Key Legal Considerations For Investing In Nigerian Startups: A Guide For Private Equity And Venture Capitals

• Published date: 27 March 2024
• Subject Matter: Corporate/Commercial Law, M&A/Private Equity, Venture Capital, Securities, Shareholders
• Law Firm: The Trusted Advisors
• Author: Deborah Dada

Nigeria is a popular investment destination in Africa due to its large economy and population size, which has led to a vast number of businesses operating in the country.

In recent years, Nigeria has witnessed a boom in private equity (PE) investments. In the African Private Equity and Venture Capital Association's (AVCA's) '2020 Annual African Private Equity Data Tracker', Nigeria is reported to have struck 50 percent of PE deals in West Africa between 2015 and 2020. Several players have taken advantage of Nigeria's potential to invest across different sectors.¹

WHAT IS PRIVATE EQUITY AND VENTURE CAPITAL?

Private equity firms buy companies and overhaul them to earn a profit when the business is sold again.² Venture Capital (VC) is a form of private equity and a type of financing that investors provide to startup companies and small businesses that are believed to have long-term growth potential. Venture Capital generally comes from well-off investors, investment banks, and other financial institutions. A venture capital firm is a company or organization that invests in and mentors new, early-stage, and growth-stage companies. It plays a crucial role in fostering innovation and supporting entrepreneurship in the country.³

LEGAL FRAMEWORK FOR VENTURE CAPITAL & PRIVATE EQUITY IN NIGERIA

Various laws regulate both private equity and venture capital investment in Nigeria. Some of the key legislations and regulations include the Companies and Allied Matters Act (CAMA), the Investment and Securities Act (ISA), and National Office Technology Acquisition and Promotion (NOTAP), etc. However, one of the major laws regulating private equity investment and venture capitalist investment is the Investment and Securities Act (ISA). The Securities and Exchange Commission's primary duty with regard to venture capital in Nigeria hinges on the importance of regulating the involvement and operations of individual and corporate investors in venture capital transactions in Nigeria.

In addition to the SEC Rules, an additional rule (Rule 249D) was issued and made effective on the 28^th of February 2013 to regulate the activities of private equity firms with a minimum commitment of 1 (one) Billion Naira Investment funds. Rule 249D (3) expressly provides that

a private equity fund shall not:

1. Solicits funds from the general public but shall privately source funds from qualified investors alone;
2. Invest more than 30% of the Fund's assets in a single investment

LEGAL CONSIDERATION...