Words of advice

New rules make it easier for Section 12J companies to list on the AltX, thus encouraging investment in small and medium-sized enterprises

Words of advice

The JSE has changed the listing requirements for Section 12J companies, making it simpler and cheaper for them to list on the AltX. So-called Section 12J companies are set up under this section of the Income Tax Act and provide a tax incentive for investors in venture capital companies (VCCs) that are intended to fund small and medium-sized enterprises. Qualifying investors are able to deduct the full amount invested from their taxable income in the year in which an investment is made. One estimate suggests there are more than 100 registered Section 12J companies in SA, with in excess of R3.6 billion being raised by the end of 2018.

According to Alwyn Fouchee, Head: Regulatory Compliance in the JSE’s Issuer Regulation department, ‘the VCC regime helps address one of the main challenges to the growth of small and medium-sized businesses and junior mining exploration entities, which is access to equity finance’.

VCCs are intended to be marketing vehicles that will attract retail investors, and have to be registered as a financial service provider with the Financial Sector Conduct Authority and be approved by SARS as a VCC. Given the underlying purpose of the incentive structure, certain sectors may not qualify for the VCC benefit. It may not involve companies that trade in immovable property (with the exception of trading as a hotel keeper); offer financial service activities, such as banking or insurance; provide financial or advisory services; operate in the gambling/gaming sector; or are involved in the liquor, tobacco or arms/ammunition trade.

To provide more flexibility for a VCC listing on the AltX, the JSE has amended listing requirements to allow these types of companies to appoint either a designated adviser or a VCC adviser. ‘The appointment of a VCC adviser will reduce costs for the VCC issuer and is an initiative of the JSE’s to support the growth of small and medium-sized businesses and junior mining exploration through equity funding,’ according to Fouchee.

The JSE says the ‘VCC adviser must comply with, and is subject to, all the provisions of the listing requirements as though they were a designated adviser’. And, in order to be admitted to the list of eligible VCC advisers, they must meet the requirements for a VCC adviser as per the provisions of Schedule 16 of the JSE’s listing requirements. These include attending prescribed training.

While there is this new flexibility for VCCs to appoint a VCC adviser rather than a designated adviser, ‘all AltX requirements apply equally to a VCC’, says Fouchee. ‘If, however, a VCC is looking to list on the Main Board of the JSE it will be required to appoint a sponsor and not a VCC adviser.’ National Treasury recently announced that the tax incentives received by VCCs investing in small and medium-sized enterprises in SA are under review. The application of Section 12J of the act will come to an end on 30 June 2021, subject to an extension by SARS or Treasury.

Fouchee says it is important to note that a ‘VCC company listed on the JSE will invest in other companies that are unlisted and are looking for further investment to help develop their business. ‘The aim is to encourage investment into new SA businesses, and this will help the JSE build a pipeline for future listings when the small companies have matured and the VCC company exits the investment’.

With an end to this incentive in sight, listing may be a viable option for many of these entities.

By Hilton Tarrant
Image: Gallo/Getty Images