Headnote
National Policy 11-203 Process For Exemptive Relief Applications in Multiple Jurisdictions - Revocation and replacement of prior relief exempting pre-determined and pre-disclosed mergers among series of shares issued by a labour sponsored investment fund from the securityholder and regulatory approval requirements of paragraphs 5.1(f), 5.1(g) and 5.5(1)(b) of NI 81-102 - Change in allocation of venture and non-venture investments among the series requiring revocation and replacement of prior relief in order to reflect the current facts - Each series of the fund to share in common venture portfolio while maintaining specific share of non-venture portfolio - Each series considered a separate mutual fund under NI 81-102 - Relief granted from securityholder and regulatory approval requirements under NI 81-102 for pre-determined mergers among series of the fund subject to certain conditions.
Applicable Legislative Provisions
National Instrument 81-102 Mutual Funds, subsection 1.3(1), paragraphs 5.1(f) and (g) and 5.5(1)(b), section 19.1.
February 12, 2010
IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the “Jurisdiction”)
AND
IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF GROWTHWORKS COMMERCIALIZATION FUND LTD. (the “Fund”)
DECISION
Background
The principal regulator in the Jurisdiction has received an application from the Fund for a decision under the securities legislation of the Jurisdiction of the principal regulator (the “Legislation”) for
(i) an exemption under Section 19.1 of National Instrument 81-102 Mutual Funds (“NI 81-102”) from the approval requirements of paragraphs 5.1(f) and (g) (together, the “Securityholder Approval Provisions”) and paragraph 5.5(1)(b) (the “Regulatory Approval Provision”) of NI 81-102 to permit the pooling of assets among different series of Class A shares of the Fund at a future date, and subsequent conversion of series into the originally offered series, in accordance with revised asset allocation rules that are stated, or will be stated, in the prospectus for all the currently issued and outstanding series, the currently offered series and all future series that are or will be distributed under such prospectus without the requirement to obtain the prior approval of securityholders or prior approval of the securities regulatory authority (the “Exemption Sought”); and
(ii) a revocation of prior relief granted to the Fund under a decision dated January 17, 2006 (the “Previous Relief”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):
(a) the Ontario Securities Commission is the principal regulator for this application; and
(b) the Fund has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System (“MI 11-201”) is intended to be relied upon in Alberta, British Columbia and Saskatchewan.
Interpretation
Defined terms contained in National Instrument 14-101 Definitions and MI 11-102 have the same meanings in this decision, unless they are otherwise defined.
Representations
This decision is based on the following facts represented by the Fund:
The Fund is a corporation incorporated under the Canada Business Corporations Act.
The Fund is registered as a labour-sponsored venture capital corporation under the Income Tax Act (Canada), as a labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario), and is an approved fund under the Labour-sponsored Venture Capital Corporations Act (Saskatchewan) (the “LSVCC Legislation”).
The Fund primarily invests in small and medium sized businesses with the objective of obtaining long term capital appreciation and must make “eligible investments” in “eligible businesses” as prescribed under the LSVCC Legislation. The Fund is a “research oriented investment fund” under the Community Small Business Investment Funds Act (Ontario) and as such the Fund primarily invests in early stage research oriented companies.
The Manager is the manager of the Fund under a management contract. The Manager is part of the GrowthWorks group of companies. Effective January 15, 2010, GrowthWorks Ltd. is subsidiary of Matrix Asset Management Inc. (TSX: MTA) (“Matrix”). Matrix is a diversified asset and wealth management company with offices across Canada and manages approximately $3 billion in assets through three operating divisions, including the Venture Capital Operating Division which the Manager is part of.
The authorized capital of the Fund consists of:
(a) an unlimited number of Class A shares, issuable in series, which are widely held,
(b) an unlimited number of Class B Shares, of which 1,000 are issued and are held by the Canadian Federation of Labour, the Fund’s Sponsor, and
(c) an unlimited number of Class C shares, of which 100 are issued and are held by the Manager to provide a “carried interest” in the venture investments of the Fund.
The Fund is a mutual fund under applicable securities legislation. The Fund is currently a reporting issuer or equivalent in Ontario, Saskatchewan, Alberta and British Columbia (the “Jurisdictions”). The Fund’s securities are not listed on any exchange.
The Fund currently, and expected to continue to, distribute its Class A shares (the “Class A Shares”), in series (“Series”), in Ontario, Saskatchewan and Alberta by prospectus (the “Prospectus”). The Fund’s current Prospectus is dated November 6, 2009 (“Current Prospectus”).
The Prospectus discloses the investment objectives, investment strategies and risks of investing in Class A Shares. All Series have, or will have, the same investment objectives, investment strategies, and cost structure.
The Fund’s board of directors (the “Board”) has adopted, and is expected to continue in future to adopt, a dividend policy in respect of each Series of Class A Shares. The policy is to pay cash dividends during a period of approximately three years after the offering period of each Series that total about 25% of the purchase price of the Series. Each year (until determined otherwise by the Board), a new Series of Class A Shares will be offered under the Prospectus.
To permit implementation of the dividend policy, yet gain the risk mitigation benefit of broader portfolio diversification, the Fund adopted certain asset allocation rules (the “Previous Allocation Rules”). To date the Previous Allocation Rules have been set out in each Prospectus, including the Current Prospectus.
