Fund Registration in Nigeria: Navigating Regulatory Challenges and Sectoral Restrictions
by Olaniwun Ajayi LP
Introduction
The Private Equity (PE) and Venture Capital (VC) space have seen significant strides in Nigeria in recent years. The past decade has seen a surge in these investments, resulting in over 450 reported deals in 2023 and a total deal value surpassing $5.9 billion, as highlighted in the African Private Equity and Venture Capital Association’s (AVCA) 2023 Africa Private Equity Activity Report.
While the prospect of launching profitable PE funds[1] in Africa’s fourth largest economy[2] remains enticing, the process of establishing and managing a successful PE fund is challenging and this is due to the numerous regulatory hurdles and sectoral restrictions encountered when establishing PE funds in the country.
The Legal Framework and Regulatory Landscape for Establishing PE Funds in Nigeria
The establishment of PE funds in Nigeria is not regulated by a single comprehensive law. Instead, it is guided by various pieces of legislation all of which aim to protect investors, promote transparency and accountability, while supporting the growth of the financial sector.
As indicated, the establishment of PE funds in Nigeria is governed by a panoply of legislations including the Investments and Securities Act of 2007 (the ISA); the Rules & Regulations of the Securities and Exchange Commission 2013 (as amended) made pursuant to the ISA (the SEC Rules);[3] and the Companies and Allied Matters Act 2020 (the CAMA).
The SEC Rules regards a PE fund as a type of a collective investment scheme (CIS)[4]. In this regard, the ISA defines a CIS as “a scheme in whatever form, including an open-ended investment company, in pursuance of which members of the public are invited or permitted to invest money or other assets in a portfolio…”[5]
Additionally, before any PE fund can be established in Nigeria as a CIS, the ISA stipulates that such fund must be authorised by and registered with the Securities and Exchange Commission (the SEC).[6] Furthermore, the ISA also makes it unlawful for any person, directly or indirectly to deal in units or securities of a scheme (described whether as units, securities or otherwise) unless such units or securities have been duly registered with the SEC.[7] Finally, the ISA prescribes that a PE fund, established as a CIS must be administered by a manager[8] who must be incorporated under the CAMA and registered as a fund manager by the SEC and is expected to have a minimum paid up capital of NGN150,000,000[9] (One hundred and fifty million naira).
Additionally, under the SEC Rules PE funds are required to maintain a minimum commitment of NGN1,000,000,000 (One billion naira) (circa US$599,980)[10] to be registered with the SEC.[11] Furthermore, expectedly, PE funds are prohibited from soliciting for funds from the general public and must exclusively source capital from qualified investors, such as high net-worth individuals, private institutions etc.[12] They are also restricted from investing more than thirty percent (30%) of the funds’ assets in a single investment.[13]
Beyond the regulatory frameworks indicated above, CAMA and the Corporate Affairs Commission (CAC or the Commission), also play a significant and important role in the process of fund establishment in Nigeria. CAMA defines and details the various corporate structures through which a fund can be established in Nigeria. It specifies the appropriate structures and investment vehicles, outlines the applicable corporate responsibilities associated with the selected investment vehicles and sets forth all necessary filings to be provided and filed with the CAC. In Nigeria, a PE fund may be structured as either a limited liability company incorporated under CAMA, a limited liability partnership or a limited partnership incorporated under CAMA or under the partnership laws of various states[14].
Also, depending on the investors the prospective PE fund wishes to attract, adherence to sector-specific regulatory guidelines may also be required. For instance, where the prospective PE fund seeks investments from Pension Fund Administrators (PFAs), strict adherence must be paid to the provisions of the sector-governing law, the Pension Reform Act and the provisions of the Regulations on the Investment of Pension Fund Assets 2019 (the Investment Regulations). Essentially, this requirement adds another layer of complexity, as fund managers and sponsors must ensure that their PE funds are structured in a manner that complies with the relevant guidelines so the fund can attract the right calibre of investors.
Regulatory Hurdles and Challenges experienced in the establishment of PE Funds in Nigeria.
a. Lack of cohesive and unified regulatory approval structure
The regulatory environment for establishing PE funds in Nigeria is fragmented and lacks a cohesive framework. This absence of a unified regulatory structure results in a complex and disjointed establishment process, requiring multiple registrations and authorisations from various regulators. Each regulator demands different information, which may lead to duplicative requirements and an inefficient registration process. Consequently, the establishment of PE funds is often cumbersome and unnecessarily burdensome due to these overlapping regulatory frameworks[15]. Typically, authorisations and approvals are required from foremost regulators including the SEC, CAC, and any sector specific regulator. The net effect of this is that timelines cannot be sufficiently estimated, leading to constant revisions of transaction timelines and often delays in the establishment of the proposed fund.
