BEE venture capitalists coin an incentive
Cryptocurrency and tax breaks sweeten start-up investment
If a tax incentive doesn't get investors interested in investing in a venture capital company, add some cyptocurrency - and use the profits to encourage angel investing in start-up businesses.
An actuary and a chartered accountant have devised a venture capital and cryptocurrency scheme that may be worth considering if you appreciate its noble intentions to support job-creating start-ups.
That is because although it does involve the risks of investing in start-up businesses and a new cryptocurrency, there are some features that mitigate those risks.
Investors who are prepared to put money in the BEE venture capital company Alumni Energy Investments, started by Shakes Motsilili, receive an allocation of cryptocurrency known as aziza coins, operating on the ethereum cryptocurrency platform.
Motsilili is an actuary who headed Momentum Life's actuarial department.
The Aziza Coin Foundation will find a buyer for most of your allocated coins (85%) and these proceeds are used to boost the amount you invest in Alumni Energy Investments, increasing your tax deduction.
The start-ups that buy the coins can sell them to raise funding. In return for the right to buy coins, the start-ups are required to place 20% of their equity in the Aziza Coin Foundation, which is administering the initial coin offering as well as providing support services to the start-ups.
We want to ride that [cryptocurrency] wave but direct that money to support a bigger causeShakes Motsilili, Alumni Energy Investments founder
Aziza coin holders who received coins by investing in Alumni Energy Investments have rights to surplus profits generated by the foundation's portfolio of shares in the ventures.
Trade in the coins is currently restricted but the foundation plans to list them this year and at that stage investors will be able to sell the remainder of their allocated coins (15%) on the open market, hopefully realising some gain, Motsilili says.
The coins started with a value of €0.01 (about R0.1478) but their value is being increased by an algorithm and they are expected to reach €0.30 by the time they list on an as-yet-to-be-selected cryptocurrency exchange, Motsilili says.
Alumni Energy Investments is licensed as a financial services provider by the Financial Services Board and the South African Revenue Service has approved it as a venture capital company into which you can make investments that qualify for a deduction in terms of the Income Tax Act section 12J.
All of your investment qualifies for a deduction as long as you remain invested for five years; the deduction will be equal to your marginal tax rate - up to 45%.
If, for example, your marginal tax rate is 30%, your deduction will be R30. However, because the investments in Alumni are backed by the aziza coins, a R100 investment in Alumni could be boosted by proceeds of R200 from the sale of the coins. In this case, your tax deduction will be 30% of R300 (R100 + R200) = R90. In addition, you retain 15% of the original amount of aziza coins issued to you.
Alumni Energy Investments so far has two start-ups in which it is investing - gyrocopter surveying company Gyrotek and long-wave mobile phone/data company Africanopy.
In terms of the Income Tax Act, section 12J companies must invest in five ventures within three years and the Aziza Coin Foundation has its sights on start-ups in aviation, tourism, telecommunications, food, technology and renewables. The ventures in which Alumni Energy Investments invests must agree to the foundation providing certain support services such as financial, human resources and marketing.
The aim of this is to enhance the start-ups' chances of success and provide them with cheaper services through economies of scale, Motsilili says.
Explaining the decision to link the venture capital company to a cryptocurrency in the midst of the cryptocurrency boom, Motsilili says that despite the tax incentive, venture capital companies both in South Africa and the UK have failed to attract investors for start-ups that have yet to start generating revenue.
People feel start-ups are too risky — there is a nine out of 10 failure rate
"People still feel start-ups are too risky - there is a nine out of 10 failure rate in the first two years," Motsilili says. However, while the risks are high, the potential rewards are also high.
The backup from the aziza coins provides further diversification for investors in Alumni as well as for a number of UK-based venture capital companies approved by tax authorities in that country, he says.
A lot of the value in cryptocurrency is in the sentiment around it, Motsilili says. "We also want to ride that wave but direct that money to support a bigger cause."
The aziza coin is the brainchild of Motsilili and his former University of Cape Town flatmate, chartered accountant Stephen Larkin. Larkin is the co-founder of an oil and gas energy company, Africa New Energies, which registered in the UK in 2012.
Africa New Energies has yet to earn revenue but is engaged in a project to provide electricity in Namibia. It needs funding to explore and start drilling 32 potential oil and gas fields with the potential to generate billions of barrels of oil.
Africa New Energies has placed 20% of its equity in the Aziza Coin Foundation.
Motsilili says that to invest in Alumni and Aziza coins you need to have at least a five-year investment horizon and should appreciate the risks of investing in pre-revenue start-ups.
You should also be aware that the cryptocurrency environment is new, volatile and that there are lots of new entrants.
Fast facts about aziza coins and Alumni Energy Investments
• During the initial coin offering no more than 500 million aziza coins will be allocated to venture capital investors in Alumni Energy Investments and approved UK companies.
• So far R10-million has been raised for Alumni in South Africa.
• Any profits made on the cryptocurrency will be declared to the South African Revenue Service. Shakes Motsilili, founder of Alumni Energy Investments, says currently cryptocurrencies are unregistered and if you make money on them it will sit in a wallet in a foreign currency. If you bring the currency back to South Africa, you will have to declare it.
• The minimum investment in Alumni Energy Investments is R10,000. There is an annual management fee of 2.5% as well as transactional costs associated with the ethereum smart contract on which the aziza coin exists.