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Start-up Stock exchange breaking down barriers for investors

17 July 2018Jonty Sacks, Jaltech & Etienne Nel, ZAR X
Jonty Sacks, a director at Jaltech.

Jonty Sacks, a director at Jaltech.

Etienne Nel, CEO of ZAR X.

Etienne Nel, CEO of ZAR X.

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 more lenient over the years in an attempt to support industry and the economy.

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

“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”, says Jonty Sacks, a director at the financial boutique firm Jaltech that has much expertise and great experience in structuring and administering VCCs.

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 on the ground floor. The upfront tax deduction is also a significant benefit for these VCC investors.

However, the deal is about to become even more attractive as alternative exchange ZAR X gears up with Jaltech to start listing S12J VCCs. ZAR X CEO, Etienne Nel, says that the exchange is ideally positioned for the S12J market, because its platform is the only one in the country able to impose S12J-specific trading restrictions on a real-time basis.

“This means that VCCs have tight control over investor activity and can, therefore, maintain compliance. 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,” says Nel.

“As in other areas, through S12J VCCs, we are facilitating transformation not just of the financial markets but the entire economy. We are one more example of the positive, proactive difference a stock exchange can make to a country.”

“Nowhere is radical change more desperately needed in SA than in the capital markets,” adds Nel. The model that has dominated for more than 60 years is stagnant, with no broadening of the capital markets. It is also hopelessly skewed against the private investor.”

The equity market is too concentrated, and the debt market remains inaccessible and opaque. Despite there being nearly 1,300 collective investment schemes as well as many broker-managed discretionary portfolios, allocations are nearly all aligned to a limited number of old economy securities. Passive investment products such as index trackers simply compound the concentration.

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.

Before the introduction of this new platform for purchasing company shares, investors could only get a piece of the tech start-up pie through angel investments, partnering with a venture capital fund, or through a crowdfunding campaign.

With start-up stock exchanges, the gates to the world of venture capital and private equity are now open to retail investors.

To facilitate the meeting of VCC’s and investors, ZAR X and Jaltech are mounting a S12J conference in August to bring together S12J VCCs and high-net worth investors.

The timing is key because a sunset clause introduced by SARS takes effect on 30 June 2021, and this could mean the window of opportunity will close in 3 years. Investors will continue to receive tax benefits on any funds invested in a registered S12J VCC prior to June 2021.

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