I'm running 4.4.0-10-generic #25-Ubuntu with lxc version
2.0.0~rc5-0ubuntu1 , and the privileged container has:

lxc.include = /usr/share/lxc/config/nesting.conf

in the configuration file.  This is a clean VM with no ppas installed.
Inside the privileged container (also xenial with no ppas), I can create
containers as user ubuntu.

Can you show the privileged container configuration file, and
/proc/self/cgroup for the shell inside the privileged container from
which you are failing to start an unprivileged container?

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https://bugs.launchpad.net/bugs/1543697

Title:
  Unprivileged nested Xenial container will not start inside a
  privileged Xenial container

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