5 INCENTIVES AVAILABLE TO STARTUPS IN NIGERIA

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By Seun Timi-Koleolu and Oghenekaro Faith Isiorho

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Startups have the potential to play a major role in the growth of developing countries particularly because of their ability to: (i) improve the standard of living in countries through innovation; (ii) create wealth by attracting local and foreign investments; and (iii) reduce the rate of unemployment by creating new jobs.

Despite the potential to bring good to countries, the prevalent view amongst Startups in Nigeria is that the regulatory and business terrain provides many hurdles to their ability to the achievement of their fullest potential. These include high costs of doing business; multiple taxes and unpredictable regulatory oversight.

Notwithstanding the foregoing, there are incentives in existing regulations in Nigeria, which Startups can benefit from but might not utilize due to a lack of awareness of such incentives. We have tried to solve this problem by putting together in this article a list of incentives which can be enjoyed by Startups from various legislations.

The 5 Incentives are as follows:

  1. Exemption from Company Income Tax: Small businesses with an annual turnover of less than 25 million naira, are exempted from paying Companies Income Tax. A lower company income tax rate of 20% is also provided for companies whose yearly turnover is between 25 million to 100 million Startups may find this useful in their early stages. Click here to read on other impacts of the Finance Act 2019 on Startups and SMEs.
  2. Tax Holiday of Up to 5 Years: Startups who qualify for Pioneer Status in Nigeria can enjoy tax holidays for an initial period of 3 years from their first year of commencement, extendable for an additional 2-year period as established under the Nigerian Industrial Development (Income Tax Relief) Act. Startups in sectors such as e-commerce, waste management, electricity and agriculture may be eligible for pioneer status incentives. Click here to read more on industries eligible for Pioneer status in Nigeria.
  3. Reduced Tax Rate for Investors: There are various incentives provided in the Nigerian Venture Capital Incentives Act for investors and Startups engaged in venture projects. These include: (i) up to 30% capital allowances for eligible Startups on equity investments made by Venture Capitalist firms; and (ii) up to 100% exemption on capital gains tax on capital gains accruing to Venture Capital investors upon disposal of their equity interest.
  4. Opportunity for Startups in Government Projects: One way the Nigerian government has tried to encourage the growth of Startups is by requiring companies to engage Startups in projects involving the Federal Government or any of its agencies where the gross value of the project contract is 500 million naira or above. This requirement is provided in the Guidelines for Nigerian Content Development in Information and Technology 2019.
  5. Tax Exemption for Start-ups in the Agricultural Sector: Eligible small or medium-sized companies in the Agricultural sector with an annual gross turnover of 25 million to 100 million naira, may apply for tax exemption for 4 years and an additional 2 years. This incentive is created under the Finance Act, 2020 which amended the former provision under the Industrial Development (Income Tax Relief) Act. Click here to read more on the key highlights of the Finance Act, 2020.

Please note that this list is not exhaustive.

Conclusion  

As stated earlier, many Startups and investors are unaware of incentives available to them in Nigeria because of the absence of a comprehensive platform or document that highlights all applicable incentives and regulations. A search by Startups for such incentives (without the assistance of professionals) can be as tedious as searching for a needle in a haystack. It is, therefore, our recommendation that the Nigerian government collates relevant incentives and applicable regulations on a single platform for ease of reference by Startups.

 

 

 

REGULATORY UPDATE: THE REVISED REGULATORY FRAMEWORK FOR BANK VERIFICATION NUMBER (BVN) OPERATIONS IN NIGERIA

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By Aderonke Alex- Adedipe and Feyijuwa Akinyanmi

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Introduction

On February 14, 2014, the Central Bank of Nigeria (CBN) deployed a centralised BVN system.  The rationale for the creation of BVNs (an 11-digit code which uniquely identifies every customer across the Nigerian Banking industry through their biometric details) is to enhance the Know Your Customer (KYC) process in the banking industry to curb illegal and fraudulent transactions within the industry.

