2017 Budget Speech implications for the externalisation of intellectual property (IP)

2017 Budget Speech implications for the externalisation of intellectual property (IP)

Relaxing the South African (SA) Exchange Control Regulations, in relation to IP in particular, is crucial for many of our start up clients (especially those operating in the software development and technology space). Up to now, SA resident companies could not export their IP to a non-resident, unless the approval of the Financial Surveillance Department (FSD) of the South African Reserve Bank (SARB) was obtained. This proved to be an insurmountable hurdle for many companies trying to externalise their businesses by moving them “offshore” for any reason, including that of attracting foreign capital investments.

The Exchange Control Regulations provide that when a SA resident (natural or juristic person) enters any transaction in terms of which capital, or any right to capital, is directly or indirectly exported (i.e. transferred by way of cession, assignment, sale transfer or any other means) from South Africa to a non-resident (natural or juristic person) such transaction falls in the ambit of the Exchange Control Regulations.

The export of “capital” specifically includes any IP right (whether registered or unregistered), which means the Exchange Control Regulations must be considered when dealing with an externalisation of IP.

The reasoning behind this regulation is that the offshoring of assets / capital belonging to SA residents amounts to an exportation of assets / capital and therefore erodes the asset base of the SA resident by way of a transfer of ownership from a SA resident to a non-resident. While this reasoning may have seemed sound, the application of the Exchange Control Regulations to the export of IP has led to many negative and unintended consequences for SA companies, and start ups in particular.

In the 2017 National Budget review the Government proposed that SA residents would no longer need the SARB’s approval for “standard IP transactions”. It was also proposed that the “loop structure” restriction for all IP transactions be lifted, provided they are at arms-length and at a fair market price. “Loop structure” restrictions prevent SA residents from holding any SA asset indirectly through a non-resident entity.

The SARB has started the process of relaxing the Exchange Control Regulations by issuing two circulars relating to IP. These latest amendments to the Currency and Exchanges Manual for Authorised Dealers mean that, under certain circumstances, approval for the exportation of IP can now be sought from Authorised Dealers (banks appointed by the Minister of Finance for exchange control purposes), as opposed to the FSD. This is good news for clients looking to restructure and offshore their IP, as the approval process should now be less administratively intense, less expensive and with faster turnaround times.

Approval can now be sought through an Authorised Dealer for:

  • a sale, transfer and assignment of IP;
  • by a SA resident;
  • to unrelated non-resident parties;
  • at an arm’s length and fair and market related price.

The Authorised Dealer will need to be presented with: (i) the sale / transfer / assignment agreement; and (ii) an auditor’s letter or intellectual property valuation certificate confirming the basis for calculating the sale price ((iii) together with any additional internal requirements).

For the approval of the licensing of IP by a SA resident to non-resident parties at an arm’s length and fair and market related price, the Authorised Dealer will need to be presented with: (i) the licensing agreement in question; and (ii) an auditor’s letter confirming the basis for calculating the royalty or licence fee ((iii) together with any additional internal requirements).

The second set of amendments provide that private (unlisted) technology (among others) companies in South Africa may now establish companies offshore without the requirement to primary list offshore in order to raise foreign funding for their operations. This effectively means that “loop structures” can now be created to raise loans and capital offshore, and these companies may hold investments in South Africa. Note that there are still certain requirements that must be met, for example, registration with the FSD.

Our commercial team has experience in making the necessary applications for exchange control approval. Feel free to get in touch if this is something on the horizon for your business.


In an effort to keep our clients well-informed and to eliminate their chances of finding themselves on the wrong side of the law, we have found it necessary to write an article on the registration requirements of Financial Service Providers (“FSPs”). This article is a brief summary which details when the Financial Advisory and Intermediary Services Act 37 of 2002 (“the Act”) would require a business organisation to obtain authorisation. In other words, when will a business be required to be registered or licensed as an FSP?

In order to operate as a FSP in South Africa, a business entity or individual must be issued with a licence in accordance with section 7(1) of the Act read with section 8 of the Act and may not act or offer to act as a FSP unless being issued with such a license. Section 8 sets out how an FSP should apply for a license.  The process includes submitting an application to the registrar of the Financial Services Board (“Registrar”) along with certain information to satisfy the “fit and proper requirements”. Once the application has been considered by the Registrar one of the following may result:

  • the application is granted as a result of the applicant or key individuals complying with the requirements of the Act; or
  • the application is refused if the Registrar is not satisfied that the applicant or its key individuals comply with the Act.

