Does Africa Need Its Own Delaware?

Table of Contents

• Does Africa Need Its Own Delaware?

  • How did we get here?

  • Why do company set up their headquarters in Delawa …

  • Why not Africa?

  • Towards an African Alternative to Delaware's Corpo …

    • Mauritius

    • Rwanda

  • Characteristics of the African country that can so …

  • What are stablecoins?

  • Imagining a new digital currency for Africa

  • Connecting it all together

    • Incorporation

    • Banking

    • Venture funds

    • Talent

    • Support services

  • Conclusion

  • Final but biased thoughts

When I started investing in Africa in 2020, I was shocked to discover that many of the funded African tech startups are not African businesses. Granted, many of them are operating in Africa, but they are incorporated in Delaware and do mostly business in Africa. Many, if not all, of them have a structure that looks something like this.

Holdco is usually in Delaware. It raises capital in USD, and OpCo (Nigeria, Ghana, and Kenya) are usually wholly owned subsidiaries of the HoldCo. As a result, most African companies that have announced their fundraise over the past couple of years are US companies, with millions of dollars in bank accounts domiciled in the US.

How did we get here?

The rationale I was given when I raised the question a while back was that most funds are registered and domiciled in the US. These investors require the investee companies to register in the same jurisdiction as them. It makes sense because both the investee and the investor can abide by the same laws from the same jurisdiction.

Recently, many companies are struggling to open and maintain bank accounts. One of the popular startup banks that businesses use is Mercury, and the bank has unbanked many of these startups over the years, citing increased compliance requirements. The first one I could remember was in March 2022, but it happened again in July 2024. It turns out some of the founders of these companies hold Nigerian passports, and they are subject to more checks. Sadly, the companies are Americans but the founders cannot be. The bank said, and I quote “the number of customers in these countries is very small (<1% of Mercury deposits), but it was putting a lot of strain on our operational teams and all of our financial partners (partner banks, treasury, payments, etc)”.

One of the well-known founders, Adeyinka Adewale, founder of Nomba, shared a poignant tweet about going around SF with a check of $5M, looking for a bank to bank them.

I joined a twitter space with Moe Odele, founder of Vazi legal, a legal firm that works with a lot of African startups to talk about the issue a couple of weeks ago.

After the most recent closures, folks started recommending other banks startups can use. I recommended two Banking as a Service providers (BaaS), but when you look under the hood, these providers issue bank USD accounts, providers by US banks that power the likes of Mercury. This means that the suggestions are temporary, and African startups are months away from being unbanked yet again, back looking for alternatives.

Why do company set up their headquarters in Delaware?

The question everyone must be asking is: Why can’t these startups move their accounts to Africa? Before we answer this important question, let’s explore the benefits of being incorporated in the US. Some of these benefits are:

• Business-Friendly Laws: Delaware's corporate laws are highly regarded for flexibility and business-friendliness. The Delaware General Corporation Law (DGCL) allows various corporate structures and practices.

• Court of Chancery: The Delaware Court of Chancery is a key attraction. It is a court of equity that focuses exclusively on corporate issues, meaning cases are decided by judges specialising in corporate law rather than juries. More consistent rulings.

• Legal Precedents: Delaware's extensive body of case law provides clear guidance on various corporate issues.

• Tax Benefits: Delaware offers several tax advantages that appeal to corporations. For example, there is no state corporate income tax for corporations that do not conduct business in Delaware.

• Privacy: Delaware allows companies to maintain more privacy than other states. It does not require the names of shareholders or directors to be included in public filings, providing anonymity for those involved in the corporation.

• Ability to Trade Easily with the World: Incorporating in Delaware can facilitate international trade. The state’s legal framework and reputation give foreign companies the credibility to engage in global trade more effectively.

• Access to US and Global Investors: Delaware is a preferred jurisdiction for investors, including venture capitalists and private equity firms, because of its predictable legal environment and well-established corporate governance practices. Incorporating in Delaware can make it easier for foreign companies to attract investment from US and international investors. Familiarity and trust in Delaware’s legal system can significantly secure funding.

• Protection Against Currency Devaluation: Incorporating in Delaware can provide a hedge against currency devaluation. By holding assets and conducting transactions in US dollars, foreign companies can mitigate the risks associated with the devaluation of their home country’s currency. This financial stability can be crucial for companies operating in regions with volatile currencies.

