REGULATORY AND COMPLIANCE REQUIREMENTS FOR TECH START UPS IN NIGERIA.

With the advent of the 21st century, technology has taken over almost every aspect of human activities and more transactions have become digitised globally.

Today the world’s richest men, Jeff Bezos and Elon Musk amongst others have built their fortune from technology thereby paving the way for many fast-rising tech start-ups and Fintech companies in the world today. Nigeria is not left out of this fast-moving train as many tech start-ups are beginning to emerge and are transiting into unicorns, start-ups, such as Flutterwave, Paystack etc.

   What is a tech start up?

A tech start up is a company whose purpose is to bring technology products or services to the market. These companies deliver new technology products or services or deliver existing technology products or services in new ways.

As these companies continue to rise rapidly, it is important that attention is given to the laws regulating their creation and operation and that they comply with those regulations.

Below is a list of the regulatory framework guiding tech start-ups in Nigeria:

  • Companies and Allied Matters Act,2020

CAMA is the principal statute governing the registration of all kinds of businesses in Nigeria including tech start-ups. The type of business structure recommended for a tech company is a company limited by shares. The following are the requirements to register a tech company with the CAC:

  1. Two (2) options for the proposed company name.
  2. The objectives of the company.
  3. The address of the company.
  4. The share capital and shareholding formula among shareholders of the company.
  5. The particulars of a minimum of one (1) Director with valid means of identification such as identification card, national ID, drivers’ license, or international passport.
  6. Particulars of the shareholders of the company and their means of identification.
  7. The memorandum and Articles of association of the company.
  8. Evidence of payment of the prescribed application fees.

Upon incorporation of the tech company with the CAC, the company obtains a unique tax identification number (TIN) and also registers for Value Added Tax (VAT) with the Federal Inland Revenue Service (FIRS). The TIN is used for the payment of applicable taxes.

    Where there is foreign shareholding held by venture capitalists, angel investors etc. The tech start up should note that it ought to have a minimum share capital of 10 million naira (10 000 000). This means it will be classified as a large company for incorporation purposes. The official fees to be paid to Corporate Affairs Commission (CAC) will be dependent on the authorised share capital of the company.

  • National Information and Technology Development Agency (NITDA)

This agency is empowered by the NITDA Act to issue guidelines to cater for electronic governance and monitoring the use of electronic data exchange. Its major responsibility however includes regulation, monitoring, evaluation, and verification of the progress made in the technology sector under the supervision and coordination of the Ministry of Communications.

Its duties include but not limited to the following:

i. To operate and implement the National IT policy and to give effect to provisions of the National Information Technology Development Agency Act (NITDA Act) of 2007;

ii. To enter into strategic alliance with the private sector as well as international organizations for the actualization of the IT vision;

iii. To develop and regulate the Information Technology Sector in Nigeria;

iv. To ensure that Information Technology resources are readily available to promote Nigerian development; and

v. To empower Nigerians to participate in software and IT system development.

Flowing from the above, it is important to note that every technology company in Nigeria has to be registered with NITDA.

NITDA through the NITDA Act developed and issued the Nigeria Data Protection Regulation 2019. NITDA, however recently shared a proposed law with stakeholders titled the National Information and Technology Development Agency Act 2021 which if enacted will repeal and replace the Act. The Bill also seeks to establish a framework for mandatory licenses to be obtained by technology companies from NITDA.

 Under the NITDA Act there is a tax levied on ICT companies called the Information Technology Tax. This tax is payable by companies such as GSM providers, telecommunications companies, cyber companies, internet providers etc.

  • The Cybercrimes (Prohibition, Prevention etc.) Act

This Act 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. The fundamental purpose of the Act is to establish a framework for the prohibition, prevention, prosecution and punishment of cybercrimes in Nigeria.

  • Nigerian Investment Promotion Commission (NIPC)

Where a tech starts up intends for foreign investors to participate in the business by way of shareholding, offering facilities or the likes, it will need to register with the NIPC and obtain a Business Permit from the Ministry of Interior, after incorporation but before commencing business activities.

