COSOB Recommendation on the Use of Shareholder Current Accounts by Venture Capital Companies

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THE ALGERIAN DEMOCRATIC AND POPULAR REPUBLIC

COSOB NOTE Position- Recommendation of the COSOB on the recourse to the use of shareholder current accounts by venture capital companies

In the context of their participation acquisition operations in small and medium-sized enterprises, venture capital companies often resort to the use of shareholder current accounts as a means of supplementary financing, given its ease of implementation, efficiency, and operational flexibility within the company.

The recourse to shareholder current accounts aims to allow the company to compensate for a shortfall in its equity, address cash flow needs, or guarantee bank financing (fund blocking clause). It is also preferred because it avoids the lengthy process of a bank loan or the rigid formalism involved in modifying the company's capital. This financing mechanism generally takes the form of a loan granted by a shareholder (partner) in favor of the company. The terms of remuneration and repayment conditions for this loan are generally set by an agreement established for this purpose and signed by both parties.

Except for some provisions of finance laws regulating the use of shareholder current accounts in the context of foreign direct investment or those provided for by fiscal legislation regarding the deductibility of interest generated by said account from the company's taxable income, it should be noted that there is an absence of a precise regulatory framework in this matter; this often refers to statutory clauses or contractual stipulations.

Referring to the provisions of Law No. 06-11 of June 24, 2006, relating to venture capital companies, particularly its Article 6, which states that a venture capital company may carry out, on an ancillary basis, within the framework of its object and for the account of interested companies, any ancillary operation compatible with its object. This object was fixed by Article 2 of the same law, which stipulates that "The venture capital company has as its object participation in the share capital and any operation consisting of equity and quasi-equity contributions in companies in creation, development, transmission, or privatization."

Commission for the Organization and Supervision of Stock Market Operations

17, Campagne CHKIKEN – 16043 - Val d'HYDRA – Ben Aknoun- Alger. Tél: 023 47 27 93/ 47 28 03 Fax: 023 47 28 00 / 47 28 04

Furthermore, Article 5 of the same law clearly specifies that the venture capital company intervenes through the subscription or acquisition of ordinary shares and all other categories of securities assimilated to equity.

As indicated above, while the opportunity to resort to the use of shareholder current accounts, assimilated on an accounting basis as quasi-equity, is not contested in itself, it remains that this intervention method should be used on an ancillary basis, within the framework of the exercise of activities related to the corporate object of the venture capital company.

In other words, the COSOB estimates that the abusive recourse to the use of this financing mode by venture capital companies could result in the amount of the loan granted to the company being disproportionate or even incomparable to the capital of the target company, and even less so to the amount of the venture capital company's participation in said target company.

This practice can be assimilated to an artifice tending to violate prudential participation rules, particularly that which sets the limit of 49% of the target company's capital (except for companies with the startup label).

Furthermore, it is useful to highlight that the 2019 Finance Law (Article 2) has capped the deduction of financial interest paid to shareholders due to sums they leave or make available to the company in addition to their capital shares, regardless of the company's form. Thus, the fiscally authorized remuneration of this account must not exceed the limit of the average effective interest rates communicated by the Bank of Algeria.

Also, this deduction is subject to the double condition that:

1. The share capital has been fully paid up;
2. The sums made available to the company do not exceed 50% of the capital.

From the foregoing, and pending the promulgation of a regulatory device clarifying this mode of intervention in the activities of venture capital companies, the Commission considers that the approach adopted by the tax administration is judged prudent and wise regarding the use of funds injected into shareholder current accounts, and consequently recommends that venture capital companies adhere to the conditions and rules set by fiscal legislation.