A vivid example of the increasing multiplicity of legislations is the circular which was published by the CAC on 5 December 2023, which sought to increase the minimum paid-up capital requirement for companies with foreign participation from NGN10,000,000 (Ten Million Naira) to NGN100,000,000 (One hundred Million Naira) (the Amendment). This was issued in paragraph 3, page 5 of the Revised Handbook on Expatriate Quota Administration 2022 (the Revised Expatriate Quota Handbook) and created a daunting problem for multiple foreign promoters and fund sponsors who had sought to establish the PE Funds and even General Partners (GPs) — where the funds were structured as limited partnerships — and increase the regulatory expenses to be incurred and further straining the efforts of promoters and prospective funds with established structures. Our firm, in the process of providing legal advisory on the establishment of a fund in Nigeria, sought to rectify this amendment by writing to the CAC describing that the GP sought to be incorporated, (its incorporation had been stalled and flagged by the CAC for failure to comply with the amended share requirement), was exempt from this requirement as it had no element of foreign participation given its sponsor was a Nigerian entity. The Amendment was retracted by the Commission via communication on its official X account on 8 December 2023, our application was successful, and the GP incorporated, albeit beyond the timeline envisaged.
As such, in order to avoid continuous legal and regulatory hurdles and hopefully increase the ease of establishment of funds within the country, and increasing its financial profile, we recommend that the regulatory frameworks for PE and VC funds, applicable across relevant regulators, be unified to ease the registration process and boost investor confidence.
b. Regulatory compliance uncertainty and cost of compliance
Another challenge often faced in the establishment of PE funds in Nigeria is the regulatory uncertainty and costs of compliance. The frequent and constant changes in regulatory frameworks, guidelines and regulations in Nigeria often create uncertainty for prospective PE funds, investors and fund managers.
Additionally, the cost of compliance and registration with multiple regulators remains a daunting challenge for smaller prospective PE funds and the continuous changes to regulatory frameworks make compliance more difficult and expensive. As an example, the minimum cost of registration of a PE fund with the SEC in Nigeria can amount to over NGN250,000,000[16] (Two hundred and fifty million naira), compared to a minimum amount of USD25,000[17] (Twenty five thousand US Dollars) which is usually chargeable for the establishment and registration of PE funds in Mauritius, and this cost usually remains completely dependent on the structure of the PE fund adopted by its promoters. Comparatively, the costs related and incurred by prospective promoters in establishing PE Funds in Nigeria continue to be dauntingly expensive and often poses a significant problem when compared to the value of the prospective fund to be established, especially where the parties wish to establish a small fund.
It is recommended that the Nigerian regulators collaborate with each other to effectively unify the costs of registration such that double costs paid to different regulators are extinguished. This will in turn improve Nigeria’s profile as a favourable destination for the establishment of PE and VC funds.
c. Uncertain and expensive tax regime
The establishment of PE funds in any location will generally be influenced by the tax regime of such location. This also applies to Nigeria, which, due to the proliferation and multiplicities of the various tax legislation, is considered to have an uncertain and expensive tax regime. Where a PE Fund vehicle is established or structured as a company, a limited partnership or a limited liability partnership, such entity shall be liable to pay corporate income tax ranging between 20% (twenty percent) and 30% (thirty percent) of its taxable profits. Furthermore, a PE Fund established as a company in Nigeria is required to pay from its net profit, a police fund levy of 0.005% and from its assessable profit, a tertiary education levy set at 2% (two percent).
Additionally, where the PE Fund is structured as a limited partnership, the income of the partners is taxable at a progressive rate up of 24% (twenty-four percent). Compared to the tax administration and regime in Mauritius, Mauritian investment funds are subject to a tax rate of 17% on their net chargeable income. However, the taxable funds of a PE Fund, structured as a Global Business Corporation, which operates significantly outside the country, benefits from a partial exemption of 80% on certain categories of income which may bring the taxes applicable to such PE fund to as low as 3.4%. In addition to the above, PE Funds in Mauritius are not imposed with the payment of withholding taxes on dividends, capital gains and interest.