While these benefits help African companies, it still doesn’t protect them from being unbanked.

Why not Africa?

Getting back to the main question, many companies that have raised money don’t repatriate this capital for a million reasons. Some of these are:

• Currency Stability and Risk: Many African currencies are subject to high volatility and inflation. The NGN has slumped 70% since June 2023. If a founder raised $100,000 in June 2023, that capital would be worth $30,000 at the time of this writing (August 2024)

• Regulatory Environment: Some African countries have complex and unpredictable regulatory environments, including capital controls and restrictions on repatriating funds. This can make it difficult to move money freely in and out of the country. In the WAEMU region, individuals and businesses cannot hold USD bank accounts, and funds must be kept in XOF (FCFA). This makes it hard for any business to repatriate their funds. Economic colonialism is still hard at work, but this is not the topic of this article.

• Investment Opportunities: Companies might initially park their funds in international financial markets to earn better returns or maintain liquidity before deploying the capital for specific projects in Africa. Over the past few years, the Federal Reserve has kept rates higher, and companies can earn healthy returns (5%) on their cash.

• Political and Economic Instability: Political instability, corruption, and economic challenges in certain African countries can pose significant risks to capital. Keeping funds abroad can mitigate these risks.

• Tax Considerations: Tax policies and incentives in different jurisdictions can influence where companies hold their funds. Some countries offer tax benefits for holding funds abroad or may have more favourable corporate tax rates.

Towards an African Alternative to Delaware's Corporate Dominance

By adopting Delaware's pros and mitigating the cons listed above, I believe there is room for replicating an environment that can support businesses a la Delaware, thus making it possible for companies to repatriate funds back to the continent and still operate freely.

I’ve discussed this with many people, and I plan to hold more discussions to understand what this could look like. It could be a country or a region on the African continent. Some countries already have a head start.

Mauritius

Mauritius appears to be a haven for many funds, but I haven't spoken to a fund manager who enjoys the experience. I don’t know to what extent companies also incorporate in Mauritius. I led over 100 early-stage investment deals and have not dealt with a company incorporated in Mauritius. I have heard from fund managers that some documents need to be notarized. I’m not against notarisation, but in 2024, when everything is digital, Mauritius needs to calm down. I’m sure it works for fund managers who have been operating in the region for many years.

Rwanda

Rwanda has been promoting a business-friendly environment for quite a while now, and I have invested in two companies incorporated in Rwanda. But again, these companies still had Delaware C-corps, and the funds ended up in the USA.

The above-mentioned countries are not solving this problem to make it easier for African companies to consider them as their Delaware. I still believe this is a problem that an African country can solve, especially for businesses that trade online. For a start, the country must be off the grey/black list, in line with FATF rules.

Characteristics of the African country that can solve the problem

This country will need to develop a unique set of laws and regulations to accommodate businesses that want to keep funds on their shore while offering benefits similar to those of Delaware. The country also needs to be economically and politically stable to accommodate a new wave of businesses willing to bring their capital and do business there.

The country needs to build a lot of infrastructure, physical and digital and may need to go as far as erecting a new currency. This currency will most likely be a digital currency, at parity with the dollar, to do the trick. Stablecoins. Yes - the country must be able to enact and accept a stablecoin that could work globally just like any other stablecoin. I like USDC and USDT, but when you look at the underlying assets, they are all US securities, meaning that we are sorta back to square one.

What are stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value relative to a specific asset or basket of assets. Unlike traditional cryptocurrencies like Bitcoin or Ethereum, whose prices fluctuate wildly, stablecoins aim to provide price stability, making them more suitable for everyday transactions, trading, and as a store of value.

Here are the main types of stablecoins:

1. Fiat-Collateralized Stablecoins: These are backed by traditional fiat currencies like the US dollar, euro, or yen, held in reserve by a central authority or financial institution. An equivalent amount of fiat currency is held in reserve for every stablecoin issued. Examples include Tether (USDT) and USD Coin (USDC).

2. Crypto-Collateralized Stablecoins: These are backed by other cryptocurrencies. To account for the volatility of the underlying assets, these stablecoins are usually over-collateralized, meaning more crypto assets are held in reserve than the value of the stablecoins issued. An example is Dai (DAI), backed by Ethereum and other cryptocurrencies.