To channel the BVN system towards the prevention of fraudulent banking activities and prevent abuse of use, the CBN on October 18, 2017 issued the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2017 (“Previous Framework”).

On October 12, 2021, the CBN published the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2021 (“Framework”) which revises the Previous Framework. The Framework defines the operations of BVN as well as the establishment and operation of a watch-list for the Nigerian Banking Industry.

Today’s newsletter briefly highlights salient provisions on use, access and prohibited activities in relation to BVN of customers.

Who Can Access the BVN Database?

Similar to the Standard Operating Guidelines for BVN Matching System, 2021 (SOG), the Framework categorises persons who can access BVN information of customers into two- Tier 1 users and Tier 2 users.

Tier 1 users include banks (e.g. deposit money banks, payment service banks), Mobile Money Operators and Other Financial Institutions (“OFIs”) (e.g. Microfinance Banks and Finance Companies), while Tier 2 users include Payment Service Providers, Credit Bureaus and other entities approved by the CBN. While Tier 1 users do not require the approval of the CBN to gain access to the BVN of customers, Tier 2 users can only access the BVN of customers through the Nigeria Inter-Bank Settlement System (NIBSS). In addition, all institutions except banks require the consent of customers to gain access to their BVN.

Law enforcement agencies, The National Pension Commission, Pension Fund Administrators and other entities as may be approved by the CBN can only access BVN information upon the presentation of a valid Federal High Court order.

It is pertinent to note that foreign entities are not eligible to access the BVN database, while individuals are not eligible to access the BVN of other persons.

Are there any restrictions on use of BVN?

Although the Framework restricts the use of BVN to purposes specified by the CBN, the Framework does not explicitly mention any specific purpose. It, however, prohibits the use of BVN for the purpose of (i) sanctioning individuals for non-financial offences, (ii) identification of individuals outside the banking system and (iii)any other misuse, as may be designated by the CBN. The Framework prescribes several penalties for failure of participants to comply with the provisions of the Framework[1].

What is a Watch-List in the Nigerian Banking Industry?

The Framework also establishes a Watch-list for the banking industry to address the increasing incidence of fraud. The Watch-list is a record of the BVN of individuals who are involved in confirmed cases of breaches as listed in the Framework.

While some breaches such as the use of forged documents, forgery, duplicate enrolment, infractions on AML/CFT laws and the Cybercrimes (Prohibition, Prevention, etc) Act, 2015 are self-explanatory, breaches such as compromise, non-cooperation with efforts to reverse wrong credit, erroneous multiple or duplicate payments or credits, concealment of relevant information, dishonest acts, receipt of proceeds of deception, deception, complicity and connivance are rather ambiguous and vague.

In determining whether an individual is guilty of a breach, the institution is required to investigate the alleged breach within 1 month of the report of the breach and the individual will also be entitled to a fair hearing. During the process of the investigation, the customer’s account will be placed on “post-no-debit” and the customer is to be given 3 business days to present evidence in his favour.

 

Which Sanctions apply to Individuals whose BVN are on the Watch-List?

The Framework provides for a number of sanctions for persons whose BVNs are on the Watch-list by reason of the commission of a breach (Watch-listed Individuals). Some of the penalties include:

  1. The Watch-listed Individual is prohibited from entering into any new relationship with any Bank or OFI;
  2. Any bank or OFI can choose to discontinue a business relationship with the Watch-listed Individual;
  3. Banks or OFIs that do not discontinue their relationship with the Watch-listed Individual are required to prohibit the Watch-listed Individual from using all electronic banking channels such as ATMs, POS, internet banking, mobile banking, USSDs and from issuing third party cheques. Cash inflows will, however, be allowed into the account or wallet of the Watch-listed Individual; and
  4. The Watch-Listed Individual is prohibited from referencing accounts and from accessing or guaranteeing credit facilities.

