This episode takes a look at exchange control regulations in terms of how they help and hinder innovation with Bruce Lister from Adams & Adams and JP Fourie from the South African Venture Capital Association (Savca).

Stephan Lamprecht: The South African Government introduced exchange control restrictions during the late1960s to manage capital outflows and protect the local economy. With me at the Summit TV studio is JP Fourie from the South African Venture Capital Association (Savca) and Bruce Lister a partner at Adams & Adams to talk about the role of exchange control in managing IP especially when taking IP offshore. Bruce, what is exchange control - tell us a little bit about what it is and why do we have it?

Bruce Lister: Exchange control is a system of rules and regulations that are aimed at keeping capital in South Africa - they control the flow of money out of South Africa as well as the flow of capital out of South Africa...

Stephan Lamprecht: When we say capital that includes intellectual property as well?

Bruce Lister: Yes, in terms of the recent court case Couve vs Red Dot the court held that capital includes patents and other forms of intellectual property, yes.

Stephan Lamprecht: So if I’m in the business of intellectual property - especially when thinking of taking it offshore, or getting international investment - then I need to consider exchange control?

Bruce Lister: Certainly in terms of the current legal environment yes, and the current court rulings you need to bear exchange control very much in mind, yes.

Stephan Lamprecht: Very briefly in layman’s terms what does it mean? What does it imply for me as a business person?

Bruce Lister: If you are going to get a licence into South Africa from an entity outside South Africa - you will be licensing intellectual property into South Africa - you need to get exchange control approval for those royalties that need to be paid from South Africa to the foreign entity. Equally, if you are wanting to export an intellectual property right, a trademark or a patent you will need to get exchange control approval in terms of that Red Dot decision that I referred to.

Stephan Lamprecht: Who do I get approval from? Who is running it?

Bruce Lister: The SA Reserve Bank is the ultimate entity that controls exchange control. They have delegated certain of the functions to the Department of Trade and Industry (DTI) with regards especially to the payment of royalties and the like.

Stephan Lamprecht: From your point of view I know Savca is lobbying for greater investment in science and technology type investments - call it the typical venture capital environment - how do you see this impact of exchange control in raising capital for South African venture companies?

JP Fourie: From a raising capital point of view it’s not necessarily such a big problem with investors coming in to invest into venture capital funds, but for portfolio companies that are looking to increase their market the nature of venture capital investment is that it normally involves high growth, high technology or innovative type of businesses - and in order for them to make big returns they need to have some type of global scaling opportunity. When those scaling opportunities come about very often that requires additional funding to be injected - normally from foreign entities because those foreign entities want to invest into the business because they want to make geographic nodes where they can platform that business to expand, and sometimes that leads to the premature exit by South African venture capital investors simply because exchange control regulation sometimes limits the amount of capital that can flow out as Bruce has mentioned. At the same time a South African entity can’t own shares or assets in an offshore entity that owns assets in South Africa. There are ways around that, but it causes venture capital funds managers in South Africa to prematurely exit a business before it really reaches maximum capacity when it looks to expand globally.

Stephan Lamprecht: I had a discussion with one of the prominent investors in this asset class this week - the statement from their side is it’s a tremendous frustration and a resource-intensive process to get exchange control permission, and in certain instances you won’t get exchange control permission. How do you see that within the context of the Savca members and hampering our ability to actually then not just raise funding and get venture capital investment in South Africa, but more so to really develop a culture of innovation?

JP Fourie: It does not inhibit capital coming in, but for capital going yes it does constrain the industry in relation to that - but we need to understand that there’s been a lot of moves and a solid foundation in terms of why exchange control was implemented, and a lot of moves by SA National Treasury and the likes to prudential regulation which is an industry norm globally. We continue to say to people like SA National Treasury and the SA Reserve Bank understand the implications here and we continue to sell that and they understand...

Stephan Lamprecht: You’re making progress?

JP Fourie: Yes, we are definitely making progress. It’s all aimed at building a knowledge based economy driving innovation in South Africa…

Stephan Lamprecht: Bruce, from your point of view in terms of dealing with the licensing transactions and so on - do you see development especially in terms of businesses understanding exchange control, and how to be more proactive about it? Is that happening?

Bruce Lister: It is definitely happening. I think in the past you found a lot of people weren’t aware that the requirements were there in the first place - they perhaps weren’t aware of the consequences of non compliance. Due to a number of factors people are becoming a lot more aware of exchange control - especially with the payment of royalties and the like - and certainly we’re seeing a lot more applications, people building appropriate clauses into agreements when dealing with national licensing agreements, and the like.

Stephan Lamprecht: Is there an extended capacity at the Reserve Bank and DTI dealing with exchange control? Are they beefing up their systems to deal with these applications?

Bruce Lister: As far as I am aware they certainly are processing applications fairly efficiently, and certainly are helpful as far as they can be…

Stephan Lamprecht: From your point of view if I’m a business executive and I need to know how I can be proactive about this, how should I got about it, at what stage should I start thinking about exchange control, and if I start realising that there is a need to consider it more up front who should I speak to and how do I go about it?

Bruce Lister: The most important thing is to get advice as early as possible. When you’re looking at structuring a business make sure you’ve structured it appropriately - taking into account exchange control considerations. Also, when you’re entering into negotiations for example with licences - or possibly assignments of intellectual property - make sure you get advice early. For example the Red Dot decision held that you have to get that advice in advance otherwise the agreement is null and void…

Stephan Lamprecht: So if I’ve made a transaction and I base a number of other contracts on that transaction and it comes out that I did not consider it properly - then I can find that some of those contracts might be voided?

Bruce Lister: Exactly. In terms of the Red Dot decision that is a potential consequence, yes.

Stephan Lamprecht: So you have to be proactive and speak to the right people upfront…

Bruce Lister: Get in early and speak to people who are appropriately qualified in the areas that you’re wishing to deal with - and get that advice early to avoid unwanted consequences at a later stage.

Stephan Lamprecht: JP, from your point of view especially if we talk about the biotech sector and so on - the whole point of venture capital for most part in the whole is really to get to the growth markets, so if I want to support that kind of investment in South Africa I really need to get to the Silicon Valleys and so on - do you see your involvement with Treasury and your discussions with the DTI and the SA Reserve Bank and so on - is it paying off, and is it creating that picture of innovation outside of the country as well, and that we need to build that?

JP Fourie: Most definitely so. You just need to listen to the Minister of Finance talk around how we need to grow the economy - looking towards innovation and building a knowledge-based economy. I think it is a nice problem to have because it means there are businesses in South Africa that are looking to expand - so the more opportunities or applications that the SA Reserve Bank and DTI need to deal with the better the status of the South African economy in terms of building that knowledge base and capitalising on innovation which is very positive.

Stephan Lamprecht: That’s very good to hear, and I hope you are going to have a lot more success in terms of raising funding - because I think most of what we are talking about on the IP show deals with new and exciting things that are looking for funding. Exchange control has been a hot topic for some time, but we need to get the necessary attention from our regulators - let’s support Savca and the rest of the industry in their endeavours to create a more conducive environment for investing in and globalising our intellectual property.