry of Finance and other relevant regulatory agencies, shall offer additional fiscal incentives in the form of tax reliefs to Startups[x]

5. Investment Support

• The Act mandates the Ministry of Finance and other relevant MDAs to develop and implement a national policy for incentives for individuals, impact investors, private equity funds, accelerators, or incubators which invest in a labeled startup to enjoy tax credits on their investment.
• These individuals and investors are entitled to an investment tax credit equivalent to 30% of the investment in the labeled startups.
• Exclusion of the capital gain tax charge on gains accruing to angel investors impacts investors with respect to assets held in relation to labeled startups as long as the assets have been held in Nigeria for a minimum of 24 months.

CONSEQUENCES FOR NON-COMPLIANCE WITH REGULATORY REQUIREMENTS BY STARTUPS

The penalty for non-compliance with regulatory requirements is dependent on each regulatory agency. Generally, the penalty is majorly steep fines, license revocations, and limits. For example,

• startups that fail to file annual returns to Corporate Affairs Commission shall be required to pay an additional N3,000 or N5,000. Startups that fail to remit the statutory contribution to NSITF shall be required to pay a fine of at least 2% of the amount due to be remitted in addition to the amount to be paid.
•  Federal Inland Revenue Service (FIRS): Failure to file CIT to Federal Inland Revenue Services attracts a penalty of N25,000 for the first month and N5000 for the subsequent month. Failure to remit VAT attracts a payment of N5,000 for every month of default[xi]

CONCLUSION

It is important that a startup understand the regulatory terrain it wishes to operate in, take necessary measures to ensure compliance and engage the services of a lawyer to advise on the regulatory requirements of the license the startup requires to operate in Nigeria.

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[i] Contractbook, “ What is legal compliance?”, < https://contractbook.com/blog/what-is-legal-compliance>, accessed on March 16^th, 2023.

[ii] S.T Koleolu & Adedolapo Arisoyin, “Nigeria: Regulatory Compliance Checklist for Startups in Nigeria”, <https://www.mondaq.com/nigeria/contracts-and-commercial-law/1215110/regulatory-compliance-checklist-for-startups-in-nigeria?login=true&debug-domain=.mondaq.com&login=true&debug-domain=.mondaq.com>, accessed on March 16^th,2023

[iv] Olaniwun Ajayi, “ The Nigerian Startup Act 2022: Highlights of its framework and notes on its prospects”, <ttps://www.mondaq.com/pdf/1246288.pdf> accessed on 16^th March 2023

[v] Section 21 of the Nigerian Startup Act.

[vi] Section 25(3) of the Nigerian Startup Act

[vii] Olaniwun Ajayi, “ The Nigerian Startup Act 2022: Highlights of its framework and notes on its prospects”, <ttps://www.mondaq.com/pdf/1246288.pdf> accessed on 16^th March 2023

[viii] Section 28 of the Nigerian Startup Act

[ix] Section 25 of the Nigerian Startup Act

[x] Funmilayo Odude & Oluchi Duru, “The Nigerian Startup Act 2022: Highlight of key provisions, CANDEELP Publication, accessed on March 16^th, 2023

 

Written by Deborah Dada for The Trusted Advisors

Email us: info@trustedadvisorslaw.com

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