Tech startups are responsible for driving innovation – from the creation of apps to ecommerce platforms and even mobile money.
The rapid rate of innovation has, however, also meant that there continues to be uncertainty among techpreneurs regarding the legal or regulatory issues they need to comply with.
The consequences of failure to comply can range from steep fines and loss of operating licenses and in some cases imprisonment. For example businesses that do not comply with the Protection of Personal Information (POPI) Act can face hefty administrative fines of up to R10 million, prison terms of up to 12 months, or both.
To help tech startups navigate the minefield that is the law and other regulations, SME South Africa speaks to legal expert and co-founder of online legal platform LexNove, Andrew Taylor.
Taylor takes through 3 South African tech startups and what other entrepreneurs can learn from the legal obligations they may be facing.
Legal considerations for ecommerce platforms
Case study – Faithful to Nature
Faithful to Nature is an online organic and natural store. Faithful to Nature has a very active social media strategy and are catering to a very specific target audience.
The legal perspective: For ecommerce businesses like Faithful to Nature regulating ecommerce and traditional retail risks is essential, says Taylor.
Legal risks affecting traditional retail outlets will apply.
Including: the certification of the products being sold, particularly in an environment where customer acquisition takes place online, there are numerous examples of retail outlets that have been dragged through the public relations mud pit for incorrect labelling and invalid certifications (think Woolies rBST saga regarding their milk). All ecommerce businesses ought to regulate these aspects in their terms of service very carefully.
Liability for incorrect “claims”.
Particular issues of liability may arise in circumstances where the products are marketed as having certain “health benefits” but which are then proven to be incorrect or inaccurate. This is relevant both from the perspective of the public relations fallout and reputational damage, but also from a legal liability perspective where the ingredients have unanticipated side effects.
POPI compliance has become very relevant in any ecommerce environment where you create databases of client information and regularly use this information to communicate with your database, one needs to be very careful that the original consent provided covers the purpose for which you process the personal information, as contemplated in the POPI act.
Legal considerations for startups handling personal information
Case study: Giraffe
Giraffe is a mobile recruitment app that enables businesses to recruit medium-skilled workers faster and cheaper than any other way.
The platform enables job seekers to create a CV on their cell phones which means users share with the startup their personal information like employment history, qualifications and criminal records.
The legal perspective: POPI compliance is the big issue for startups, like Giraffe, who are dealing with personal information, says Taylor.
POPI compliance. They are handling lots of sensitive information. The candidate submitting the information needs to be made acutely aware of the reason for the processing of the information so provided since the nature of the information is very sensitive and, in some instances may qualify as special information as contemplated in section 26 of POPI. It is thus crucial that the information so collected is used in accordance with and for the purpose identified in the terms of service. Failure to adhere to this could result in severe sanctions of up to 10 years in jail or a R10 million fine.
The key aspect here is the quality of the consent.
What information is the applicant consenting to provide to the company and why has such information been provided?
Liability is further an area of concern.
Giraffe makes certain representations about who the people listed on their platform are, and on the back of the background checks they conduct represent that the potential employee has been validated. This creates the basis upon which the employee is eventually employed, so the integrity of the data being collected and conveyed to the prospective employer is vital.
Legal considerations for startups offering financial services
Case study: Livestock Wealth Capital
Livestock Wealth is a first-of-its-kind investment platform that allows users to invest in cattle using both a web and mobile app to buy their cows online and manage their investment portfolio.
The legal perspective: Livestock is another example of entrepreneurial innovation being streaks ahead of the regulators who create and enforce legislation, says Taylor. But there are legal issues that all financial services startups should consider including:
The Financial Intelligence Centre Act (FICA) is in place to prevent money laundering from taking place. It provides a secure marketplace for individuals and businesses to transact in line with international best practices.
According to FICA, investment institutions such as Livestock Wealth would be required to Know Your Client (KYC). The various requirements of FICA differ depending on who the entity seeking the investment or making the investment is. For instance, the requirements relating to an individual will differ from the requirements relating to a corporate entity.
– Financial Advisory and Intermediary Services Act (FAIS) would particularly apply to Livestock Wealth in circumstances where they would be rendering financial advice to individuals which may be translated by the type of investment that they’re making, for example, whether they advise to buy a particular cow, a particular breed of cow that could be deemed to be financial advice which then may require FAIS approval.
Consumer Protection Act
– The third and final piece of legislation that I think bears significant relevance at least to Livestock Wealth and to the fintech space in general, would be the Consumer Protection Act. In essence, what that piece of legislation seeks to do is to provide a set of remedies and guidelines for best practices for businesses in terms of how they access their clients and in terms of how they deal with their clients’ complaints and complaints procedures.
Taxes that may be applicable –
Livestock also runs the risk of some interesting tax implications, since the ownership and subsequent sale of the cow may result in the investor being taxed on the sale as part and parcel of their income-producing activities resulting in the investor being taxed at the prevailing tax rate applicable to the investors level of income. This is contrary to the permutations arising about conventional investment vehicles.