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Entering Nigeria’s Venture Capital Market: Regulatory Clarity, Capital Thresholds, and Structuring Pathways for Investors

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By Aderonke Alex-Adedipe and Mark Imonitie

Introduction

Nigeria’s venture capital (VC) sector has evolved from an informal, relationship-based market into a structured ecosystem shaped by various laws and regulatory requirements including regulations provided by the Securities and Exchange Commission (SEC).

As local and international VCs provide capital to high-growth businesses, VC firms must adeptly navigate Nigeria’s dynamic regulatory landscape which governs capital raising, fund structuring, portfolio management, and exits.

In this newsletter, we examine some key aspects of the SEC regulations for VC firms in Nigeria, highlighting recent registration and compliance amendments essential to the operations of VC firms amid evolving capital requirements.

SEC’s Registration Requirements

The SEC registration threshold for full registration of VC funds was raised from ₦1 billion to ₦5 billion in April, 2025. Consequently, while VCs with a target fund size of ₦5 billion or less are exempt from full registration, they are required to file governing documents and obtain a “no objection” certificate from the SEC.

Additionally, the SEC’s 2025 Ease of Doing Business guide mandates smaller funds to provide a notarized compliance checklist duly executed by the boards of both the fund manager and sponsor, containing various details including, the investment policy and objectives of the funds, profile of the Fund Manager and its experience, material risks of investing in the fund, duration of the fund and provisions for extension of the fund.

By reducing the registration threshold, the SEC aims to reduce the regulatory burden on smaller funds.

For funds above the ₦5 billion threshold, the documentation requirements include the information memorandum, partnership agreements amongst many others.

Minimum Capital Updates

The SEC in its circular of January 16 2026, raised the minimum share capital for VC fund managers from twenty million naira (N20,000,000) to two hundred million naira (N200,000,000). Existing fund managers of VCs, are required to increase their share capital to meet the minimum requirement of N200,000,000 on or before June 30, 2027.

The primary goal of the increase in the capital requirement is to enhance market stability, protect investors, and align regulations with global standards by ensuring that only VC managers with sufficient capital to handle operational risks are licensed to operate, thereby deterring unqualified entrants.

Practical Compliance Touchpoints for VC Firms

In practice, VC firms in Nigeria need to navigate both fund‑level regulation and deal‑level compliance. Some practical touchpoints include:

  • Fund formation: VC firms are advised to critically select an appropriate vehicle (Limited Partnership, Limited Liability Partnership or company), and ensure that its agreements are robust and align with SEC rules on the operations of VC funds.
  • Licensing and filings: VC firms are required to determine whether the manager or adviser requires SEC registration, whether the fund must register or only submit documents for “no‑objection”.  They are also required to keep up with exposure drafts and guidance notes released by the SEC from time to time, in respect of their operations.
  • Investor protection and disclosures: VC firms are to ensure that they adhere to valuation policies, fee and expense disclosures, and conflict‑of‑interest management in their operations.
  • Exit planning: In exit planning, VC investors must carefully consider initial public offerings, secondary sales, or buybacks within Nigeria’s corporate, securities, and tax frameworks, alongside exchange control regulations applicable to foreign investors, to secure optimal returns on their investments.

Conclusion

The recent amendments to the SEC rules and regulatory framework for venture capital firms mark a coming‑of‑age moment for Nigeria’s VC ecosystem, signaling a more mature, transparent and investor‑friendly environment for capital formation. For VC firms, smart legal and regulatory planning is no longer just a compliance chore, it has become a strategic edge that builds trust and unlocks opportunities.

STARTUP FUNDRAISING – UNDERSTANDING THE ANTI-DILUTION PROVISION IN INVESTMENT AGREEMENTS

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By Seun Timi-Koleolu and Karo Isiorho

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In our previous article, we identified the various stages commonly adopted by Startups in raising funds. Each funding round would typically involve the issuance of shares by the Startup to investors for an injection of funds into the business. The implication of issuing fresh shares at every investment round is a possible dilution of the value of shares held by the founders and existing investors in the business.

