National Treasury has proposed relaxations to the exchange control regulation of intellectual property (IP) in SA.
In its 2017 National Budget Review, National Treasury says: "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 arm's-length and at a fair market price."
Law firm Webber Wentzel, which has been lobbying for the changes, believes this is a positive development for South African technology companies.
Foreign capital
The firm says once the law formally comes into effect, the ability of technology companies to access foreign capital and foreign know-how and IP will be significantly widened.
"This policy statement must still be implemented in law, and the precise legal and practical mechanics must be clarified. We will continue to engage the regulators as part of our ongoing lobbying process. Nonetheless, this remains a very positive message to industry that its concerns have been heard," says Aalia Manie, senior associate in the technology, media, telecommunications and IP practice at Webber Wentzel.
The National Development Plan notes IP is an important policy instrument in promoting innovation, technology transfer, research and development, industrial development and more broadly - economic growth.
According to a report published this month by the US Chamber of Commerce's Global IP Centre, SA ranks number 33 out of 45 countries on patents, trademarks, copyright, trade secrets, enforcement and international treaties.
Webber Wentzel notes the current exchange control regime provides that South African residents are restricted from, among other things, selling, assigning or licensing IP to foreign residents, and paying royalties to foreign residents, without prior approval from the South African Reserve Bank.
The law firm notes the negative impact of these rules include adding transactional uncertainty, complexity and cost to IP cross-border deals, and severely constraining commercial agility, global expansion and access to foreign capital/investment by local businesses.
Manie says the first big issue is ensuring IP is properly protected. "We often see start-ups, in particular, failing to adequately protect IP. Such protection is often not as costly as they would otherwise expect. The effect is that they lose out on potential assets and competitive advantages, which may make them less attractive to potential investors."
Another challenge is ensuring companies have all the IP rights they need to operate their businesses. "We often find businesses do not have adequate licences in place, which puts them at risk of IP infringement claims. Even open source licences present some legal and commercial risks."
To date, she notes, the exchange control regime has presented an additional layer of complexity and uncertainty around exploiting and commercialising IP, whether through licences, assignments, joint ventures, development, outsourcing and the like.
"Ultimately, it is key for tech companies to formulate an appropriate IP strategy that is aligned with their business strategy. We are hopeful these changes will make South Africa a more attractive jurisdiction for entrepreneurship, investment and technology outsourcing," says Manie.
Outsourcing impact
One of the biggest risks local organisations face is protecting their IP when it is outsourced. Manie notes that on the face of the current exchange control regulations, when read with the Copyright Act, exchange control approval will be required for most technology outsourcing where a South African developer is appointed to develop technology and associated IP for a foreign resident.
In most cases, she explains, an assignment of IP is required to ensure the foreign resident owns the IP arising from such development. This, in turn, triggers the requirement for prior exchange control approval.
If the proposed relaxations are implemented in law, this additional regulatory hurdle will be removed and South African developers are likely to become more attractive as potential service providers, she notes.
"The new proposals will also enable technology companies to be more agile in their choice of business models and how they can exploit their IP on a global scale. Given this positive message from National Treasury, we think South African technology companies will become more attractive to foreign companies as service providers, partners and potential targets for investment," she adds.
Manie explains that although this is a policy recommendation and is not yet law, tech companies that are currently exploring cross-border IP transactions may wish to revisit their approach. "We are aware that exchange control compliance adds additional cost and complexity, which can possibly be avoided depending on the specific facts, legal structures and commercial objectives of those companies."
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