A Study of the Section 12J Venture Capital Company Regime as a Capital Procurement Instrument for Small Medium and Micro Enterprises

Abstract

The significance of this academic research emanates from the difficulty small, medium and micro enterprises encounter in capital procurement. These enterprises warrant attention due to the indelible contribution they make towards the South African economy, These enterprises are faced with a multitude of encumbrances inhibiting them from growth and, in some instances, causing their unsustainability. The difficulty in capital procurement is identified as one of the momentous encumbrances. Capital procurement at the early stages of an enterprise’s development is imperative to the success of the enterprise. An inability to procure sufficient venture capital is cited as a predominant factor contributing to the failure of a multitude of small medium and micro enterprises. In light of this, the South African venture capital provisions were introduced in section 12J of the Income Tax Act in order to encourage investment into small medium micro enterprises as a measure to address the capital procurement difficulty these enterprises are faced with. However, section 12J has been unsuccessful to date. This study purports to encourage the reform of the venture capital provisions as enacted so that it achieves the purpose for which it was created. In an effort to achieve this, consideration must be had to the bureaucratic environment in which small, medium and micro enterprises exist, regulatory incentives that have been created to encourage the sustainability and development of small medium enterprises and other incentives that have been designed to render support to this sector. Furthermore, the pragmatism of the use of tax incentives to address economic ills is envisaged in order to substantiate the necessity for the venture capital provisions. In order to effectively reform the venture capital provisions, it is imperative that the venture capital investment procedure be comprehended. This warrants the synopsis of the venture capital procedure provided for in this study. An analysis of the venture capital provisions and its shortfalls is also provided. These shortfalls primarily take the form of the restrictions imposed on the type of small, medium and micro enterprises to which investments may be directed, restriction imposed on the venture capital company and the lack of powers vested in the Commissioner to withdraw a company from venture capital company status and the penalties that may be imposed thereafter. In an effort to reform the venture capital provisions, a brief observation of foreign jurisdictions with similar tax incentives is provided with the intention providing possible alternatives to the reformation of the current section 12J.