Venture capital firms in Nigeria are increasingly becoming key players in the startup system. They provide funding to startups and small businesses that investors see as having strong growth potential. This financing usually takes the form of private equity (PE), with ownership shares sold to select investors through limited partnerships (LPs).
While venture capital primarily targets emerging companies, private equity generally funds established companies needing an equity boost. It is an important funding source for startups, especially those without access to capital markets, bank loans, or other debt options.
However, establishing a venture capital firm requires careful planning, a strong understanding of the financial environment, and compliance with regulatory requirements. In this article, we provide step-by-step instructions for establishing a venture capital company in Nigeria, from initial considerations to operational steps.
Understanding Venture Capital Company in Nigeria
Venture Capital is a modern financing method in which high-net-worth investors come together to fund startups and small businesses with strong growth and scalability potential. A Venture Capital firm functions as an investment entity that provides funding and support to early-stage or growth-stage companies, utilizing capital raised from its limited partners.
Before setting up a venture capital firm, it is essential to understand the Nigerian startup system. Nigeria is home to a large number of startups in various industries such as technology, agriculture, fintech, and healthcare. However, the business system also faces challenges like limited access to financing, regulatory hurdles, and an underdeveloped exit market.
A successful venture capital firm helps to address these gaps by providing capital and support to entrepreneurs and access to networks.
In Nigeria, a venture capital company can operate under several business structures, but the most common ones are:
- Private Limited Liability Company (Ltd.): Most venture capital firms choose this structure because it allows for limited liability and is recognized by Nigerian corporate law.
- Limited Partnership (LP): Some VC firms operate as partnerships, where there are general partners who manage the company and limited partners who provide capital but do not partake in management decisions.
You must decide on the structure that best suits your objectives, whether you are focusing on raising funds or managing investments. For guidance, it is better to engage an experienced legal firm in choosing a suitable structure.
Procedure and Costs for Setting Up a Venture Capital Firm in Nigeria
To establish a venture capital management firm in Nigeria, promoters must first incorporate the firm as a private limited liability company with shares through the Corporate Affairs Commission (CAC). Following incorporation, they must obtain licensing as Venture Capital Managers from the Securities and Exchange Commission (SEC).
This requires submitting three qualified sponsored individuals, providing necessary documents, paying applicable fees, and meeting all other licensing requirements. The cost of setting up a venture capital firm in Nigeria involves two main categories: incorporation costs and licensing costs.
1. CAC Incorporation Costs
Incorporation costs in Nigeria vary based on the share capital of the company, as this affects both stamp duty payable to the Federal Inland Revenue Service (FIRS) and the filing fee charged by the CAC.
For a venture capital firm with a share capital of N20 million, the estimated incorporation cost is approximately N305,000, which includes both CAC registration and stamp duty.
- CAC Registration Cost: For a N20 million share capital, the CAC fee is around N105,000. This is calculated by paying N10,000 for the first N1 million of share capital, plus N5,000 for each additional N1 million. This results in N105,000 for N20 million.
- Stamp Duty: FIRS requires a stamp duty payment of N153,050, calculated at 0.75% of the N20 million share capital.
Note that these fees are exclusive of federal government remita payment platform fees, miscellaneous costs, and professional fees for the registration.
2. SEC Registration or Licensing Costs
To operate as a venture capital firm, a company must also obtain licensing from the Securities and Exchange Commission (SEC), with estimated costs totaling around N11,250,000. These costs include:
- Application Fee: N50,000
- Processing Fee: N200,000
- Registration Fee: N300,000
- Sponsored Individual Fee: N50,000 per sponsored individual with a minimum of three sponsored individuals.
Again, these fees are exclusive of miscellaneous costs and professional fees for registration.
3. SCUML Registration:
Venture Capital companies fall under the category of Designated Non-Financial Institutions (DNFIs) and must register with the Special Control Unit Against Money Laundering (SCUML). Therefore reach out to a law firm to help you register with SCUML as non-compliance could result in penalties.
These combined incorporation and licensing costs form the financial foundation for establishing a venture capital firm in Nigeria.
Documents Required to Set Up a Venture Capital Company
To obtain a venture capital manager license in Nigeria, the following documents must be prepared and submitted to the SEC:
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Corporate Documents:
- Certified copies of the company’s Certificate of Incorporation
- Memorandum and Articles of Association with appropriate venture capital clauses
- A CAC Status Report showing N20 million share capital, share allotments, and director details.
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Financial Documents:
- Latest audited accounts (for existing companies)
- A statement of affairs (for new companies)
- A bank statement operated by the company for the last six (6) months
- Evidence of N20 million minimum paid-up capital, and
- A fidelity insurance bond covering 20% of this capital.
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SEC Forms:
- Form SEC 3: For company registration and licensing.
- Form SEC 2 and 2D: For registering sponsored individuals, including directors and the compliance officer.
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Documents required from Sponsored Individuals:
- Educational and NYSC certificates
- Detailed Curriculum Vitae (CVs)
- Police clearance
- Two recent passport photographs and means of identification of each sponsored individual
- Evidence of personal income tax payment
- Proof of residence i.e. utility bill
- Bank and referee details.
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Business Documents:
- Company profile
- Details of subsidiaries/associates
- A sample agreement between the Venture capital company and investors
- Proof of payment of shares allotted to shareholders
- Evidence of venture capital funding sources
- An operational manual or organization chart of the company
- A business plan.
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F. Sworn or Notarized Documents:
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- Sworn undertaking to keep proper records and render returns as may be specified by the Commission from time to time signed by a director or the company secretary (to be notarized)
- Sworn undertaking to abide by SEC Rules and Regulations and Investments and Securities Act No.29 of 2007 by a director or the company secretary (to be notarized)
- Sworn undertaking to strictly engage in venture capital business only (notarized).
These documents collectively ensure regulatory compliance and operational readiness for the venture capital business. The SEC usually conducts regulatory examinations for sponsored individuals on a quarterly basis, with successful candidates eligible for licensing or registration in the following quarter.
The SEC licensing or registration process is estimated to take between 3 to 6 months. However, this timeline may be shorter if the applicant company chooses individuals who are already sponsored or qualify for an exemption from SEC examinations.
The Bottom Line
Venture capital (VC) offers funding to startups and emerging businesses that lack sufficient cash flow for traditional debt financing. This arrangement can be mutually advantageous, as it provides companies with the capital needed to kickstart their operations, while investors gain equity in high-potential ventures.
However, businesses accepting venture capital may face trade-offs in terms of creative control. VC investors usually require a substantial equity stake and may exert influence over company decisions. Many VCs focus on achieving quick, high-return exits and might pressure the business to pursue rapid growth or an early exit strategy, which may not align with the founders’ vision for the company’s long-term development.
Ultimately, setting up a venture capital company in Nigeria requires careful planning, compliance with legal and regulatory requirements, and a strategic approach to fundraising and investment. If you are looking to set up a venture capital company, then contact the team of financial legal experts at Resolution Law Firm to kickstart the process.