It is also interesting to note that the Framework, unlike the Previous Framework now applies the sanctions to the bank and OFI accounts and wallets (except for Tier 1 accounts) of Watch-listed individuals as opposed to only banks under the Previous Framework.

Conclusion

The publication of the Framework is a step in the right direction in protecting the BVN information of individuals. In addition, while the Watch-List is a commendable effort by the CBN to penalize individuals perpetrating fraud in the banking industry, the offences and the mode of investigating and confirming that a breach has truly occurred leaves room for abuse of the Watch-List process.

We recommend that provisions be made for the establishment of an independent tribunal to investigate the occurrence of a breach and penalize erring individuals. Guidelines should also be set up to ensure that the investigation and penalization process are in accordance with the principles of fair hearing and natural justice.

[1] Paragraph 3.1.2. of the Regulatory Framework for Bank Verification Number (BVN) Operations and Watch-List for the Nigerian Banking Industry, 2021

REGULATORY UPDATE – REVISED RULES ON MERGERS, ACQUISITIONS AND TAKE-OVERS IN NIGERIA

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By Seun Timi-Koleolu and Eustace Aroh

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Prior to 2019, the Securities and Exchange Commission (“SEC”) was the primary body responsible for mergers, acquisitions and take-overs of public and private companies in Nigeria. With the enactment of the Federal Competition and Consumer Protection Commission (“FCCPC”) Act 2019, the provisions within the Investment and Securities Act 2007 on mergers were repealed and the FCCPC became the primary body responsible for regulating mergers. Notwithstanding, SEC maintained its rights to regulate mergers and acquisitions affecting public companies on the basis that it is the primary regulator of the capital market in Nigeria.

Consequently, SEC released an Amendment to the SEC Rules on Mergers, Take-Overs, and Acquisitions (“Amendment”) on August 30, 2021. In this article, we have highlighted some salient provisions of the Amendment.

 

What Transactions require the approval of SEC?

Although all companies are required to obtain an approval for mergers and acquisitions from the FCCPC, the Amendment mandates public companies to apply to SEC for approval in respect of the following transactions.

  1. Any amalgamation or merger involving a public company.
  2. The conversion of a public company to any other form of company or the reconstruction of the shares of a public company.
  3. Restructuring of a public company which includes “carve-outs”, “spin-offs” and “split-offs” as defined in the Amendment.
  4. Acquisition or disposal of assets that result in a significant change in the business direction or policy of the public company.
  5. Any of the foregoing transactions carried out by a subsidiary of a public company.

The power to prevent monopoly and restraint of competition, however, remains with  FCCPC.

 

Whose obligation is it to apply for the approval?

It is the obligation of the public company involved in the transaction to apply to SEC for approval notwithstanding the involvement of other types of companies in the transaction.

 

What are SEC criteria for granting approval?

In obtaining the approval of SEC, the applicant must prove that all the shareholders of the public company are treated fairly, equitably and are given sufficient information in connection with the transaction.

 

What transactions are exempt from the requirement to obtain SEC approval?

The following are exempt.

  1. Any acquisition by a public company of a business or asset which does not involve the issuance of shares of the public company as consideration for the acquisition. The company will, however, be required to provide pre and post-acquisition financial statements to its shareholder; and disclose any conflicting interest with respect to the transaction.
  2. Any divestment of the asset of a public company that is less than 15% of the total asset of the company or any divestment of assets that do not form a core part of the business. The company may, however, voluntarily notify SEC of any such divestment.

 

What is the process of obtaining the approval of SEC?

In addition to complying with the requirements under the Companies and Allied Matters Act 2020 and the provisions of the FCCPC Merger Review Guidelines, a public company is also required to make an application to SEC. Prior to the merger, the public company is required to make a preliminary application to SEC and obtain an approval in principle before arranging court-ordered meetings for the shareholders of the respective companies. The public company is expected to invite SEC to this meeting. Upon approval of the shareholders of the respective companies, a formal application is to be made to SEC.