 However, the NIPC has since released new guidelines for the application for Pioneer Status Incentives in Nigeria to encourage and attract investments into the ICT sector of the economy. It is important for tech start-ups to know the benefits introduced and to take advantage of them. These benefits include:

Tax holiday: The company is allowed to not pay tax for three years in the first instance, with the possibility for extension by one or two additional years. This enables the company to re-invest its otherwise taxable profit into the business during its critical early years.

Tax losses: Tax losses incurred during the tax holiday can be set off against taxable profits earned after the tax holiday.

Although the introduction of the Pioneer Status is a commendable initiative, the requirements to obtain a pioneer status are very demanding for tech start-ups. For example, a company wishing to obtain pioneer status is expected to show evidence of incurring capital expenditure i.e., money spent to acquire or maintain fixed assets such as land, equipment etc. In the sum of 10 million naira. This current rate is simply too high for start-ups who may find it difficult to access working capital for their business. Perhaps it could be reviewed so as to enable the tech start-ups to enjoy the incentives.

  • Federal Inland Revenue Service (FIRS)

Every tech start up is to register with the FIRS for Companies Income Tax and Value Added Tax within 6 months of incorporation after which a Tax Identification Number (TIN) will be issued. Failure to do this will make the company unable to withhold tax from its foreign partners, investors and clients. The company will also not be able to file tax returns and obtain Tax Clearance Certificate. The tech start up may then be eligible to pay the Information Technology Tax which is imposed on companies in the Information and Communication Technology Sector. The tax payable is 1% of the total profits before tax but is payable only by companies with a turnover of N100 000 000 (One Hundred Million Naira) and above.

  • National Office for Technology Acquisition and Promotion (NOTAP)

NOTAP is tasked with the responsibility of ensuring that all contracts and agreements entered into for the transfer of foreign technology, use of intellectual property rights or for the provision of managerial or supervisory assistance etc. Are registered and in line with acceptable purposes provided for in the National Office for Technology Acquisition and Promotion Act. The company will be required to register the relevant agreement with NOTAP Act Section 4(d)(i-vi) which has the discretion to accept or reject such contract according to its provisions.

In granting the certificate of registration the Director of NOTAP is guided by the provisions of Section6(2) of the Act which sets out the specifications that should not be contravened by an applicant before a certificate can be issued.

Requirements for the registration of a tech company with NOTAP are as follows;

  • A copy of the duly completed application form.
  • Certificate of Incorporation with the Corporate Affairs Commission.
  • Memorandum and Article of Association of the company.
  • A duly completed TAA Pre-Qualification Form.
  • Tax Payer Identification Number (TIN).
  • A draft copy of the Technology Transfer Agreement to be registered.
  • A copy of the duly completed NOTAP questionnaires for different sectors.
  • A duly completed copy of the Monitoring Form.
  • A copy of the feasibility study report of the company.
  • Annual audited accounts for the preceding three years.
  • Evidence of tax payment for the preceding three years.
  • Profile of the technical partner.
  • Performance bond for advanced payment.
  • A comprehensive training program, which must include staff, skills or knowledge to be acquired.
  • Approval or licenses obtained from the relevant authorities and bodies such as the Nigerian Communication Commission (NCC) for agreements on communication etc.

