Following the federal government’s lead, Ontario’s budget proposes to support venture capital investment through the creation of Ontario Commercialization Investment Funds (OCIFs).

As well, Ontario is proposing a moratorium on new labour-sponsored investment funds, and changing a number of the rules around LSIFs.

The proposals are detailed in Budget Paper C: Ontario’s Revenue Plan.

An OCIF would raise capital from institutional, corporate and accredited investors. The capital would be accessible to eligible publicly funded research institutes for the commercialization of intellectual property derived from scientific research. The minimum purchase required of each investor would be $25,000. A grant would be provided to the OCIF after it invests in seed-stage businesses whose primary asset is intellectual property.

The grant would be calculated as 30% of eligible investments made in a year, to the extent that the investments are supported by new capital raised by the OCIF. The grant would be payable once a year upon receipt of an application from the OCIF. The grants would support up to $30 million of capital raised by OCIFs per year, if that capital is fully invested in eligible investments. This would represent potential maximum support of $9 million per year for the program. An OCIF would be restricted from paying dividends or redeeming any shares within four years after the issuance of the shares by the OCIF.

An OCIF must be sponsored by a research institute that qualifies under the Ontario Business-Research Institute Tax Credit. These institutions include universities, colleges of applied arts and technology, Centres of Excellence and hospital research institutes in Ontario. Each institute would only be able to sponsor one OCIF.

Eligible investments would require a strong link to intellectual property of the sponsor. An eligible investment must be risk-capital. At the time of initial investment, the investee business or prospective business must have less than $1 million in assets. And, the OCIF would be required to diversify its investments. To be eligible, the business would not have established commercial operations and must need financing for research and product development.

To ensure a review of the program, registration of new OCIFs would be allowed until the end of 2006. No grants would be available after 2008. While the program is running, the government would work with OCIFs to assess the program’s effectiveness.

Ontario will also encourage the participation of the federal government in the OCIF program to maximize the leverage potential of public investments. The government will introduce legislation to create the OCIF program following consultations with the federal government and other interested parties.

As for LSIFs, the government notes that in the last several sales seasons, a number of newly registered LSIFs have failed to raise sufficient capital to be viable investment companies for the long term. LSIF capital is spread too thinly among too many LSIFs and many of the existing LSIFs are too small to be viable long-term investors, it says. So, to ensure the stability and health of the venture capital pool available for Ontario businesses, the province is proposing a moratorium on new LSIF registrations effective May 18.

Applications for registration received by May 18 will be processed. This would allow existing LSIFs to continue operations and raise capital while the province works with the federal government and venture capital community to determine appropriate changes to the LSIF program.

A number of amendments will be proposed to the Community Small Business Investment Funds Act that would ensure that the LSIF program continues to operate effectively while the program is under review, it says. These amendments include: the introduction of rules allowing the amalgamation of LSIFs through asset purchases; and, an amendment of the investment requirements such that LSIFs must offset 70% of realized losses deducted from investment requirements with a maximum of 70% of realized gains.

The restriction on LSIF investments in companies listed on a stock exchange would be relaxed so that an LSIF could invest up to 25% of its investments in a year in listed companies; and, LSIFs would be able to determine this limit on the greater of either their current or previous years’ investments.

Other technical amendments would: allow LSIFs to control investee companies; allow research-oriented investment funds more flexibility when determining their investment requirements by providing them with a choice of August 31 or December 31 as the date on which the requirement would be determined; change the calculation of the LSIF tax credit to conform to federal practice, giving investors greater certainty with respect to the amount of their tax credit; no longer permit LSIFs to count investments in holding companies against their investment requirements; clarify that investments that have been written off without having been disposed of would be deemed to be disposed of; and, change various provisions to comply with administrative practice.

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