 

Conclusion

The Amendment helps to provide a level of clarity on SEC requirements pertaining to mergers, acquisitions and take-overs involving public companies. Please note, however, that not all changes introduced by the Amendment were highlighted by SEC in the document as new introductions. Companies are, therefore, advised to seek professional support when engaging in such transactions.

PROTECTION AND ENFORCEMENT OF TRADEMARK RIGHTS IN NIGERIA

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Trademarks are unique marks or a combination of marks used to distinguish the goods or services offered by a business. Trademarks of successful businesses are often subject to infringement by competitors attempting to exploit their good will. It is therefore important for businesses to take necessary steps to protect their trademark and enforce them when the need arises.

In our previous article, we discussed the procedure for registration of trademarks, as it is the most important protection which the law provides to trademarks. Notwithstanding this protection, infringement may still occur. In such instances, an owner of a registered trademark may seek to enforce its rights. Today’s newsletter will briefly highlight what amounts to trademark infringement as well as procedures for enforcement.

Infringement of Trademark

Proprietors of registered trademarks have the exclusive right to use their trademarks in connection to the classes of goods and services under which they are registered and the right to claim infringement of their trademarks. Therefore, a person will be deemed to have infringed on a proprietor’s exclusive rights to its trademark where a person (who is not the proprietor of the mark or a registered user), uses a mark identical to the proprietor’s trademark or uses a mark so nearly resembling it as to be likely to deceive or cause confusion in the course of trade.

Proprietors of unregistered trademarks on the other hand cannot not claim infringement of their trademarks as they are not entitled to the exclusive use of their trademarks. As such the law only entitles them to institute a claim for passing off.

Ways of Enforcing Trademarks

1. File a Notice of Opposition– The proprietor of a trademark can file a notice of opposition at the Trademarks Registry, challenging the application for the registration of an infringing trademark. The Trademarks Act grants persons the right to file a notice of opposition to the registration of a mark when the mark is published in the Nigerian Trademark Journal. The purpose of publishing marks submitted for registration before they are finally registered is to give the public notice of the intention of the Trademarks Registry to register the mark. Persons who are of the opinion that the mark infringes on their trademark have the opportunity to file an opposition within 2 months from the date of the publication. The notice must be in writing and must contain the grounds for opposition. Upon filing of the opposition, the Trademarks Registrar (“Registrar”) will send a copy of the notice to the applicant who is entitled to respond to the notice. The Registrar will after hearing the parties and considering the evidence decide whether the registration will be permitted. The Registrar will after hearing the parties and considering the evidence decide whether the registration will be permitted.

2. Cease and Desist Notification– Proprietors can enforce their rights by sending a cease and desist letter to the infringing entity, containing a description of the trademark that is being infringed and a warning to the infringing party to cease and desist from performing further acts of infringements.

3. Formal Application for the Cancellation of a registered trademark– Where the infringing trademark has already been registered, the proprietor of the trademark may make a formal application to the Registrar of Trademarks or to the Federal High Court for the cancellation of the trademark. The application will be required to be supported by evidence of registration of the proprietor’s trademark which should precede the trademark it seeks to cancel.

4. Institution of a civil action for trademark infringement– A proprietor is entitled by the Trademarks Act to institute an action against the infringing entity for infringement of his trademark. Upon institution of an action, the burden of proof rests on the proprietor to prove infringement on his trademark. Remedies available to the proprietor under this action includes: damages; injunctive reliefs; an order of the court compelling the infringing party to give account and pay to the proprietor the profits from the infringement; delivery up or destruction of infringing goods or products, etc.

5. Formal Application to Relevant Government Agencies– Agencies such as the Corporate Affairs Commission and the Nigeria Internet Registration Association prohibit the registration of a name either as a company, partnership or a domain name which violates an existing registered trademark/domain name unless the consent of the owner has been obtained. The proprietor can therefore make a formal application to these agencies seeking the withdrawal or cancellation of the name on the basis of infringement.

