Modified Flow Through Principle

Modified Flow Through Principle
(Cannot be used by an EME or a QSE)

In order to understand the Modified Flow Through principle, we first need to look at the Flow Through Principle:
Flow Through Principle:  Company A is 25% black owned and it owns 10% in Company B – then, Company B is 2.5% black owned.  If Company A is 100% black owned, and owns 25% in Company B, then Company B would be 25% black owned.  Pretty straight forward.
Modified Flow Through Principle:  The Modified Flow Through Principle allows us to increase the level of black ownership in an entity from 51% to 100%.  A measured entity’s ownership percentage will therefor be enhanced by incorporating a new company, and holding the BEE shares in that company. The non-black shareholders would then hold 49% of the shares in this new company, with the black ownership percentage as 50.1%.  This new company would then be viewed as being black owned, provided that it is at least 50.1% black owned. 
EME and QSE enterprises with 51% or more black ownership, could therefore by using the Modified Flow Through Principle, claim a Level 2 contributor status – be it through a complicated flow through of ownership through various entities.

The BEE Commission issued a Practice Note with regards to the enhanced recognition afforded to EME and QSE enterprises making use of the Modified Flow Through Principle.  Even though this Practice Note is non-binding, the intention of the Commission is clear. 

In terms of this Practice Note, only the “Flow-through Principle” and not the Modified Flow Through Principle would apply to EME and QSE enterprises.
If you are an EME or a QSE and relying on the Modified Flow Through Principle for the enhanced recognition of ownership, you very well may have a problem with the BEE Commission. 

Chances are that you will be charged with fronting. 
Please keep in mind that where a verification analyst or a procurement officer becomes aware of such an instance, they need to report this, failure of which makes them also guilty of an offence.
Where you are in this position, contact a suitably qualified professional soonest to restructure your ownership. 
Being found guilty of fronting will have catastrophic consequences for your business.
A Qualifying Small Enterprise (QSE) is one of the categories of South African businesses as per the Broad Based Black Economic Empowerment Act. ... A Qualifying Small Enterprise is a business with a turnover between R10 million and R50 million and is measured using the QSE Scorecard.
Exempted Micro Enterprises (EME) are businesses that are exempt from measurement in terms of the DTI's codes of Good Practice for Black Economic Empowerment.
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