Kenya would soon be joining Tunisia and Senegal as the only countries in Africa where a Startup Act exists. Although similar plans are already being mulled by Rwanda, Ethiopia and Ghana, a new bill is before Kenya’s national parliament, and once approved, the East African country will make history as the number three country in Africa with a Startup Act.
“The Kenyan startup ecosystem has experienced rapid growth over the last decade. Construction of Konza Techno City, “Silicon Savannah” is expected to further positively impact the country’s tech startup ecosystem. Start-up is generally associated with young innovative tech companies or new businesses that leverages on technology to solve a problem or pain point of a population segment…[the] Bill…[will] create a more favourable environment for innovation; to attract Kenyan talents and capital…” the bill states.
Here Is What You Need To Know
What Is A Startup Under The Proposed Law?
To begin with, for a business in Kenya to qualify to benefit from the provisions of the law, two requirements must be met:
- First, the business must be a startup; and
- Second, the business must be registered and admitted into an incubation programme by a Registrar of Startups.
A startup? A business entity is considered a startup in Kenya under the law if all of the following conditions are met:
- The business must be registered in Kenya as a: private limited company under the Companies Act; a partnership firm under the Partnership Act; limited liability partnership under the Limited Liability Partnership Act or non-governmental organization under the Non-Governmental Organizations Co-ordination Act.
- The business must be newly registered or has been in existence for a period of not more than seven years from the date of its incorporation or registration and in the case however, in the case of startups in the biotechnology sector, the period shall be up to ten years from the date of its incorporation or registration.
- The business has as its objects the innovation, development, production or improvement and commercialisation of innovative products, processes or services or if it is a scalable business model.
- The business is wholly owned by one or more citizens of Kenya.
- At least fifteen percent of the business’ expenses can be attributed to research and development activities.
- A business which is a holder, depositary or licensee of a registered patent or the owner and author of a registered software.
Therefore, once the business is established to be a startup, its startup status then qualifies it to be admitted into an incubation programme.
Established Corporates Are Shut Out!
One significant thing achieved by the law is to shut out startups owned by established corporates. Hence, under the new law, any startup business unit (whether a subsidiary or not) owned by any established company which is not itself a startup, will not be considered a startup.
Also shut out are businesses established or formed as a result of the merger or acquisition of an existing business. In other words, where an existing business was not first registered as a startup, no entity created out of it as a result of a merger or acquisition will be conferred with the status of a startup.
Read also: Senegal Approves A-Three Year Tax Exemption For Its Startups
What Are Expected Of Startups Under The Law?
Once a startup is registered under the law, a few things are required in order for it to continue to maintain its startup status. That is to say, the registered startup must:
- Maintain proper accounting and submit its annual financial budgets to the Agency no later than thirty first day of March in each financial year, as well as;
- Inform the Kenya National Innovation Agency of a change in its structure, composition or object within a period of one month from the date of the change.
Failure to do all of these will lead to the de-registration of such a startup.
What Special Benefits Accrue To Startups Registered Under The Law?
Access To An Incubation Programme
Under the law, only startups are allowed to take part in an incubation programme, and no other! The law has therefore gone ahead to create the legal framework for the registration and certification of incubators in Kenya, which shall have as their primary purpose the delivering of services in support of the establishment and development of startups.
Consequently, all a startup needs to do to be admitted into such incubators is to make an application for admission into an incubation programme to the Kenya National Innovation Agency or to the relevant county executive committee that manages the incubators, as the case may be. A certificate of admission into an incubation programme is issued at the end of the registration process.
The way the law is structured has further ensured that many incubators are going to spring up in Kenya soon, as a legal framework has been established under the law for the registration of incubators at both the national and county levels. Through the incubators, startups can access both mentoring, technical and funding support. The law specifically mandates incubators to assist startups to implement their ideas and form new business ventures.
Technical And Funding Support
Technical Support:
- Under the law, registered startups will be assisted by the Kenya National Innovation Agency to apply for grant or revocation of patents and to institute legal action for infringement of any of the startups’ intellectual property rights.
- They will also be assisted to file and register patents at the international level.
- They will also be exposed to series of programmes for the purpose of their training and capacity building.
Funding Support
Creation Of A Credit Guarantee Scheme
One of the most innovative funding opportunities created by the law is a ‘Credit Guarantee Scheme’ to be established by the country’s Cabinet Secretary for science, technology and innovation. The credit guarantee scheme shall, among other things, guarantee investments for investors in Kenyan startups; offer accessible funding support to startups; provide a framework for credit guarantee for startups; make available financial and credit information to startups; and assist startups to build capacity on financial and risk management.
Inclusion Of Startups As Beneficiaries Under Kenya’s National Research Fund
The law also increases the chances of startups accessing funds through the National Research Fund of Kenya. To that effect, the law has reconstituted the Board of Trustees of the Fund to include two persons representing startups in the country nominated by the most representative organisations representing startups. The implication of this is that startups in Kenya will further be exposed to funds under the country’s National Research Fund apart from the ones they already have access to.
Tax Incentives
Although no express tax exemptions or incentives were made under the law, the law however, opens up the possibility of grant of incentives to registered startups. Accordingly, Kenya’s Cabinet Secretary for science, technology and innovation is empowered, in consultation with the Cabinet Secretary responsible for matters relating to finance, to put in place measures for the granting of fiscal incentives including tax incentives in favour of startups in the country. This will unarguably pave way for the easy categorisation, identification and grant of tax incentives to startups in Kenya.
Criticisms And The Implications Of The Startup Law Generally
Criticisms
- The proposed law failed to draw a line between registration as a startup and registration into an incubation programme. The law implies that a business entity shall not be called a startup if it has not been issued with a certificate of admission into an incubation programme. There should be clarity as to whether a business entity can stand on its own and still retain its startup status once it has been registered as a startup without being admitted into an incubation programme at the same time. This argument is even strengthened by the fact that the law provides that “an entity shall be eligible to be registered as a startup and for admission into an incubation programme” on the one hand; and that “an entity that qualifies for admission into an incubation programme…may submit an application, in the prescribed form,” on the other hand.
- The proposed law also failed to specify whether the Kenya National Innovation Agency or the relevant county executive committee shall be responsible for assigning startups into various incubation programmes.
- No express provisions for tax support were made, either in favour of investors or startups. The law only promises to create rooms for tax incentives.
Implications
- Combined with the recent 30% ICT policy in the country, the Startup Act, if it ever comes into effect, has the capacity of creating in Kenya the largest concentration of incubators in Africa.
- The Startup Act will, also, finally separate startups from SMEs in Kenya, thereby enabling the Kenyan government to precisely target startups.
- Overall, the latest proposed law will draw foreign investors more to the East African country. Kenya is famous for leading all VC investments in Africa in recent years. In 2018, the country received the highest amount of VC investments in Africa. This is even aided by the fact that the country, at 87.2%, has the highest internet penetration rate in Africa (47 million internet users out of a 54 million population).
Charles Rapulu Udoh
Charles Rapulu Udoh is a Lagos-based lawyer who has advised startups across Africa on issues such as startup funding (Venture Capital, Debt financing, private equity, angel investing etc), taxation, strategies, etc. He also has special focus on the protection of business or brands’ intellectual property rights ( such as trademark, patent or design) across Africa and other foreign jurisdictions.
He is well versed on issues of ESG (sustainability), media and entertainment law, corporate finance and governance.
He is also an award-winning writer