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Intellectual property (IP) exchange control is a contentious issue in South Africa, especially when it comes to software development and technology businesses. In the 2017 Budget Review, the National Treasury announced that IP exchange control would be relaxed, which is good news for startups.
— Aalia Manie (@Aalia_IP) February 22, 2017
A history of the talks
The term “capital” was originally defined as cash and money, which, when exported out of SA, required the approval of the SA Reserve Bank.
In 2012, the exchange control regulations were changed to define the export of capital as “any intellectual property right, whether registered or unregistered.” This amendment would cause problems for SA IP holders.
Manie said that last year, the South African Reserve Bank (SARB) contacted Webber Wentzel, stating that it was concerned about what people were saying about the exchange controls on IP and wanted their view on them.
In addition to engaging extensively with the SARB and National Treasury with regard to the legal concerns (such as substantive uncertainty and transactional complexity), the firm had several small group discussions with “other industry players” in order to understand the practical and economic impact of the exchange control regime.
“Through those discussions, SARB and National Treasury have been very positive in their engagement with us. They asked us to effectively pull together our research and engage with the community and stakeholders on their concerns around intellectual property.”
The process included a round-table discussion and stakeholder workshop led by Webber Wentzel in August last year. Those attending included National Treasury and the SARB, both of which represented government, Silicon Cape, Simodisa, prominent venture capital and private equity firms, several high-impact entrepreneurs in the startup spaces, and Nicholas Hall, a lawyer at Michalsons and representative for Make Games SA.
A recommendations report was drafted with input from internal stakeholders at Webber Wentzel (including specialist IP, tax and exchange control experts) and Simodisa in particular. There have since been many in-depth talks with the National Treasury around the subject.
Holding back startups wanting to expand
Manie says that having the exchange control relaxed isn’t only about uncertain and complex transactions, but also “all of the transactions that never happened as a direct result of the exchange control.”
It has limited the expansion of startups out of SA, especially when it comes to searching for funding.
“Access to foreign capital for high-impact technology startups that would otherwise grow on a global scale is limited. And that access to foreign capital is actually quite critical in developing the IP further and expanding your business[…]”
The exchange control regime has also limited how business models can expand and restricts access to global markets by ‘high potential’ startups.
It won’t just benefit startups
Speaking to Hall, a founding member of Make Games SA, he says the relaxation of IP control will also benefit video game developers. It will mean setting up out of country services, such as Google Merchant accounts and Kickstarter funding projects, will become an easier process.
He also reiterated Manie’s sentiments on investment, saying the relaxation will make SA a more attractive destination for foreign IP holders.
According to the 2016 Interactive Entertainment South Africa Industry Survey [download], the value of video game organisations in the country is worth R100-million, an 85.6% growth over the previous year.
The budget speech
Even though government mentioned intellectual property in the 2017 Budget Speech, Manie points out that it is a ‘plain language’ summary that comes with several underlying, underpinning recommendations as well.
As per page 170 of the National Budget Review [download]
Government proposes that companies and individuals no longer need the Reserve Bank’s approval for standard intellectual property transactions. It is also proposed that the “loop structure” restriction for all intellectual property transactions be lifted, provided they are at arms-length and at a fair market price. Loop structure restrictions prohibit residents from holding any South African asset indirectly through a nonresident entity.
“What does standard intellectual property transactions mean? What precisely is the loop-structure restriction in regards to intellectual property? These are the kinds of details that need to be unpacked, of course, to ensure that the market understands the extent and impact of the changes.”
She says Webber Wentzel will continue to engage the National Treasury and those who have been constructive in their approach.
“We will be unpacking that in our continued engagement with the National Treasury and the staff who have been very constructive in their approach.”
When asked about future changes and details surrounding the control, Manie was not at liberty to discuss any details as yet, as it still needs to be further explored and hasn’t been publicly announced.
“We have a very good sense of what those changes are likely to look like in terms of the finer details.”
Advice for startups with intellectual property
Manie had some advice for startups when it comes to IP exchange control, such as obtaining legal advice.
“Formulate an IP commercialisation strategy that aligns with your business strategy. It is always important to make sure you perform an IP ‘health check’ before you expand beyond SA and seek to attract foreign investment.
“A big part of this is assessing what regulatory approvals might be required. Currently, the IP exchange control regime is a hurdle that startups need to overcome before engaging in cross-border IP deals.
“It is important for startups to watch this space closely and obtain legal advice before they engage in cross-border IP transactions or group restructures.”
According to the 2015 Ventureburn Startup Survey, 43% of companies survey have their own product or IP.
Update: added comment on SA video game industry, clarification on capital.
Feature image: Traci Lawson via Flickr.