In a significant development, Nigeria’s Corporate Affairs Commission has imposed stringent regulations, making it considerably challenging for companies incorporated in foreign countries to establish subsidiaries in Nigeria. The new rules dictate that any application for the incorporation of a company with foreign participation must comply with a minimum paid-up capital requirement of N100,000,000 (approximately $126,355.23 USD), as outlined in the Revised Handbook on Expatriate Quota Administration (2022).
According to the commission, existing companies with foreign participation that fall short of the N100,000,000 paid-up capital requirement are given a six-month grace period to align with this new directive. Failure to comply within this timeframe may result in the initiation of compulsory winding-up proceedings under Section 571 (e) of the Companies and Allied Matters Act 2020.
A significant casualty of these stringent measures is the widely adopted strategy of cross-border incorporation flipping by Nigerian startups. This maneuver, often employed to meet investor requirements and facilitate seamless operations, involves the creation of a new foreign holding company. This holding company then acquires all shares in the existing Nigerian entity, establishing a legal link between the two.
For instance, the Delaware flip, a commonly used approach, involves creating a new US holding company, typically in Delaware, to hold all shares in an existing Nigerian company. The Delaware entity then becomes the majority shareholder in the Nigerian company, establishing a legal link between the two entities.
Charles Rapulu Udoh, a tech startup lawyer based in Lagos, expressed concern about the implications for Nigerian startups. “This is going to hit Nigerian startups the most,” he remarked. “It used to be a minimum authorized capital of N10 million, but the new rules have increased this to N100,000,000 paid-up capital. This will significantly impact the cost of registering new startups with foreign participation, translating to thousands of dollars in incorporation costs. We are anticipating more than a 10% increase in the cost of registration. Again, this is a case of paid-up capital (as against authorized capital), meaning there should be evidence of liquidity of approximately $127,000 in Nigeria in favor of the Nigerian entity.”
This development comes at a time when Nigeria recently passed a Startup Act aimed at enhancing the ease of doing business for startups. The new regulations, however, appear to run counter to the spirit of this legislation, posing challenges for entrepreneurs and potentially hindering the growth of the startup ecosystem in the country.
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