In a Johannesburg courtroom recently, a venture capital dream built on sunshine and tax breaks was formally picked apart for what it was for some: a mirage. The case of Pillay v Stokes and Others wasn’t just a dispute between an investor and a director; it was a microcosm of the dearth of funding in South Africa’s tech ecosystem and the perils of a well-intentioned but flawed government intervention.

The judgment centred on Persimmon Energy VCC, a Venture Capital Company (VCC) set up to take advantage of Section 12J of the South African Income Tax Act. 

For a while, Section 12J of the Income Tax Act was the talk of the town. Launched in 2009, it was South Africa’s answer to the UK’s successful Venture Capital Trust (VCT) scheme. This provision, now defunct, was the government’s big idea to spur investment into small and medium enterprises. The pitch was simple and irresistible: invest in a registered Venture Capital Company (VCC), and you could deduct the full value of your investment from your taxable income. It was a powerful tool to de-risk investment in SMEs and startups, into which the funds were mostly channeled.

The plan worked, in a way. Capital flooded in. The national treasury reported that over R11 billion ($756 million at the time) poured into some 360 Section 12J companies. A vibrant ecosystem of VCCs, including firms like Kalon Venture Partners and Grovest, popped up, and South Africa began punching above its weight, securing over 21% of all African VC deals in 2020.

But the government soon developed a hangover. An official review found the scheme wasn’t really creating jobs or fostering innovation. Instead, a “significant tax deduction” was being enjoyed by “wealthy taxpayers” to fund “low risk” ventures like hotels and student housing — assets that would have found funding anyway. Shockingly, a generous tax break was used by rich people to lower their tax bill. With that damning assessment, the incentive’s “sunset clause” was left to expire in June 2021, leaving a funding void for the very startups it was supposed to help.

The R3m Solar Dream That Went Dark

In 2018, investor Poovanderen Pillay was enticed by Persimmon’s executive summary. The pitch was timely: a solar energy fund to capitalise on South Africa’s perennial load-shedding crisis. The VCC would use investor money to buy solar installations, sell the power to businesses at a discount to the grid, and generate “high yield annuity cashflows.” The subscription agreement promised his funds would be held in an interest-bearing account until deployed. It sounded very professional.

Sold on the deal, Pillay invested R3 million (approx. €150,000). His subscription agreement was clear: the funds would be placed in interest-bearing deposits while “suitable Qualifying Investments” were identified by a diligent investment committee.

They never were.

After his investment, Mr. Pillay was met with a wall of silence. No updates, no annual general meetings (AGMs), and no audited financial statements. When he finally forced the company to hand over documents via a court order, he discovered a governance wasteland. He sued to have the company’s directors declared “delinquent” — a severe sanction under South African law reserved for those who grossly abuse their position.

The court case unraveled a masterclass in mismanagement by the two active directors, who were found to have:

• Failed to hold a single AGM.
• Failed to produce financial statements for most of the company’s existence.
• Failed to conduct any due diligence on the companies (startups) they were meant to be funding.
• Breached the subscription agreement by not investing the funds as promised.
• Created a blatant conflict of interest, with one director being the sole director of the company receiving the bulk of the investment.

The court found that the bulk of Pillay’s money, R2.6 million, was funneled not to the promised company, but to another entity in the group, Cobalt Energy 1, without any viability assessment. 

The delinquency application also targeted a fourth respondent, Mr. Garside, a non-executive director. His defense? He claimed to be a director in name only. Roped in by the key players, he was presented as a veteran in the venture capital industry — nothing more than a pawn used by the master strategists to lend the scheme a semblance of credibility.

Mr. Garside told the court he was only a friend of the other directors, had no venture capital experience, and was persuaded to join the board based on a glossy prospectus. He claimed he was completely excluded from management, had no idea Mr. Pillay had even invested, and was kept in the dark about all financial activities. His involvement was limited to occasionally signing documents the active directors put in front of him, often without the full context.

In a fascinating legal distinction, the judge accepted his version. 

For directors who prefer not to ask too many questions, it was a victory. The application against him was dismissed.

The ruling painted a picture of a venture where governance was an afterthought and the tax incentive was the product, not the investments it was meant to enable.

The Legacy: A Growing Funding Gap and the Government’s Fear of Being Burnt Twice

For Mr. Pillay, the outcome was mixed. The two main culprits were declared delinquent, a serious professional sanction. Yet, his claim for his R3 million back was dismissed. The court noted he hadn’t proven a total loss — he still owned the (likely worthless) shares — and, crucially, had already received a hefty tax benefit from the Section 12J scheme.

This case is the ghost of Section 12J, haunting a startup ecosystem that remains starved of capital. The tax scheme’s cancellation left a significant funding gap, with South Africa’s tech ecosystem now ranking low in VC funding in Africa compared to its peak period of 2021. While its intent was noble, its execution created a gold rush mentality, attracting actors more interested in the tax arbitrage than in the hard work of building companies. 

The Persimmon Energy saga illustrates the perfect storm: a desperate investor seeking yield and tax relief, paired with directors who saw the complex VCC structure not as a tool for growth, but as a shield for incompetence or worse. It shows how a well-intentioned incentive, without iron-clad oversight, can attract operators who are ill-equipped or ill-intentioned, leaving investors exposed and tarnishing the reputation of the broader venture capital industry.

While the incentive was flawed, it did get money moving. Now, entrepreneurs and legitimate VCs are hoping for a more targeted replacement, like a Startup Act, to rebuild momentum. These advocacy campaigns are now years old, with initiatives like the Startup Act Project even gaining support from the UK government. However, the South African government, still reeling from recent Section 12J setbacks, has been slow to act. For the country’s tech entrepreneurs, the takeaway is stark: a tax break may not be a strategy, after all. In practice, these mechanisms can be warped to serve a different agenda — one that is a world away from the rickety basements of downtown Cape Town, where founders operate on a shoestring, battling for a share of elusive venture capital.