In this article, we have set out below the mechanism that can be adopted to protect against excessive dilution.

How are shares granted to investors under Nigerian law? Under Nigerian law, shares can be granted to investors after a funding round through any of the following routes: (i) where shares have been fully allotted, either by a transfer of a portion of the shares currently held by shareholders to the investors; or by increasing the share capital and issuing fresh shares to the investors; (ii) where the share capital has not been fully allotted, by allotting the available portion to the investors; or by subdividing the share capital, increasing the number of shares in issue and decreasing the nominal value of the shares.

How does dilution occur? When shares are issued to new investors, the percentage of an existing investor or founder’s stake/shareholding in the Startup may decrease and in such an instance, a dilution of shares would be said to have occurred.

A practical example is as follows: Assuming an investor (“Investor A”) owns 100,000 shares in a Startup having 1,000,000 shares outstanding (i.e., shares held by existing shareholders) at $2 price per share, meaning Investor A has a $200,000 stake in the Startup valued at $2,000,000. He would therefore own 10% of the Startup. Where the Startup subsequently engages in a financing round and issues an additional 1,000,000 shares bringing the total outstanding shares to 2,000,000, at the same $2 value per share, Investor A would then hold a $200,000 stake in a $4,000,000 Startup and therefore his shareholding in the Startup would have been diluted to 5%.

Does Dilution reduce the value of shares held? A reduction in the percentage of shares held by an investor or founder in a Startup does not necessarily mean a reduction in the monetary value of the shares held by that investor. As a fresh injection of capital in the business may result in an increase in the valuation of the business and, therefore, an increase in the value of each share held in the business (e.g., 1 share previously worth $1 might be worth $5).

It is, however, possible for the business to be valued for less in new investment rounds so that new investors get more shares for less (“Down Round”), thereby diluting the value of shares held by existing investors.

How does dilution affect voting rights? An issue with dilution of shares is the effect it has on voting rights and controlling interests in the business (particularly for the founders). Under Nigerian company law, certain decisions require a special resolution, such as change of name, an alteration of the memorandum and articles of association, etc. must be by a special resolution passed by not less than 75% votes. Whilst decisions such as the removal of directors and appointment of auditors require at least 51% votes to be passed. Founders would typically want to maintain a sufficient number of shares in the business to enable them make key decisions for the business.

Are there provisions under Nigerian law to prevent involuntary dilution of shares? Under Nigerian company law, there are provisions that require founders to first offer their shares in the Startup to existing shareholders prior to offering such shares to new investors (this is, however subject to the Articles of Association and shareholders’ agreement). This ensures that the existing shareholders are made aware of subsequent funding rounds and can opt to invest in the business to protect their interests.

How can investors or founders contractually protect against dilution? Anti-dilution provisions are clauses included in an investment agreement or a financing document to protect founders and investors from the effect of dilution, particularly if shares are sold at a lower price during subsequent funding rounds. These provisions are capable of mitigating the effect of dilution on an existing investor or shareholder.

What are the types of Anti-dilution provisions?

There are various types of anti-dilution provisions typically included in investment agreements, some of which are discussed below.

A. Full Ratchet Provision

A full ratchet provision allows an existing investor to adjust the value of his shares purchased to the share price being offered to new investors at subsequent Down Rounds. Consequently, the existing investor may become entitled to additional shares and retain his ownership percentage in the Startup at no cost.

Using our example above, in the subsequent round of investment, let’s assume the shares being offered to new investors were offered at a lower price of $1 per share, (“Conversion Price”), where a full ratchet provision was included in Investor A’s investment agreement, his percentage holding in the Startup will not be diluted in the new round and rather than holding 100,000 shares, he would hold 200,000 shares in the Startup.