Failure to register a contract or agreement for technology transfers or fails to make or makes false returns in violation of the NOTAP Act, every director, manager, secretary will be severally guilty of an offence except he or she can prove that the act or omission constituting the offence took place without his knowledge. NOTAP Act specifies the types of agreements that must be registered with NOTAP. These include:

  • Use of trademarks.
  • The right to use patented inventions.
  • Supply of technical expertise
  • Engineering and machinery
  • Central Bank of Nigeria (CBN)

Financial technology (FinTech) providers have become part of the financial services sector creating a wide range of products and services which have made money management easier and faster. Today, Nigeria hosts over 250 FinTech companies including Paystack, Piggyvest, Flutterwave etc. The CBN is the primary regulator of the Financial Services Sector in Nigeria and has made regulations that impact FinTech. The regulations include:

  • Guidelines on Mobile Money Services in Nigeria.
  • Guidelines on International Money Transfer Services in Nigeria.
  • Guidelines on International Mobile Money Remittance Services in Nigeria.
  • Regulatory framework for the use of Unstructured Supplementary Service Data (USSD) for Financial Services in Nigeria.
  • Guidelines on Operations of Electronic Payment Channels in Nigeria.
  • Guidelines for Licensing and Regulation of Payment Service Banks.
  • Regulatory framework for Sandbox Operations.
  • Intellectual Property Law

Since technology start-ups are focused on innovations and inventions and transformation of ideas. It is also characterised by the use of distinct name, logo, slogan, domain name, shape, colour or sound all of which can be registered in the Commercial law department of the Ministry of Trade and Investment in Nigeria. Given this uniqueness it is critical that their outputs and marks are legally protected by registering their trademarks, patents and or designs. Registration of these rights is achieved in three extensive stages.

  • Availability search in order to determine whether there are existing rights similar to that being proposed by the start up.
  • An application for the registration of the ideas or marks at which stage, a letter of acceptance is issued to the start up to serve as an approval in principle.
  • The last stage involves the application for Certificate of Registration to enable the start-up becomes the original author/owner of the invention.
  • Registration of intellectual rights provides legal protection against thefts and other infringements, in addition to other remedies available to the owner of the rights, an action may be commenced at the Federal High Court for damages and an injunction restraining the person from continuing the infringement.
  • Nigerian Communications Commission

A tech company willing to carry out any services relating to telecommunication or value-added services (VAS) is mandated to obtain a license from the NCC.

  • National Insurance Commission of Nigeria (NAICOM)

The National Insurance Commission is in charge of guaranteeing the efficient administration, monitoring, regulation and control of the insurance industry in Nigeria, as well as the protection of insurance policyholders, beneficiaries, and third-party beneficiaries of insurance contracts.

For any company to operate as an Insurtech company in Nigeria, such a company is required to be registered with NAICOM, and obtain relevant licenses and permits.

The National Insurance Commission of Nigeria (NAICOM) has recently teamed with FSD Africa to create the BimaLab Insurtech initiative in Nigeria, which will allow for the implementation of ideas for improving insurance in the country. BimaLab Nigeria aims to close insurance market gaps by educating, nurturing, and promoting innovators and Insurtech start-ups.

The program invites promising Insurance innovators to apply for a chance to contribute to the insurance industry’s growth, by bringing creative ideas to the table.

Applicants must fundamentally define and illustrate how their innovations answer to difficulties in the insurance sector, with a strong focus on the social effect, in order to be considered.

Conclusion

In conclusion, the pervasive nature of technology has made it a critical element in driving the 21st century economy. This has encouraged a vast number of technology experts and young entrepreneurs to participate in the start-up space hence the need to have appropriate legal vehicles to achieve their entrepreneurial dreams.

References

www.mondaq.com

A business owner’s legal guide to tech start-ups in NIGERIA. (2020, September 14). Legal services blog.

https://legalservices.ng/a-business-owners-legal-guide-to-tech-startups-in-nigeria

www.pavestoneslegal.com

www.techcabal.com

Scott, B.  (2019, July 29). Nigeria: Intellectual Property Protection for Software Rights in Nigeria. S.P.A. Ajibade& Co.

https://www.mondaq.com/nigeria/trademark/830390/intellectual-property-protection-for-software-rights-in-nigeria

www.proshareng.com

www.gentechnews.com

www.advocaatlaw.com

www.omaplex.com

WRITTEN BY EUNICE NDENATI JAURO.

Intern at Starlion Legal

FOR: Starlion Legal

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