3. Algorithmic Stablecoins: These use algorithms and smart contracts to control the stablecoin supply, adjusting it based on market demand to maintain a stable value. Any traditional asset or cryptocurrency does not back them but relies on mechanisms that reduce or increase the coin's supply to stabilize its price. Examples include TerraUSD (UST) before its collapse.

4. Commodity-Collateralized Stablecoins: These are backed by physical assets, such as gold, real estate, or other commodities. The stablecoin's value is tied to the underlying asset's value. Examples include Paxos Gold (PAXG), which is backed by gold.

Imagining a new digital currency for Africa

Imagine a new digital currency, fiat-collateralised that is at par with the dollar but with African securities as the underlying securities. This means that instead of buying US securities with the deposits, the assets are African securities across the continent. Some examples of securities that appear liquid are:

• The Dangote Sugar Refinery N43 Billion Commercial Paper announced two months ago.

• Kenyan T-bills paying between 15% to 18%

• South African 3 months bonds are paying 8%

Many countries would be open to welcoming this new innovation, which would buy their liquid securities, increasing access to liquidity across the continent. So, if I were running a country that’s serious about business, I would welcome this innovation and enable the adoption of a digital currency that can enable businesses to repatriate their funds to Africa while this capital remains stable and is protected against currency devaluation. As a country, we would first buy local securities and then make the option available to other countries. If this country was in the XOF/XAF region, they can now get around the UEMOA restrictions mentioned above.

As African currencies are very volatile, it will be important to figure out a hedging mechanism to maintain parity with the dollar for the underlying asset cost. I’m not sure how organisations like the IMF would feel about their borrowers getting access to capital through other channels, such as the one proposed above, but I’m willing to let my naive mind wonder.

Finally, this innovation will need to be done with crypto experts such as Coinbase, Stellar Foundation and Circle, to name a few. These entities can support the adopting country in building the rails and enabling this innovation.

Connecting it all together

Incorporation

To attract businesses to operate in your country, much is required, starting with the incorporation processes. Norebase, a global incorporation service provider, can be the ideal partner, enabling as many companies as possible to get started with minimum friction. Itana, a Peter Thiel-backed startup, is working on enabling a digital-free zone for businesses is another viable option. It’s not clear when Itana will start operating.

Banking

Once incorporation is done, then companies need to open a bank account. Norebase partners with Raenest, a banking service provider, to provide bank accounts, so the banking piece is done. As deposits come in, this capital can be used and converted to the new currency.

Venture funds

Many companies need to raise capital, so making it super easy for funds to domicile in this country to fund startups would make sense. They can hold this new currency and deploy capital in it.

Talent

Hiring and retaining must be easy and straightforward for all this to work. If the country doesn’t have the required workforce, visa rules must be very relaxed to enable talent to relocate or be employed without living there. This could be another revenue source for the country.

Support services

There will be many support and professional services to make this work. Some of them are:

• Legal and Regulatory Services

• Market Access and Growth Services

• Government and Policy Support

• Technology Infrastructure

• Education and Training

• Supportive Culture and Media

Conclusion

The challenges faced by African companies in repatriating funds and operating seamlessly across the continent highlight the need for an alternative to the dominant Delaware model. By leveraging Delaware's business-friendly environment and addressing the key limitations in the African context, there is a clear opportunity to create a new corporate and financial hub on the continent.

Key elements of this vision include:

1. An African country bold enough to create new laws, regulations, and infrastructure to accommodate companies that want to keep their funds onshore while enjoying Delaware-like benefits.

2. Developing a new digital currency that is somehow pegged to the US dollar but backed by African liquid securities, providing stability and access to liquidity across the continent.

With the right vision, execution and people, an African alternative to Delaware's corporate dominance could be a game-changer for the entire continent. It would empower more African companies to scale, retain capital on the continent, and drive sustainable economic development.

In summary, Africa needs its own Delaware, but we are very far from it coming to life.

Final but biased thoughts

I think a country like Togo would be perfect for such innovation. Maybe i’m biased and naive because it’s my country of birth but I strongly believe that something like this can be transformational and propel our GDP to greater heights. I’m open to learn so if you, the reader, has any comments or thoughts about this article, please reply and let me know.

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Thank you for reading 🤝