B. Weighted Average Provision

A weighted average provision allows an existing investor to adjust the value of his shares based on a formula stated in the agreement. A narrow based weighted average formula or a broad based weighted average formula may be adopted.  The broad based formula takes into account all shares previously issued by the Startup whilst the narrow based formula is limited to preferred or common shares issued.

When a weighted average formula is adopted, the existing investor would not be entitled to retain 100% of his ownership percentage in the Startup like the Full Ratchet provision above, rather the investor would be entitled to adjust his percentage holding in the Startup upwards to a percentage considered fair for both existing and new investors.

This anti-dilution provision is more common in practice because it is the compromise provision for all parties involved.

CONCLUSION:

Founders and investors should, however, be mindful of anti-dilution provisions as such provisions can give investors controlling rights in the Startup for a long period of time. Such long-term controlling rights may be a hurdle to future funding rounds and may also not align with the growth plan of the business. A way to mitigate the effect of an anti-dilution provision is by limiting its operation to a particular period or funding round. In addition, Startups should always ensure that they engage experts before signing investment agreements so as not to create future problems for the company.

 

[1] Dollar examples are only for explanatory purposes.

THE ROLE OF ADVISORY BOARDS IN STARTUP COMPANIES IN NIGERIA

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By Aderonke Alex-Adedipe and Feyijuwa Akinyanmi

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Introduction

Startups are young technology driven companies with innovative ideas and solutions capable of changing the status quo in their respective industries. Majority of Startups do not survive beyond their first five years of inception for a number of reasons; some of which include the lack of business acumen, managerial experience and technical expertise necessary to scale the company to the next level. A startup can, however, make up for these deficiencies by establishing an Advisory Board.

This article highlights the importance of Advisory Boards to Startups and the factors distinguishing them from the Board of Directors.

What is an Advisory Board?

An Advisory Board is an informal body of individuals set up by the management or board of directors of a company to provide business and strategic advice to the company. Advisory Boards usually consist of industry experts who can provide relevant assistance and advice to the Startup in areas where the company is lacking such as marketing and sales of products, investment options, technical experience and regulatory support, amongst others.

What is the difference between an Advisory Board and the Board of Directors of a Company?

Advisory boards are not a substitute for a company’s board of directors. The table below highlights the differences between an Advisory Board and the Board of Directors of a company.

  Advisory Board Board of Directors
Establishment There is no statutory requirement to have an advisory board. The number of members is at the sole discretion of the management and the Board of Directors of the company. The Companies and Allied Matters Act, 2020 (CAMA) mandates all companies to have a Board and to appoint at least 1 director.
Functions The board provides business and strategic advice to the management or the board of directors. The board directs the affairs of the Company.
Decision making It has no decision-making powers. The board is empowered by CAMA (and other relevant legislations) to make decisions on behalf of and for the company.
Qualification There is no statutory provision on the qualification of members of an advisory board. It is, however, recommended that they should be experts in the field in which the company requires guidance. Section 283 of CAMA, provides for persons who are disqualified from being appointed as directors eg persons who are less than 18 years old.
Statutory filings upon removal or appointment This is not required. Statutory filings are required to be made to the Corporate Affairs Commission and other relevant regulatory bodies.
Formal Meetings Formal meetings are not required. Members of the board may give advice to the management of the company through informal means such as telephone conversations, emails e.t.c. The Nigerian Code of Corporate Governance, 2018 requires companies to hold formal board meetings every quarter.
Fiduciary duty The members of the Advisory board do not have a fiduciary duty towards the company. The directors of the board members have a fiduciary duty towards the company.

What are the Benefits of Advisory Boards to Startups?

Members of the Advisory Board can assist Startups by bridging experience/ knowledge gaps in the management of Startups. They also provide fresh opinions and perspectives regarding the business of the company.

The appointment of well-known professionals and experts on the Advisory Board can increase the credibility of the company as clients, vendors, investors and other companies in the industry are more willing to partner with Startups who have experienced oversight.

