Qualifying Investors will invest in approved VCC’s in exchange for the issue of Venture Capital Shares and investor certificates. Investors can claim tax deductions in respect of their investments in an approved VCC. The approved VCC will, in turn, invest in qualifying investee companies in exchange for qualifying shares.
Alumni is regulated by the Financial Services Board in South Africa as well as the South African Revenue Services.
Who qualifies to be an Investor?
Any taxpayer qualifies to invest in an approved VCC. Qualifying investors can claim income tax deductions in respect of the expenditure actually incurred to acquire shares in approved VCCs.
Where any loan or credit is used to finance the expenditure in acquiring a venture capital share and remains owing at the end of the year of assessment, the deduction is limited to the amount for which the taxpayer is deemed to be at risk on the last day of the year of assessment.
EXTERNAL GUIDE VENTURE CAPITAL COMPANIES GEN-REG-48-G01 REVISION: 6 Page 5 of 9
No deduction will be allowed where a taxpayer is a connected person to the VCC at or immediately after the acquisition of any venture capital share in that VCC.
On request from SARS, the investor must verify a claim for a deduction by providing a VCC Investor Certificate that has been issued by an approved VCC, stating the amount of the investment and the year of assessment in which the investment was made.
Except in the case of Venture Capital Shares held by a taxpayer for longer than five years, the deduction is recouped (recovered) if the taxpayer disposes of the Venture Capital Shares to the extent of the initial VCC investment (under the general recoupment rules of section 8(4) of the Act)).
Standard income tax and CGT rules apply in respect of VCC shares.
What supporting documents will the investor receive from the VCC?
The approved VCC must issue investor certificates to its investors. This will provide SARS with the proof it needs to allow the investor the relevant tax deduction.
The Alumni Investment Committee with the assistance of the manager applies rigorous investment criteria in its investment decisions and conducts a rigorous due diligence process before committing to any investment.
Post investment management
Alumni will become actively involved in each of the companies invested in order to mitigate risk. This involvement does not only include the executive directors and staff but also the non-executive directors to ensure the maximum value is unlocked from every asset.
Besides a board seat, the Alumni team will be involved in a number of business building activities (engineering growth) including:
- A sophisticated techno-economic reporting tool developed by the founder – which took 17 years in creation, tracks innovation through to financial success. This allows for daily planning through to multi-decade planning
- Networks – identify, monitor and continuously evaluate the partner universe
- Corporate governance – supplementing the board with external experts
- Financial reporting in line with best practices
- Involvement in sourcing and recruiting with hiring human capital
- Sales – guidance with the establishment of a measurable sales process as well as attendance at sales meetings, if required
- Development of sales leads where the crowdfunding is base incentivized to offer potential sales leads
- Access to a website cluster around an innovative charities support social media/SEO strategy
- Marketing strategy – clearly articulate value proposition to the client base
- Legal compliance with tax, fundraising IP and other legal requirements
An investor in Alumni will obtain a 45 % tax incentive (for an individual tax payer at the maximum marginal rate) at the time of investment
No recoupment of tax incentive at the time of realisation of investment in Alumni if the investment is held for a minimum period by the investor of 5 years.
The onus will be on the VCC to ensure that it invests in companies (i.e. investees) that meet the stipulated requirements.
The VCC must issue “VCC investor certificates” to qualifying investors in the year in which the investment is received. The certificates issued by the VCC must include at least the following details:
- The VCC reference number
- The name and address of the VCC issuing the certificate to which enquiries may be directed
- The date of receipt of the investment
- The name and address of the Investor
- The Tax Reference Number of the Investor
- The amount of the investment
On request from the Minister of Finance, a VCC must submit a report providing information that the Minister may prescribe.
Risk mitigation and risk management
The Alumni model incorporates a number of features that mitigate investment risk. These include:
- The use of grants to reduce the capital required;
- The use of research and development tax credits;
- The use of repeatable templates and centralized and shared service procurement processes to reduce costs for individual startups;
- An innovative media and thought-leadership program tailored to each investee company
- The development of a funding crowd for each company to increase business development opportunities;
- Creation of sales opportunities and sympathetic customer reference case studies within the Alumni investment cluster;
- The partnering with technology companies around the world;
- The tax deductibility of the amount invested in the tax year of investment;
- The stringent investment criteria applied by the investment committee when testing for the three alumni criteria – competitive advantage through community involvement, IP and financial engineering
- The multi-stage investment approach, where the top level stage ables over $50 million per year to be raised from an international crowd.
Investors not resident in South Africa
Investors not resident in South Africa should seek professional advice as to the consequences of making an investment in a VCC as they may be subject to tax in other jurisdictions as well as in South Africa.
Procedure to claim tax deduction of investment
Subject to the Qualifying Application, Investors will be entitled to deduct the full amount of their investment in Alumni from their taxable income in the tax year the investment is made.
A certificate to substantiate a claim for tax deduction will be sent to investors within 6 weeks of the closing date.
Investors can claim the tax relief as follows:
- By obtaining a directive from SARS for a reduction in their PAYE deduction, or
- By reducing their estimate of taxable income when submitting their first, second or third Provisional Tax returns, or
- By claiming the deduction in their Income Tax Return