Conclusion

The options highlighted above are not mutually exclusive and an aggrieved proprietor may decide to pursue one or more of the options listed above. It is recommended that the proprietor considers all possible avenues to enforce its trademark and prevent continued or further infringement before commencing legal action so as to save time and reduce the costs involved in litigation. Overall, it is important that all steps taken in relation to the enforcement of a trademark be taken immediately infringement occurs to prevent further damage to the business of the proprietor.

ESTABLISHING A DIGITAL BANK IN NIGERIA – LEGAL REQUIREMENTS

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By Seun Timi-Koleolu and Eustace Aroh 

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With the growing demand for faster and more convenient financial services, there are more people looking to solve this problem by setting up a digital bank. We have had startups ask us for advice on how to set up a digital bank in Nigeria.[1] In view of this, we have set out below the steps to be taken by a startup wishing to establish a digital bank.

  1. WHAT IS A DIGITAL BANK?

It is a technology-based company that provides banking and other financial services to its customers solely through digital/virtual platforms such as websites, mobile applications etc. Examples of these are Kuda, Vbank and ALAT by Wema in Nigeria; and Starling Bank in the United Kingdom. Digital Banks aim at providing faster and more convenient banking and financial services than the average traditional bank.

2. WHAT ARE THE LEGAL AND REGULATORY STEPS TO TAKE IN SETTING UP A DIGITAL BANK?

i. Licensing

Promoters seeking to establish a digital bank must first understand the regulatory landscape before proceeding to set up a company. The principal regulatory authority for all financial institutions in Nigeria is the Central Bank of Nigeria (CBN). As the CBN is yet to create a specific licensing regime for digital banks, companies intending to provide digital banking services must work with one of the available financial licenses including the following:

  • Microfinance Bank Licence: A microfinance bank (MFB) licence is the most commonly used licence for the purpose of digital banking in Nigeria. The MFB licence enables the holder to receive deposits and grant loans to its customers. It, however, prohibits its holder from purchasing or selling foreign currency or from remitting funds internationally. Also, 80% of the loans granted by MFBs must be below 500,000 naira. The capital requirement to obtain this licence ranges between 50 million to 5 billion naira depending on the category of the licence.
  • Payment Service Banks Licence:[2] A holder of a Payment Service Banks (PSBs) licence is permitted by the licence to accept deposits from its customer but cannot issue loans. The PSB licence can only be obtained by already established banking agents, licensed telecommunication companies and existing fintech companies etc. The capital requirement to obtain this licence is 5 billion naira.
  • Finance Company License:3 A holder of a finance companies licence is permitted by the licence to provide fund management and credit facilities such as loans, asset finance, project finance, debt factoring, debt securitization and other forms of credit facilities, to individuals and companies. They are, however, not permitted to receive deposits. The capital requirement to obtain this licence is 100 million naira.

ii. Incorporation and Documentation

Upon determining the right licence, the next step will be setting up the company at the Corporate Affairs Commission (CAC). In determining the share capital requirement for the company, it is important to take into account the CBN licensing capital requirement as set out above.

In addition to incorporating the company at the CAC, promoters must ensure that they have the right contract in place to protect their business and their interest in the business such as properly negotiated terms of investment in the digital bank.

iii. Protecting the Intellectual Property

The intellectual property of the business such as the logo, software and source codes are to be properly protected at the appropriate registry such as the National Copyright Commission or the Trademarks, Patents And Designs Registry.

iv. Corporate Governance

It is important that companies set up to provide digital banking services adopt good corporate governance practices in their operations such as ensuring the board is properly constituted with at least an independent director, setting up the required board committees etc. Companies with good corporate governance are attractive to investors.

For clarity in respect of the foregoing, please send an email to info@pavestoneslegal.com

 

  1. To read our article on Setting up a Fintech company, click here
  2. To read our article on Payment Service Banks, click here
  3. To read our article on establishing a Finance Company, click here