This aspect poses considerable challenges for fund managers and investors looking to navigate the Nigerian investment landscape. Nigeria’s tax regime governing the establishment of PE funds is multifaceted, encompassing different statutory taxes that must be considered and analysed before the fund establishment. For example, pursuant to the Companies Income Tax Act (CITA), PE funds registered in Nigeria are subject to corporate income tax, which can be as high as 30% on its profits. The Nigerian tax system is not without its advantages, an example is the exemption granted by the CITA[18] which exempts the payment of taxes on certain profits and dividends received by PE Funds from their portfolio companies including dividends distributed and interest payments. These payments are categorised as franked investment income[19] and will not be taxable once received by the Fund to calculate its profit to be distributed to its partners. While the tax regime in Nigeria can be characterised as certain in terms of its clear tax requirements and obligations, the multiplicities of the Nigerian tax legislations still arguably make the establishment of PE Funds and consequently, their compliance obligations a cumbersome process. As a result of this, PE funds, fund managers and sponsors may struggle to consistently comply with these obligations. The continuous changes in tax legislations, particularly the passing of multiple Finance Acts — four in the past five (5) years — have continuously rendered established investment strategies and objectives for prospective funds antiquated and this instability deters potential investors who are not assured that their investments will yield reasonable returns.
Furthermore, this problem of uncertainty posed by the duplicitous nature of the Nigerian tax regime continues to have a significant impact on the structuring options available to promoters and sponsors in the process of establishing PE Funds in Nigeria[20]. Due to higher tax liabilities and rates, many sponsors have opted to establish funds in more tax-compliant off-shore jurisdictions like Mauritius, but where the prospective fund also hopes to attract Nigerian institutional investors, many of which are restricted from investing a certain percentage in offshore entities[21], it becomes necessary to establish a corresponding or parallel fund in Nigeria in order to comply with regulatory requirements. This creates a persistent challenge for the fund’s sponsors and fund manager, further complicating the investment process.
This creates a persistent challenge for the fund’s sponsors and fund manager, further complicating the investment process. The fund must navigate and comply with both local and international regulatory frameworks, a dual compliance requirement that significantly increases operational burdens and costs, ultimately exerting a substantial impact on investment returns.
We are aware that the Federal Government is currently working to unify Nigeria’s existing tax legislation. We remain optimistic that this unified tax regime will significantly clarify the applicable taxes for establishing and operating PE and VC funds in Nigeria, thereby fostering the growth and establishment of such funds within the country.
Sector Restrictions
Although a Fund is permitted to privately source for funds from qualified institutional investors, it is pertinent to note here that there are restrictions in the finance sector that may limit the participation of some qualified investors in investing in Funds. These sectoral restrictions are discussed in ensuing paragraphs.
1. Banks
According to the Banks and Other Financial Institutions Act, 2020 (BOFIA), no bank is to acquire or hold any part of the share capital of any financial, commercial or other undertaking without the prior approval of the Central Bank of Nigeria (the CBN)[22]. BOFIA further imposes the following restrictions on equity investments, even when the approval of the CBN has been obtained to the investment by a bank:
i. Although a bank can acquire shareholding in a company set up for the purpose of promoting the development of the money market or capital market in Nigeria or for the purpose of improving the financial machinery for financing economic development, the aggregate value of such equity interest acquired must not at any time exceed 10% of the bank’s shareholders’ funds unimpaired by losses[23].
ii. A bank may acquire or hold part in the share capital of any agricultural, industrial, private equity or venture capital company provided that (x) the PE or VC company is set up for the purpose of promoting the development of indigenous technology or a new venture in Nigeria; (y) the shareholding acquired is in a small or medium-scale industry and agricultural enterprise; and (z) the shareholding acquired does not exceed 10% of the bank’s shareholders’ funds unimpaired by losses and 20% of the paid-up share capital of the company or such other percentage as the CBN may prescribe[24]. BOFIA further provides that the aggregate value of the equity participation of such a bank in all the enterprises it invests in is not to exceed 20% of the bank’s shareholders’ funds unimpaired by losses or such other percentage as the CBN may prescribe[25].
From the foregoing, it is evident that even though banks can invest in PE firms, such investments can only be made in funds focused on indigenous technology or new ventures. These restrictions on equity investment by a bank, however, do not apply to shareholding acquired by a merchant bank while managing an equity issue[26] or shares acquired by a bank in the course of satisfaction of debt owed to it[27].
2. Pension Fund Administrators
The Pension Reform Act, 2014 (PRA) provides that investment of pension funds is to be in accordance with the provisions of the PRA and the regulations issued by the National Pension Commission (PENCOM)[28]. The PRA saddles the PFAs with the responsibility of investing pension contributions and such contributions are to be made with the objectives of safety and maintenance of fair returns on the amount invested[29].
Although PENCOM permits investments by PFAs in open-end or specialist open-end investment funds registered with the SEC, and specialist investment funds approved by PENCOM, such investments are subject to PENCOM guidelines regulating such investments[30].
