Setting Up a Venture Capital Company for Startup Investment in Nigeria

*Seun Timi-Koleolu and Olawale Atanda

Startups require funding for their operations and to scale. This is where venture capital companies (VCs) come in. VCs (as a subset of private equity) provide early or late stage financing to startups. VC funding is growing in Nigeria and has led to startups receiving increased financing year-on-year. Nigeria attracted $747 million in VC funding in 2019 with a majority of investments going to fintech companies. Although, a large number of these VCs are foreign, there is an increasing number of local VCs such as Ventures Platform, EchoVC, and Microtraction which invest in Nigerian startups. In this article, we list important points to consider when setting up a VC fund in Nigeria.

1. Company Structure

In Nigeria, VCs may be registered as a Limited Liability Partnership or a Limited Liability Company under the Companies and Allied Matters Act 2020. VCs may also register as limited partnerships under the Partnership Law of Lagos State.

2. Regulation

The Securities and Exchange Commission (SEC) mandates private equity funds (such as VCs) to register with the commission where investor funds are above ₦1 billion. Registered VCs are prevented from soliciting funds from the public and may only privately source funds from qualified investors. They may also not invest more than 30% of their assets in a single investment. Under SEC regulations, the fund manager of a registered private equity fund must have a minimum paid-up capital of ₦20,000,000.00.

3. Raising Funds

VCs raise funds from a variety of sources which consist of banks and other financial institutions, insurance companies, pension funds, (“institutional investors”) high net worth individuals, etc. However, regulations that cover institutional investors may restrict the extent to which they may invest in VCs. For example, the Banks and Other Financial Institutions Act limits investments to the extent that such investment does not at any time exceed 10% of the bank’s shareholders funds and not more than 40% of the investee company’s paid up share capital. Foreign VCs who wish to bring in funds into the country may do so through authorized dealers (usually banks). The VCs are issued a Certificate of Capital Importation (CCI) as proof of the importation of capital which allows foreign VCs to repatriate funds without restriction.

4. Taxes

Taxes payable by VCs are dependent on the structure of the fund. Where a VC is registered as a Limited Liability Company, the company will be liable to pay income tax on its profits as provided under the Company Income Tax Act (CITA). Funds registered as business names will not subject to corporate income tax, instead, each partner would be taxed based on its individual income from the business. The investee company is however required by the CITA to withhold 10% of the interest on dividends due to investors (7.5% for foreigners whose country has a double taxation treaty with Nigeria).

5. Conclusion

Nigeria is a profitable market for VC funds which is evidenced by the impressive growth of startups and tech companies over the years. VCs who intend to set up shop in Nigeria or as foreign VCs, invest in Nigerian startups must be conversant with the rules on investing in Nigeria. This is important to ensure adherence with regulatory rules and conformity to proper business and corporate governance procedures.

*Seun Timi-Koleolu is the Managing Partner at Pavestones Legal and Olawale Atanda is an Associate at the firm.