Advisory Boards provide an informal and inexpensive avenue for Startups to gain insights from professional and experts without conferring control or decision-making powers on them.

Conclusion

While the establishment of an Advisory Board for a Startup is an important step towards ensuring its survival, Startups are advised to discuss with the members of the Advisory Board and agree on the workings of the advisory relationship. Such discussions should be documented and must contain provisions for remuneration (where necessary), the mode of providing advisory services as well as the protection of the company’s confidential information and intellectual property.

THE NIGERIAN STARTUP BILL

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By Seun Timi-Koleolu and Feyijuwa Akinyanmi

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Introduction

The recently introduced Nigerian Startup Bill (“Bill”) is one development that is expected to improve the business environment for Startups in Nigeria when passed into law. It is aimed at creating a favourable environment for Startups by: providing incentives; removing regulatory constraints; and developing an ecosystem for Startups to thrive. We have outlined below some of the salient provisions proposed by the Bill.

How are Startups defined in the Bill?

The Bill defines Startups as innovative companies that fall into the categories listed in the table below.

Areas Criteria
Nationality of the company The company should be incorporated in Nigeria and have been in existence for not more than 10 years. The headquarters of the company should also be in Nigeria.
Objects of the company Innovation, development, production, improvement or commercialization of an innovative product or process.
Shareholding of the company At least 51% of its shares should be held by Nigerians. Companies whose foreign participation exceed 49% will still qualify where the ultimate beneficial owners of its foreign corporate shareholders are Nigerian citizens.
Goods/ services provided by the company Involves a new technology or is technology-enabled.
Labour Less than 100 direct employees excluding causal workers, consultants and outsourced staff.
Expenses of the company At least 15% of its expenses should be attributed to research and development activities

The Bill requires companies that meet the above eligibility criteria to apply for registration with the One Stop Shop Centre (OSSC) to be eligible for the incentives contained in the Bill. The OSSC is made up of representatives of regulatory agencies relevant to Startups in Nigeria such as the: Corporate Affairs Commission (CAC); Central Bank of Nigeria (CBN); Securities and Exchange Commission (SEC); National Office for Technology Acquisition and Promotion (NOTAP); Trademark, Patents and Design Registry e.t.c. Eligible companies will be required to register with OSSC through the OSSC Portal, which will serve as a platform for interaction and information exchange between Startups and regulatory bodies.

What are the incentives and protections available to registered Startups under the Bill?
The Bill proposes the establishment of the National Council for Digital Innovation and Entrepreneurship (“Council”) which is responsible for collaborating with various regulatory bodies to ensure the provision of support services and incentives to the Startups. Some of the proposed incentives and support services are as stated below.

1. Provision of regulatory support by the OSSC– To reduce regulatory hurdles currently faced by Startups, relevant regulators including the CAC, Trademarks, Patent and Design Registry, CBN, NOTAP (“Regulators”) are to set up help desks at the OSSC with appropriate personnel; and to provide support to Startups through the OSSC Portal.

2. Provision of discounts to Startups- Regulators will be required to grant discounts on their licensing /registration fees to Startups. We expect that more details on the discounts will be included upon further review of the Bill.

3. Expedition of licence applications for Fintech Startups- The Bill requires the CBN and SEC to ensure that the license application process for Startups is expedited and seamless. The Bill, however, does not provide clarity as to how this will be achieved or how to measure the effectiveness of the regulators in this area.

4. Provision of tax incentives to Startups- The Bill proposes tax incentives such as:

a. tax exemption on the profits of Startups for 7 years;

b. taxation of goods and services supplied by Startups at a reduced Value Added Tax   rate of 3%;

c. provision of tax credit to Startups that create a minimum number of jobs (the   minimum number is to be determined by the Council);

5. Provision of tax incentives to employees of Startups and investors in Startups

6.Provision of funding to Startups- The Bill proposes the establishment of a   Startup Investment Seed Fund to provide funding to early-stage Startups who meet the criteria set by the Council.