In line with section 90 of the PRA which permits PENCOM to impose restrictions on investments by PFAs for the purpose of safeguarding the interests of beneficiaries, The PENCOM Investment Regulations provide that the PFAs may invest only in (i) open/close-end/hybrid funds registered with SEC[31] and (ii) specialist invested funds whose underlying assets are physical assets i.e Real Estate Investment Trusts (REITs) registered with SEC, Private Equity Funds registered with SEC and Infrastructure Funds registered with SEC[32].
In addition to the foregoing, there are geographical restrictions on the use to which funds of a private equity infrastructure funds may be put. In Nigeria, 60% of funds raised by PE funds structured as infrastructure funds must be invested in projects in Nigeria. The geographical restrictions must be taken into consideration at the fund establishment stage, especially if the potential deals contemplated by the sponsors or fund manager are mostly outside Nigeria.
Thus, any investment in a PE fund that is not covered by the scope of permitted investments provided for in the 2019 Regulations is not to be undertaken by a PFA.
Conclusion
The regulatory hurdles that may be faced in the process of registering a Fund in Nigeria becomes minimal, if not non-existent when the Fund promoters and advisers avert their minds to the regulatory requirements and sector restrictions that may exist in relation to the Fund. It is advisable that the Fund promoters and their advisers interface with regulators ahead of commencing registration to avoid elongated timeline for the registration.
[1] The discussion on the regulatory hurdles and sector restrictions for the registration of PE funds in this article are to be taken to include references to VC funds, except when expressly delineated.
[2] Top 20 Largest Economies in Africa, Top 20 Largest Economies In Africa (2024) — TalkAfricana, accessed on 25 September 2024
[3] The SEC Amendment to the Rules on Private Equity (the PE Rules), Amendment Rules relating to Collective Investment Schemes 2019 and 2021 (the CIS Rules) and the Infrastructure Fund Rules (the Infrafund Rules) are particularly relevant in the establishment of PE Funds in Nigeria.
[4] Rule 557 SEC Consolidated Rules & Regulations 2013
[5] Section 153(1) of the ISA
[6] Section 160(1) of the ISA
[7] Section 161 of the ISA
[8] Section 152 of the ISA. The manager is defined as a fund or portfolio manager registered by the SEC.
[9] Section 159 of the ISA
[10] At the US$1 to N1,666.72 NAFEM rate as at 1 November, 2024
[11] Rule 558 of the SEC Rules
[12] Rule 560(a) of the SEC Rules. Qualified investors include banks, PFAs, insurance companies, sovereign wealth
funds, multilateral institutions, etc.
[13] Rule 560(b) of the SEC Rules
[14] Sections 18 and 745 CAMA
[15] Nigerian private equity: weighing the risks and rewards, available at
https://www.iflr.com/article/2a6397nm0pg8q3v2mv6dc/nigerian-private-equity-weighing-the-risks-and-rewards accessed on 02 September 2024.
[16] Circa USD152,747.50 (as at the NAFEX rate on 16 December 2024)
[17] Circa NGNN40,917,199.95 (as at the Mid-market exchange rate dated 16 December 2024)
[18] Sections 23 and 80 CITA
[19] Section 80 CITA
[20] Legal and regulatory framework for private equity in Nigeria, https://www.financierworldwide.com/legal-and-regulatory- framework-for-private-equity-in-nigeria accessed at 03 September 2024
[21] Where the proposed investors and limited parties are regulated entities, for example Pension Fund Administrators (PFAs),
certain sector-specific laws and regulations will apply. For example, Regulation 5.2.11(ix) of the Regulation on Investment of Pension Fund Assets 2019 (Investment Regulations) prohibits PFAs from investing in private equity funds that do not invest a minimum of 60% of the fund in companies or projects within Nigeria.
[22] Section 19 of BOFIA
[23] Contravention of this restriction will make the contravening bank liable to pay a penalty of not less than NGN20,000,000 (Twenty Million Naira) as provided in section 19(8)(b) of BOFIA.
[24] Section 20(1) of BOFIA
[25] A bank that contravenes this restriction will be liable to a penalty that is not less than NGN5,000,000 (Five Million Naira) and an additional penalty of NGN100,000 (One Hundred Thousand Naira) for each day that the contravention continues. This is as provided in section 20(5) of BOFIA.
[26] Section 19(8)(b)(iii) of BOFIA
[27] Section 20(2) of BOFIA
[28] Section 55(b); section 85(2) of the PRA
[29] Section 85(1) of the PRA
[30] Section 86(g) and (i) of the PRA
[31] Paragraph 4.6 of the 2019 Regulations
[32] Paragraph 4.7 of the 2019 Regulations
