11 THINGS ABOUT INVESTING IN VENTURE CAPITAL COMPANIES

SECTION 12J (s12J) is no longer a new alternative asset class. Here are 11 things you need to know:

1. Investors can claim the full amount used to acquire shares in a s12J company as a deduction from taxable income in the year of that investment. Provided the shares are held for at least five years, the initial tax benefit will not be recouped by the tax authorities. However, after five years the full proceeds from the sale of the shares will be subject to capital gains tax.

2. A potential risk for investors is that there may be no secondary market for their shares in the s12J company after the investment period (five years or more) has elapsed. However, professionally managed s12J companies should have a clearly defined exit strategy to create liquidity for investors.

3. Time may be running out for investors to take advantage of the s12J tax benefits. The SA Revenue Service (Sars) introduced section 12J with a sunset clause that takes effect on June 30, 2021. The current regime may, or may not, be extended. However, investors will continue to receive the tax benefit on any funds invested in a registered s12J company prior to June 2021, even if the five-year investment period ends after that date.

4. By investing with a professional s12J asset management company, you will de-risk your investment portfolio, while adding much-needed diversification, tax efficiency and investments not generally found in a typical South African investment portfolio.

5. S12J investments are not all that new. They have been around since 2009, when the government introduced amendments to the Income Tax Act to stimulate the private sector and the local economy as a whole. Following further amendments in 2014, the registration of s12J companies started to gain momentum. Today, there are more than 140 registered s12J companies.

6. Not all s12J companies are created equal. Not only do they have different roles and objectives, they also differ in their strategies and methodologies.

7. S12J companies must be licensed with the Financial Sector Conduct Authority and registered with Sars.

8. Investors invest a sum of money to acquire shares in an approved and registered venture capital company (VCC) – the s12J company – which, in turn, invests the funds in qualifying investee companies. The s12J company may not invest more than 20 percent of all investor-acquired funds in any single qualifying investee company.

9. There is no legislated cap on the amount of money that an individual investor may invest in a registered s12J company.

10. The strategy adopted by the s12J company will determine the type of qualifying investee company in which it invests its funds. Qualifying investee enterprises could include start-up operations in highrisk industries, such as hi-tech.

11. A qualifying s12J investee company must be a South African entity. For an investment to qualify under the s12J benefit, it may not involve companies that:

◆ Trade in immoveable property, except to trade as a hotel-keeper;

◆ Offer financial service activities such as banking, insurance, money lending and hire-purchase financing;

◆ Provide financial or advisory services, including legal, tax advisory, stock-broking, management consulting or accounting;

◆ Are involved in gambling; or

◆ Are involved in manufacturing, liquor, tobacco or arms.