S12J Venture Capital the preserve of institutional investors

Moneyweb

Section 12J (S12J) Venture Capital Companies (VCC) have grown from relative obscurity to an attractive opportunity for investors and business ventures alike as tax rules have become lenient to support industry and the economy.

Funding remains one of the biggest challenges for startup businesses, and S12J of the Income Tax Act was introduced in 2009 to encourage financiers to invest in small businesses.

Jonty Sacks, director at financial firm Jaltech, says: “To date, there are over 100 VCCs registered with the South African Revenue Service under the S12J umbrella and the investor appetite for the investment vehicle is growing rapidly.”

What makes the S12J regime so alluring is the fact that most private investors have neither access to these types of investments, nor the expertise to gauge the opportunities, and hence the playing fields is often the preserve of institutional investors.

With S12J, high-net individuals or smaller groups can now reap similar rewards by getting in.

The upfront tax deduction is also a significant benefit for these VCC investors.

Alternative exchange ZAR X has geared up with Jaltech to start listing S12J VCCs. ZAR X chief executive Etienne Nel says the exchange is ideally positioned for the S12J market, because it imposes S12J-specific trading restrictions on a real-time basis.

“This means that VCCs have tight control over investor activity and can, therefore, maintain compliance,” says Nel. “Investors gain access to opportunities that are not otherwise available in the financial markets. Companies gain access to a pool of capital that would otherwise be unavailable. And the whole economy benefits.

Due to regulation and the structural funding imbalance between the capital market and the collective investment schemes industry, asset managers are in effect restricted to investing in securities with large market capitalisation.

It is therefore difficult for innovative small- and medium-sized companies to raise capital from asset managers. They need direct access to retail investors or bespoke asset managers who can invest in smaller companies. Only severe disruption will return the financial markets to any sense of reality and social relevance.

“Now ZAR X will open up an entirely new investment market that will open up portals to institutional funders, who usually have very specific investment mandates,” says Sacks.