Companies a Section 12J VCC can invest in?

What companies a Section 12J VCC can invest in?

When looking at the investment rules of Section 12J, Venture Capital Companies follow a strict and clearly defined set of regulations, as well as follow their own mandates for selection of investments. For example, Kalon Venture Partners’, a Section 12J VCC, overriding strategy is to provide growth capital and acquire a minority stake in high growth innovative digital technology companies. Kalon assists these companies with hands on involvement, to help build the businesses into assets of value and exit the business to trade buyers or through an IPO (a buy to flip strategy). In this article, we will look into the investment criteria for a qualifying company.

A key factor to be considered by a VCC when investing is that 80% of the capital is to be deployed in “qualifying” companies. The remaining 20% of capital deployed can be invested in “non-qualifying”, non-South African resident companies and does not need to meet the below criteria.

The recent amendments to Section 12J of the Income Tax Act permit registered VCC’s to invest in companies such that the book value of assets post investment does not exceed R 50 million.
This threshold allows Venture Capital companies, such as Kalon Venture Partners, to invest in larger and more established entities.

The following criteria are required to be met by the potential investee in order for a Section 12J VCC to invest in a “qualifying” company:

  • The Investee must be a company and must be a resident of South Africa;
  • The company must not be a controlled group company in relation to a group of companies;
  • The company’s tax affairs must be in order (a tax clearance certificate must be requested from SARS to support this requirement);
  • The company must be an unlisted company (section 41 of the Act) or a junior mining company; A junior mining company may be listed on the Alternative Exchange Division (AltX) of the JSE Limited;
  • During any year of assessment, the sum of the “Investment Income” derived by the company must not exceed 20% of its gross income for that year of assessment;

A “qualifying” company must not carry on any of the following impermissible trades:

  • Any trade carried on in respect of immoveable property, except trade as a hotel keeper (includes bed and breakfast establishments);
  • Financial service activities such as banking, insurance, money-lending and hire purchase financing;
  • Provision of financial or advisory services, including legal, tax advisory, stock broking, management consulting, auditing, or accounting;
  • Operating casino’s or other gambling related activities including any other games of chance;
  • Manufacturing, buying or selling liquor, tobacco products or arms or ammunition; or
  • Any trade carried on mainly outside the Republic.
  • There are no special tax rules for investee companies. The standard tax rules will still apply.

The VCC is intended to be a marketing vehicle that will attract retail and institutional investors. It has the benefit of bringing together small investors as well as concentrating investment expertise in favour of earlier stage startups.