A successful application may be granted with accompanying conditions and restrictions. These conditions and restrictions will be included in the licence issued by the Registrar. Upon an application being successful the Registrar must issue the applicant with a licence authorising the applicant to act as an FSP and the number of copies of such licence as the applicant requests. This licence may however be withdrawn or amended after it has been issued upon application by the applicant or by the Registrar on its own initiative. Conditions and restrictions may also be amended or imposed should key individuals change after the licence has been issued. Should an application be refused the applicant must be notified by the Registrar and be provided with reasons for the refusal.

An FSP is defined in the Act as any person, other than a representative, who as a regular feature of the business of such person furnishes advice; furnishes advice and renders any intermediary service; or renders an intermediary service. In order to determine whether one qualifies as an FSP, it is necessary to examine the meanings of “advice” and “intermediary service”. The Act defines “advice” as any recommendation, guidance or proposal of a financial nature furnished by any means or medium, to any client or group of clients about the purchase of any financial product or investment in a financial product. Any recommendation, guidance or proposal of a financial nature “on the conclusion of any other transaction, including a loan or cession, aimed at the incurring of any liability or the acquisition of any right or benefit in respect of any financial product” is also considered to be “advice” for purposes of the Act. Intermediary service means any act performed by a person, excluding the rendering of advice, which results in the client entering into any transaction in respect of a financial product with a product supplier without dealing with the product supplier directly.

A “financial product”, as mentioned above, has been given a broad definition in the Act in order to provide extensive protection to consumers. Financial products include a wide array of products such as a participatory interest in one or more collective investment schemes; securities and instruments including shares in a company, debentures, money market instruments and any “securities” as defined in section 1 of the Financial Markets Act 19 of 2012; a health service benefit provided by a medical scheme and a benefit provided by a pension fund organisation or a friendly society.

Persons who offer advice and intermediary services are either a “key individual” or a “representative”. A representative is a person who is employed or mandated by a financial services company to render advisory or intermediary services to clients. They make recommendations and perform activities based on their judgement and lead clients to conclude transactions on financial products. A key individual is a natural person who manages and oversees the activities of a FSP and is responsible for ensuring the operational ability of the FSP.

As mentioned above, part of the registration process includes meeting certain criteria, referred to as “the fit and proper requirements”. The fit and proper requirements differ according to the category in which the Registrar classifies FSPs. Section 6A of the Act provides a non-exhaustive list of what the fit and proper requirements may include. These requirements include (a) the personal character qualities of honesty and integrity, (b) competence including experience, qualifications and knowledge tested by the Registrar through examinations, (c) operational ability, (d) financial soundness and (e) continuous professional development.

  • Personal character qualities of honesty and integrity

The requirement of honesty and integrity refers to the fact that within the 5 years preceding the date of appointment as an FSP, the applicant must not have been found guilty in any criminal proceeding or liable in any civil proceedings by a court of law. The applicant must also not have been found to act fraudulently, dishonestly, unprofessionally, dishonourably or to have breached a fiduciary duty.

  • Competence including experience, qualifications and knowledge tested by the Registrar through examinations

In order for an FSP to be declared competent the FSP must pass regulatory examinations applicable to the category in which the FSP falls and be found to have necessary minimum experience. The FSP must also have a relevant qualification as prescribed based on the category into which that FSP falls, and comply with Continuous Professional Development.

  • Operational ability

Operational ability requires the FSP to meet business requirements, to confirm competence requirements of the people working for the business and the key individual is required to meet requirements.

  • Financial soundness (of the business)

The business must not be an unrehabilitated insolvent, under liquidation or under provisional liquidation and the assets of the business must exceed its liabilities. The category in which the business falls will determine the liquid assets which the business will be required to maintain. The liquid assets will be equal to a portion of the annual expenditure of the business.

  • Continuous professional development

The category into which the business falls determines the amount of hours which must be completed by the business of professional development over a three year period. The activities which the business participates in may include courses, conferences and seminars as well as structured self-study programmes and workshops.

