The Startup Bill, 2020 (the Bill) was published by the Kenyan senate on 14th September 2020 and had its first reading on 6th October 2020. The term ‘Start-up’ is generally associated with new ideas or concepts that aim to challenge or improve commonplace market practices. Merriam Webster dictionary defines a start-up as ‘a fledgling business enterprise’.
The Bill acknowledges the critical role start-ups currently play in solving the world’s socio-economic development through innovation and optimisation of market sectors. The Bill’s memorandum of objects and reasons also notes examples of start-ups that have made an indelible impact in the Kenyan economy citing Cellulant, M-Kopa, Sendy and Twiga Foods.
In the absence of bespoke regulatory framework for start-ups, the Bill proposes to enable, among other things:
- a culture of innovative thinking and entrepreneurship;
- the registration of start-ups and their linkage with private sector players such as financial institutions, research institutions as well as the national and county governments;
- facilitative environment for the establishment, development, conduct of business and regulation of start-ups; and
- the monitoring and evaluation of the legal and regulatory framework and mechanisms established to encourage the development of start-ups.
Notable Features of the Bill
Although the Bill does not define a start-up, it borrows the definitions of ‘incubation’ and ‘innovation’ from the Science Technology and Innovation Act 2013 (the Science Act). The Science Act defines incubation as ‘the maintenance of enabling environmental conditions for the purpose of facilitating the growth or development of infant technologies ideas or industries’. Innovation is described as including:
- a technovation model, utility model or industrial design within the meaning of the Industrial Property Act, 2001;
- a product, process, service or idea which is novel;
- an improved use of a new product, service or method in industry, business or society;
- indigenous or traditional knowledge by community of beneficial properties of land, natural resources, including plant and animal resources and the environment; or
- any other non-patentable creations or improvements which may be deemed as deserving promotion and protection.
A start-up incubator under the Bill is defined as a company, partnership, non-governmental organization or limited liability partnership whose primary objective is to support the birth and development of start-ups and activities related to technological transfer, research and innovation processes. This support is through the offering of dedicated physical spaces and services. To qualify, an incubator is expected to have established collaborative relationships with universities, research centres, public institutions and financial partners that carry out activities and projects related to innovative start-ups.
For admission into incubation programmes a start up:
- must be registered in Kenya as a company, partnership, limited liability partnership or non-governmental organization;
- shall be newly registered or has been incorporated for a period of less than seven years or in the case of start-ups in the biotechnology sector, has been incorporated or registered for up to ten years;
- shall be a scalable business model or have innovation, development, production or improvement and commercialisation of innovative products, processes or services as its objects;
- shall have its headquarters in Kenya and be majority owned by one or more Kenyan citizens;
- will have at least fifteen (15%) percent of its expenses attributed to research and development activities; and
- should be a holder, depositary or licensee of a registered patent or the owner and author of a registered software.
The Bill mandates the Kenya National Innovation Agency (the Agency), already established under the Science Act, to perform tasks including:
- registration of start-ups;
- appoint a registrar, deputy registrar and county registrars of start-ups;
- put in place mechanisms that promote the development of business incubation programmes;
- establish public online and other platforms for access to information that includes the establishment and development of start-ups, existing incubation programmes and access to fiscal and non-fiscal support;
- facilitate start-ups in applications for grant or revocation of patents and institution of legal action for infringement of intellectual property rights; and
- facilitate filing and registration of patents by start-ups at the international level.
The registrar of start-ups appointed by the Agency shall be responsible for, among other things, supervising and ensuring start-ups comply with the provisions of the Act, consider applications for admission into incubation programmes and the enforcement of the decisions of the Agency Board relating to registration, regulation and supervision of start-ups.
Both the national and county governments are tasked with promoting innovation, the creation of employment and wealth, facilitating transfer of technology innovation and promoting the linkages between universities, research institutions and the business communities. The Bill also acknowledges that incubation programmes may be managed by the Agency on behalf of the national government or by county governments at the county level.
The Bill proposes that the Agency and county executive committee members responsible for trade, technology and commerce shall:
- develop standards and guidelines to regulate the relationship between an incubator and a start-up;
- prescribe a criteria for the evaluation of entities, programmes and structures set up for implementation of the Act;
- put in place measures to subsidise the formalisation of start-ups;
- facilitate the protection of intellectual property of innovations by start-ups in Kenya and with international organisations;
- provide fiscal and non-fiscal support to start-ups admitted into incubation programmes; and
- provide support in the form of research and development.
The Bill also proposes the establishment of a credit guarantee scheme for the development and growth of start-ups. The credit guarantee scheme shall aim to provide start-ups with accessible financial and credit support and information, increase start-ups’ financial and risk management capacity and to provide guarantees to investors in start-ups. Other possible incentives contemplated by the Bill are tax incentives necessary for development of start-ups.
Gaps in the Bill
The Bill is a welcome first step in acknowledging the need for institutional and regulatory support for start-ups. However, the following areas may need addressing:
- There already exists statutory registration of start-ups i.e. as business names, companies or taxpayers. The requirement of registration of start-ups under the Bill does not seem to be a complementary effort among government agencies aimed at minimising bureaucratic hurdles to simplify filing requirements or shortening application review periods.
- As defined, incubators will be required to offer dedicated physical spaces in their support of start-ups. This is in stark contrast to the current reality with private businesses as well as some government institutions resorting to service provision on online platforms or altogether moving towards remote-based service delivery.
- The Bill pre-supposes the existence of an incubator - start-up relationship. The requirement to confine registration of a start-up to its belonging to an incubation programme may be counterproductive in encouraging growth. It can be argued that start-ups may establish their operations and assess viability before committing to collaboration with incubators where assistance is sought.
- The majority local content requirement for eligibility for admission into an incubation programme may force foreign investors to look elsewhere for investment opportunities.
With the Bill having had its first reading, the senate Standing Committee on Tourism, Trade and Industrialization has now published an invitation for submission of memoranda on the Bill to be closed on 26th October 2020. This presents an opportunity for stakeholders and interested members of the public to air their views and contribute to the Bill’s outlook on entrepreneurship and intended support of start-ups.
Insights by Edward Kimuma, Junior Associate at MMAN Advocates.
His area of practice is corporate and commercial law with a focus on mergers and acquisition, asset finance, commercial contracts, and corporate insolvency.