Many of the venture capital funds set-up by Nigerian sponsors are tech-focused and are domiciled offshore.[1] As of December 2021, no venture capital fund has been registered with the Securities & Exchange Commission (SEC) in Nigeria. However, the SEC in Nigeria has published rules relating to the formation of venture capital funds in Nigeria. Here are a few considerations for venture capital fund managers looking to set-up venture capital funds in Nigeria.
1. Scope of Authorisation for Venture Capital Funds in Nigeria
The SEC venture capital rules regulate venture capital fund managers at the fund level and at the manager level. This means that managers of venture capital funds and each of the funds formed are subject to authorisation requirements in Nigeria.
2. Safe Harbours/Exemption for Venture Capital Funds in Nigeria
The SEC venture capital rules do not provide any safe harbours or exemptions for venture capital funds in Nigeria, meaning that all venture capital funds regardless of the fund size or commitments require authorization.
3. Marketing Regulations for Venture Capital Funds in Nigeria
The SEC venture capital rules authorises the SEC to review marketing documentation. Venture capital fund managers are therefore required to submit key marketing documents for review and approval by the SEC before marketing commences. However, the activity or term “marketing” is not defined in the context of the SEC venture capital rules and the term does not have a specific meaning different from the ordinary meaning of the term. There are also no provisions regulating pre-marketing activities of venture capital fund managers. There are no provisions limiting the number of investors that can participate in a venture capital fund and there are no regulatory mandates on a venture capital fund manager to market only to accredited or sophisticated investors[2].
4. Authorisation Fee for Venture Capital Funds in Nigeria
On the fund level, the SEC venture capital rules require venture capital fund managers to pay an authorization fee of 1% of the fund size as part of the authorisation process.
5. Minimum Share Capital for Venture Capital Funds in Nigeria
Fund manager entities are required to have a minimum paid up share capital of N20,000,000 to qualify for authorisation under the SEC venture capital rules. Promoters are also required to obtain a Fidelity Bond Insurance covering at least 20% of the minimum paid up capital of an authorised venture capital fund.
6. Regulation of Venture Capital Fund Promoters
The promoters/founders of a venture capital fund are also subject to credential and character evaluation as part of the authorisation process. Promoters are required to have a minimum of 4 years post-graduation experience to perform their functions and are required to write exams to test their knowledge of securities laws and the Nigerian capital market. Amongst other requirements, Promoters would have to undergo police clearance and obtain a clearance report certifying that the promoters of good conduct and have no criminal history. Promoters who decide to register with the SEC are referred to as “Sponsored Individuals” and there are to be a minimum of 3 Sponsored Individuals, one of which must be the Managing Director and another, the compliance officer, responsible for ensuring compliance with securities laws.
7.General/Public Solicitation
Although the SEC venture capital rules do not contain a specific prohibition against general/public solicitation of interests in a venture capital fund, there exists a general rules against general/public solicitation or advertising[3]under Nigerian securities law. We expect venture capital fund managers looking to establish venture capital funds in Nigeria to only market their funds by way of private placement
8. Reporting Obligations for Venture Capital Funds in Nigeria
There are no ongoing reporting obligations for venture capital fund managers specified in SEC venture capital rules
Please read our primer on setting up a private equity fund in Nigeria, here.
[1] There are important advantages to domiciling venture capital funds offshore. In addition to understanding the rules around the formation of venture capital funds, it would be prudent for first-time fund managers to have a thorough understanding of how venture capital funds are structured, the motivations all of the key stakeholders in a venture capital fund, industry best practices and also the business and revenue models of venture capital funds. To speak to our investment funds team regarding forming a venture capital fund in an offshore jurisdiction or regarding a training session, please reach out via support@balogunharold.com
[2] Generally, investors are considered sophisticated when it can be established that such investors have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment.
[3] Generally, “general solicitation” is defined to include advertisements published in newspapers and magazines, public websites, communications broadcasted over television and radio, and seminars where attendees have been invited by general solicitation or general advertising. In addition, the use of an unrestricted, and therefore publicly available, website constitutes general solicitation