On January 17, 2006, the Fund was granted the Previous Relief which provided relief from the Shareholder Approval Provisions and Regulatory Approval Provision for mergers of Series of Class A Shares of the Fund carried out in accordance with the Previous Allocation Rules. The Previous Allocation Rules are as follows:
- The venture and non-venture investments made with the capital raised from the sale of a particular Series will be allocated solely to that Series during the period ending on March 1st of the third calendar year after the RSP season the Series was first offered in (the “Separate Pool End Date”).
• Once the Separate Pool End Date has passed for a Series, the venture and non-venture investments previously solely allocated to that Series will be pooled with the assets of all other Series Shares that have passed their Separate Pool End Dates and be allocated among those Series in proportion to their relative net asset values.
The Previous Relief was sought because the change in the allocation of assets to a Series that occurs after the Separate Pool End Date was technically considered a merger of separate mutual funds and required the Fund to comply with the Securityholder Approval Provisions and the Regulatory Approval Provision.
Since the 2005 announcement of the phase-out of Ontario’s LSVCC tax credit, levels of diversification in the Fund’s separate Series’ venture portfolios have been limited, primarily due to declining annual capital raises by Series and higher initial investment amounts due to the dramatic decrease in the supply of venture capital, particularly for early stage research-oriented businesses. These trends have resulted in recent Series making fewer venture investments than originally anticipated. In order to provide for earlier pooling of venture investments, thereby providing greater diversification and lowering the overall risk profile for all Series, the Fund’s board and independent review committee approved the Fund seeking shareholder approval for revised allocation rules.
At the Fund’s annual general meeting held on December 3, 2009, shareholders of the Fund’s current issued and outstanding Series approved, by separate Series’ votes, the following revised allocation rules (the “Revised Allocation Rules”) to be implemented on a date specified by the Fund’s President and CEO for the commencement of the application of the revised rules (the “Implementation Date”):
Each year (until determined otherwise by the Board), a new Series will be priced at $10 per share until the Cut-Off Date (defined as being the last day an investor can obtain a federal or provincial tax credit for the preceding tax year on a purchase of Class A shares). The new Series will typically continue to be offered for sale for about four to six months thereafter, as determined by the Fund’s Manager, at its NAV per Series Share after which time the new Series will no longer be sold.
Unless otherwise determined by the Board, each Series will have a dividend policy (the “Dividend Policy”) to pay dividends equal in total to approximately 25% of the purchase price with a target that the dividends be paid within the three year period following the Cut-Off Date for that Series. It is expected that dividends will be paid in February of each year (the “Dividend Payment Date”). Venture investments made by the Fund generally include an initial income generating component intended to fund dividend payments. The period of time during which a Series is allocated income at least equal to the aggregate payments under its Dividend Policy is the “Dividend Allocation Period”.
On the Implementation Date, venture investments of all Series will be pooled and allocated among Series on a share for share basis. Each Series will be allocated its specific share of the non-venture investment portfolio so as to retain each Series’ NAV and NAV per Series Share on that date. This rebalancing will subsequently occur on each date: when a new Series becomes subject to these allocation rules, which will be within 30 days of its Cut-Off Date, with the specific date to be determined by the Fund’s Manager; and when a Series converts into the 05 Series as described below.
The investment portfolio of a Series that participates in the pooled venture portfolio will consist of its specific non-venture portfolio and its proportionate share of the pooled venture portfolio, including gains and losses, allocated on a share for share basis with all other such Series and will include interest and other income earned on the pooled venture portfolio as allocated below.
Interest and other income from the pooled venture portfolio will be allocated during each year leading up to a Dividend Payment Date as follows: first to the Series in their Dividend Allocation Period, in proportion and up to the amount of the dividend to be paid by the Series on the next Dividend Payment Date in accordance with the Dividend Policy, reduced by any surplus and increased by any deficiency of income allocated to that Series during previous periods, and subject to a first allocation to any Series that has completed its dividend payments under its Dividend Policy; and thereafter to all Series on a share for share basis.
Once a Series has completed payments under its Dividend Policy and has completed its Dividend Allocation Period, shares of that Series will be converted into shares of 05 Series (the original Series offered) based on both Series’ relative net asset values. At that time, the converting Series shareholders will hold 05 Series and the converted Series will cease to exist.
The Fund’s Current Prospectus sets out the Revised Allocation Rules and states that they will become effective on the Implementation Date subject to shareholder and any regulatory approval. If the Exemption Sought is obtained, on a go forward basis, the Prospectus would not include disclosure regarding the Previous Allocation Rules.
The Previous Relief is based on the Previous Allocation Rules and includes a condition that the Prospectus set out the Previous Allocation Rules. As a result, before the CEO can designate an Implementation Date for the Revised Allocation Rules, the Fund must obtain the Exemption Sought. Like the Previous Allocation Rules, the change in the allocation rules and the conversion of a Series into the originally offered Series after completion of the converting Series’ Dividend Allocation Period, will technically be considered a merger of separate mutual funds and would require the Fund to comply with the Securityholder Approval Provisions and the Regulatory Approval Provision.
Decision
The principal regulator is satisfied that the decision meets the test contained in the NI 81-102 for the principal regulator to make the decision.
The decision of the principal regulator under the Legislation is that:
- the Exemption Sought is granted, provided that:
(a) the Prospectus under which a Series is distributed includes substantially the disclosure set out in paragraph 14 regarding Asset Allocation Rules, and
(b) the investment objective of the Fund or any Series does not change without the prior approval of securityholders of the Fund or Series, as the case may be; and
- The Previous Relief is revoked.
“Vera Nunes”
Vera Nunes
Assistant Manager, Investment Funds Branch
Ontario Securities Commission
SEDAR #1526886