Exemptions in terms of the Act:

Certain persons and businesses are exempt from the requirements set out above. These exemptions apply to administrators of Pension Funds, administrators of Medical Schemes, managers of Collective Investment Schemes and an authorised user or clearing house under the Securities Services Act.


It is important to bear in mind that a person or business will be required to apply to register as an FSP in terms of the Act where that business or person supplies financial products including the furnishing of financial advice and the rendering of intermediary services. However, certain businesses and persons are exempt from application for a licence as set out in section 45 of the Act and mentioned briefly above. The application process involves various steps and persons and businesses applying to be an FSP must ensure that they meet the “fit and proper requirements” as set out in section 6A of the Act if they intend their application to be successful. It is important that the applicant be able to prove that the requirements are met and that where additional training is required, such as in section 6A(2)(e) which requires continuous professional development, that certificates and proof of such development are maintained.

Please don’t hesitate to contact us for assistance with the registration process or with any queries about whether you need to apply to be an FSP.

Companies Act, 71 of 2008 Series Part 6: Share capital – what to consider?

The monies raised by a company through the issue of shares is commonly referred to as the share capital of that company. The Companies Act, 71 of 2008 (as amended) (“Companies Act“) regulates certain aspects regarding share capital, which every director, shareholder and potential investor should be aware of. Set out below are 8 of the most important things you should know in order to manage your company’s share capital and to help you make informed decisions about potential equity investments.

  1. Where is the share capital recorded?

A company’s memorandum of incorporation (“MOI“) must set out the classes of shares, the number of shares of each class that the company is authorised to issue and any specific preferences, rights, limitations and other terms associated with the shares. The share capital is therefore located in the MOI, which is theoretically a public document available for inspection from the Companies and Intellectual Property Commission (“CIPC“).

  1. The distinction between the authorised and issued shares of a company

The authorised shares are the shares which the company is entitled to issue in terms of its MOI. Authorised shares have no rights associated with them until they have been issued. The issued shares are shares that are authorised and issued to shareholders, and to which certain rights are then attached.

  1. Basic rights attaching to every share

Save as provided otherwise in the MOI of the company, a share affords every holder of such share the right to certain dividends when declared, the return of capital on the winding up of the company and the right to attend and vote at meetings of shareholders. These rights can, however, be limited, for example, dividend preferences or liquidation preferences may attach to one class of shares but not the others. Non-voting rights may also attach to a class of share. However, every share issued gives that shareholder an irrevocable right to vote on any proposal to amend the preferences, rights, limitations and other terms associated with that share. This is an unalterable right under the Companies Act.

  1. How many authorised shares is appropriate?

This of course depends on the circumstances, but there is no limit to the number of authorised shares a company can have in its share capital. When starting a business an entrepreneur will often acquire a “shelf company”, which typically has an authorised share capital of 1 000 shares. This is suitable if there are only one or two shareholders. If more shareholders are anticipated, the authorised share capital will need to be increased. It is advisable to have enough authorised shares to avoid having to create further shares (and go through the process set out in point 5 below) every time the company needs to issue further shares.

  1. Amendment of the share capital – how is the CIPC involved?

The authorisation, classification, number of authorised shares, and preferences, rights, limitations and other terms associated with the shares, as set out in the company’s MOI, may only be changed by way of an amendment of the MOI. Such amendment can be approved by resolution of the board of the company, or by special resolution of the shareholders of the company, depending on which method is provided for in the MOI. It is common practice to restrict the board’s powers in this regard and reserve such matters for approval by the shareholders (in the MOI).

Any amendment of the MOI must be submitted to the CIPC for acceptance and registration. This process could take anywhere between 1 – 3 months, depending on the CIPC’s capacity and any backlogs.

  1. What happens if shares are issued in excess of the authorised share capital?

In the event that more shares are issued than are authorised (or shares are issued that have not yet been authorised), the board may retroactively authorise such an issue within 60 business days of “issue” – otherwise the share issue is void to the extent that it exceeds the authorised share capital. In such circumstances, the company must return to the relevant person the fair value of the consideration received in terms of such share “issue” (plus interest) and the directors could be held liable for any loss, damage or costs sustained by the company as a consequence of knowingly issuing unauthorised shares.