7.Procurement of Technology-related goods and services by government parastatals- The Bill proposes that Ministries, Departments and Agencies of the Government set a 15% margin of preference in favour of Startups when procuring technology related products.

Conclusion

The introduction of the Bill is truly a step in the right direction in creating an enabling environment for Startups to thrive in Nigeria. It is, however, worthy of note that the test of the effectiveness of any law such as this majorly depends on the ability of the stakeholders to enforce it. We expect that as the Bill undergoes legislative review, it would be updated to include practical provisions and guidelines that would ensure the  implementation of the proposed incentives and support to Startups.

PLEASE NOTE THAT THE BILL IS YET TO BE PASSED INTO LAW AND MAY BE REVISED IN THE PROCESS.

Startup Funding: Raising Capital as a Startup in Nigeria

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Lack of financing is a major constraint which businesses experience at the startup phase. Seed capital is required for startups to fund their operations and scale, thereby returning profits to founders and investors.

A major indicator that a startup may thrive is the availability of capital. Where capital is low or inadequate, the business operations will be impacted and the startup will likely fail. Research conducted on small businesses in the U.S. indicates that 79% of businesses fail because they start out with too little money and are unable to fund their operations.

It is therefore essential that founders are familiar with the several ways in which capital may be raised and identify the funding path that is best suited for the startup. Below are several funding sources that founders should consider when seeking capital.

  1. Crowdfunding

The proliferation of technology has seen the emergence of digital solutions aimed at solving every day problems. An example of this is the growth of crowdfunding sites which enable founders raise funds from the public. Crowdfunding[i] entails pitching the business idea of a startup to willing investors via an online platform. Investors may receive equity in exchange or a percentage of interest over a period of time. Crowdfunding is particularly advantageous to founders because they can decide the terms of the investment and easily retain control of their company.

  1. Incubators and Accelerators

Incubators and accelerators nurture and prepare startups to scale. Incubators are focused on startups  at the conception stage while accelerators target startups that are viable and ready to scale. Startups who successfully pass through incubators or accelerators typically receive a seed investment at the end of their program from the incubators/accelerators or investors/mentors introduced to the startups in exchange for nominal equity.

  1. Business Loans

Although, not typical, startups may apply for loans from banks or microlending companies. These may however attract high interest rates. Startups therefore must consider their revenue flow and ability to repay loans obtained from banks and other lending institutions.

  1. Angel Investors and Venture Capital Funding

Angel or seed investors typically fund startups at the beginning of their lifecycle while venture capital firms usually provide funds to startups that are viable with a recognized customer base and established revenue stream. These funding sources provide much needed capital in exchange for equity in the startup. The terms of the funding and equity participation are contained in agreements such as Simple Agreement for Future Equity and convertible loan agreements.

  1. Bootstrapping

Bootstrapping means growing a startup without external funding. Startups would have to rely on funding from its founders to operate and rely on revenue from sales. Bootstrapping is perhaps the toughest method of funding startups as it means that growth might be stifled or delayed due to the absence of funds required to scale their operations. However, where founders subsequently decide to receive external funding, it portrays a sense of seriousness to investors that the startup depended on the sweat and faith of its founders to grow and generate revenue. With bootstrapping, founders are also assured of absolute creative and operational control of the startup.

Conclusion

Although there are several sources of funding which startups can take advantage of, startups must consider which funding source is most suitable by weighing the pros and cons of the funding options available to them.

 

[i] Equity-based crowdfunding in Nigeria is potentially regulated by the Securities and Exchange Commission (SEC). Please find our article on the crowdfunding rules proposed by SEC here https://pavestoneslegal.com/review-of-the-crowdfunding-rules-proposed-by-sec-nigeria/

You can also watch a brief analysis of the crowdfunding rules by our Partner, Aderonke Alex-Adedipe, here https://furtherafrica.com/2020/05/05/insights-funding-startups-in-nigeria-video/