South Africa’s exchange control regulations almost cost local cryptocurrency startup VALR a significant chunk of foreign investment, CEO Farzam Ehsani has told MyBroadband.
“We have raised a total of $1.55 million (over R20 million) so far, and the bulk of this has come from offshore,” Ehsani said.
VALR attracted investors such as former FNB CEO Michael Jordaan, and Bittrex, an international cryptocurrency exchange. Bittrex is also VALR’s platform partner.
Ehsani, who founded VALR, previously served as the blockchain project lead at Rand Merchant Bank.
“We were tremendously excited to attract this type of investment into the country following President Cyril Ramaphosa’s calls for investment into the country,” Ehsani said.
VALR used a fundraising instrument known as a Simple Agreement for Future Equity (SAFE) for the deal, and Ehsani is enthusiastic about the fact that they were able to use it.
He said that SAFE is a relatively new fundraising instrument that came out of Silicon Valley about 5 years ago, which likely makes VALR one of the first South African start-ups to use it.
As exciting as it was to be in discussions for a funding deal using an instrument like SAFE, Ehsani said that exchange control regulations made the process much more challenging that it would have otherwise been.
“The offshore investor had to engage one of the largest law firms in the US who, in turn, hired the services of one of the largest law firms in South Africa,” said Ehsani.
All this to ensure that the investment complied with all exchange control requirements, and that the investor could get its money out of the country in the future.
Deal in danger
Ehsani explained that SAFE was a new instrument to the bank they were using, and it took considerable effort from all parties to get the investment over the line.
“We nearly lost the deal because of the complexities,” he said.
“It took us 158 emails, hundreds of hours, and scores of meetings to save the deal.”
Constitutional Court fight over exchange controls
Ehsani is not the first South African businessman to complain about the country’s export controls.
In 2013, Mark Shuttleworth took the South African Reserve Bank to court over a R250 million levy he had to pay to move his assets to the Isle of Man. The levy was 10% of the assets he wanted to export.
Shuttleworth paid the levy under protest and launched a court challenge on the Reserve Bank’s export controls.
He lost in the High Court, but won in the Supreme Court of Appeal, only to have the ruling overturned by the Constitutional Court in 2015.
“Exchange controls may appear to be targeted at a very small number of South Africans but their consequences are significant for all of us,” Shuttleworth said when he first took the case to court.
He said that the consequences are especially felt by those who are building relationships across Southern Africa, such as migrant workers and small businesses trying to participate in the growth of the African continent.
“It is more expensive to work across South African borders than almost anywhere else on Earth‚ purely because the framework of exchange controls creates a cartel of banks authorised to act as the agents of the Reserve Bank in currency matters,” Shuttleworth said.
“We all pay a very high price for that cartel‚ and derive no real benefit in currency stability or security for that cost.
“Banks profit from exchange controls‚ but our economy is stifled‚ and the most vulnerable suffer most of all. Everything you buy is more expensive‚ South Africans are less globally competitive‚ and cross-border labourers‚ already vulnerable‚ pay the highest price of all – a shame we should work to address.”
South Africa losing start-ups
Ehsani’s comments echoes Shuttleworth’s from almost six years ago.
“Experiences like this push startups offshore as they don’t want to be stuck with such a burdensome process to raise money from offshore,” stated Ehsani.
As a result of the onerous process, South Africa loses businesses and talent. Even worse, he said, we lose the opportunity to grow our economy, increase tax revenues, and create employment.
“It’s difficult to reconcile the fact that our leaders make calls for the country to bring in investment money, yet practically our laws and regulations make the process much more difficult than in should be,” Ehsani said.
“If we’re serious about turning our country around, then the will to change needs to be translated from words into action so that laws and regulations pave the way for investments to flow into the country uninhibited. Exchange control needs to go.”