“The Ghana Investment Promotion Act (GIPCA) makes it virtually impossible for international tech investors to invest in Ghana’s start-ups” writes Auria Styles, cross-border transactional attorney, among other things responsible for detailing parts of the investment deal by Ghanaian startup Saya and US based company Kirusa. What should be changed?
As references to Africa’s “Cheetah Generation” fall off the tongues of global investment bankers as commonly as “BRICs” did in the early 2000s, Accra has become a mandatory destination for the world’s venture capitalists and angel investors. It’s a gold mine for savvy tech companies scouting for talent and access to Africa’s promising digital economy. Along with its surge towards a tech-driven future, Ghana has been managing its debut as an emerging oil nation, with all of the bricks and mortar infrastructure that’s required to successfully exploit its petroleum reserves.
Unfortunately, Ghana’s tech and oil worlds collided last year with the implementation of the Ghana Investment Promotion Centre Act, 2013, (Act 865) (“GIPCA”). While the intent of the GIPCA was to create efficiencies and harmonize policies concerning investment promotion, the GIPCA is clearly drafted almost solely with mining and petroleum companies in mind.
The minimum capital requirements of the GIPCA make it virtually impossible for international tech investors to invest in Ghana’s start-ups. Article 28 provides that non-Ghanaian citizens can invest in a Ghanaian company only if the foreign investor invests: 1) in the case of a joint venture, more than US$200,000; or 2) in the case of a wholly-owned subsidiary, more than US$500,000. In addition, the Ghanaian partner cannot own less than 10% of the equity in the joint venture.
Venture capital everywhere depends on a few courageous individuals, be they friends and family or professionals who take on the early stage risk of funding startups. These investors may risk anywhere between $10,000-$250,000 to help get an idea off the ground to the point where there are actual revenues. Mandating that an investor commit $200,000 to a pre-revenue company that may only have a product that is still in beta mode is simply unreasonable.
Equally inappropriate is the use of a “joint venture” structure to describe the relationship between a team of founders and their investors. Though there is no clear definition of what constitutes a “joint venture,” in practice joint ventures are undertaken by well funded companies with either significant capital or assets that are contributed to jointly exploit a product or resource. In addition to cash or other assets, joint venture parties will also contribute management resources to the enterprise to ensure the principal goals of the joint venture get realized. While keen to provide funds early stage tech investors have little if any interest in actively participating in the day-to-day management of a fledgling company.
While some could argue that this $200,000 threshold will have no adverse effects on Ghana’s tech scene because VCs only invest in their own backyards anyway, and the Ghanaian VC community should be responsible for funding its own tech community, this view ignores the reality on the ground. In its “Accelerating Entrepreneurship in Africa” 2013 report, the Omidyar Network reported that Ghana lagged behind its peers in metrics related to access to equity capital for entrepreneurs, and recommended that seed and angel networks needed to be more formalized. Anecdotally, several angel investor groups outside of Ghana are looking to partner with local angel groups to help facilitate investments into Ghana and other parts of Africa and observe that it is difficult to identify Ghanaian groups with which to partner.
For the time being, early stage international investors in Ghana have only three choices if they want to be players in Ghana’s startup market, they can: 1) incorporate a well-capitalized subsidiary in Ghana for the sole purpose of investing in early-stage Ghana companies; 2) invest directly into Ghanaian startups using a convertible note; or 3) import the variable-interest entity structure commonly known in China as the “Sina Structure”, and establish an offshore investment vehicle that controls a domestically-established Ghanaian company through contractual relationships.
Option 1 is unlikely as very few international funds are willing to dedicate an entire fund to Ghana-only investments. Option 2 maybe a viable option for those investors who are comfortable with the risks of investing directly into a Ghana company, but it is not a good option for investors with trepidations about it. Option 3 may be an option, depending upon the company’s business model, but it may be too expensive to implement widely because the cost of the drafting the control contracts and the transfer pricing analysis associated therewith may be too expensive. Furthermore, there is a very real argument that the use of this structure violates the letter and spirit of the GIPCA and is in fact illegal. However, it may be the only solution that gives a foreign investor the comforts of investing through a foreign vehicle while minimizing the risks.
A final option would be to exempt venture capital and angel investors from the application of the GIPCA. The GIPCA does not apply to “portfolio investments,” defined as investments in shares or convertible bonds that are mandatorily convertible into shares or other securities traded on the Ghana Stock Exchange. If the “portfolio investment” definition could be amended to apply to minority investments by private individuals or investment funds whose investments represent no more than 25% equity in the company, international investors would be able to help provide some of the much needed technical and financial expertise that Ghanaian startups need, while helping catalyze and organize Ghana’s domestic venture capital community. Thus, Ghana’s legislators need to refine and specify quickly the exact terms of an alternative to the current GIPCA. Ghana’s startup scene is heating up and could establish Ghana as Africa’s leading technology center if the proper investment conditions are in place.