While these consequences can be severe, the potential costs and damages to the company (and its board) can be limited in the event that all the shareholders are willing to participate in rectification steps that would need to be taken and simultaneously waive their rights to claim any return of consideration and damages, where such actions were not taken knowingly and not timeously retroactively authorised.

  1. Share capital may comprise of different classes of shares

Not all shares in a company need have equal rights and preferences. Some shares may have preferential rights as to capital and/or dividends, privileges in the matter of voting or in other respects. A company may, for example, create one class of shares for the founders of the company, another class of shares for its investors and a third class of shares for its employees, with each class having its terms tailored for specific purposes. Note that the preferences, rights, limitations and other terms of shares distinguish the different classes, but are always identical to those of other shares of the same class.

  1. Shares in a company incorporated under the “old” Companies Act, 61 of 1973 (as amended) (“1973 Companies Act”)

Any issued shares held in a company that was incorporated under the 1973 Companies Act and were issued before 1 May 2011, being the effective date of the Companies Act (“Effective Date“), continue to have all the rights associated with it immediately before the Effective Date. Those rights may only be changed by means of an amendment to the MOI of the company.

All shares of companies incorporated under the Companies Act are no par-value shares. Under the 1973 Companies Act, however, a company could have a par-value share capital. If par-value shares had been issued as at the Effective Date, such company may still issue further authorised but unissued par-value shares, but the authorised par-value share capital itself may not be increased. In the event that such a company wishes to increase its authorised share capital, it can either convert its existing par-value shares to no par-value shares and then increase such number of authorised shares, or alternatively, create a further class of no par-value shares thereby also increased the total number of authorised shares.

Concluding remarks

Although at first glance the exact composition and structure of a company’s authorised and issued share capital may not be considered a top priority for busy entrepreneurs to worry about, we trust that the issues highlighted above will give you some insight and guidance into how and why your company’s share capital should be of great importance to your shareholders and any potential investors. If you would like to discuss any of these topics in more detail, please feel free to contact our commercial department and we will gladly assist you.

Automotive Industry Code Of Conduct In Terms Of The Consumer Protection Act

For the first time ever in South African legal history the status of a “private” document is being elevated and given the status of law. The Consumer Protection Act 68 of 2008 (CPA) makes this possible by providing for “Industry Codes of Conduct” to regulate the application of the Act within a specific industry once so published as an Industry Code of Conduct. After a number of drafts, the legislature finally published the South African Automotive Code of Conduct (the Code) in the government gazette. The Code will have the same legal effect as the CPA itself or its accompanying Regulations.

The main objective of this Code is to give effect to the Consumer Protection Act, regulate the relationships between the role players conducting business within the Automotive Industry and, most importantly, to provide for a scheme of alternative dispute resolution between consumers and industry role players. The Automotive Industry will include importers, distributors, manufacturers, retailers, franchisors, franchisees; suppliers, and intermediaries who import, distribute, produce, retail or supply any of the goods listed in the Code. These goods include, for example, passenger -, recreational -, agricultural -, industrial -, or commercial vehicles. It furthermore includes trucks, motor cycles, quad cycles, and many more.

In broad terms, the Code will bring significant changes to the manner in which the Automotive Industry handled consumer complaints in the past. The Motor Industry Ombudsman of South Africa (MIOSA) has been established to assist in resolving disputes that arise in terms of the CPA when it comes to any goods or services provided by a role player within the Automotive Industry. MIOSA is an independent non-statutory body that has been afforded recognition under section 82 (6) of the CPA, meaning that MIOSA is an “accredited industry ombud” for the Automotive Industry. The objective is for MIOSA to consider and dispose of complaints in a manner that is procedurally fair, informal, and economical.

Once a complaint has been successfully lodged with MIOSA, MIOSA would first play a passive role mediating between the two parties in an attempt to facilitate resolution of the dispute.

Cutting to the chase, all suppliers will be obliged to establish internal complaints handling processes (including an internal complaints handling department, as well as the procedure a consumer could follow when lodging a complaint with the Ombud) coupled with the training of, or at the very least informing, their entire staff about the Act, its Regulations and the Code. Suppliers will also have to adhere to other requirements such as notices that need to be displayed at their premises.

For more information on how this industry code may affect you in your business operations, you can contact Jandré Robbertze at jandre@dommisseattorneys.co.za.