Investment Capital Programs

Summer, 2012

presented by the Investment Capital Branch Ministry of Jobs, Tourism and Innovation

• Overview

• Accessing Capital

• Investment Capital Branch

• Allocation Structure

• Outcomes

• Regional Activity

• Qualifying Activities/Prohibitions

• Sample Application

• Summary Comments

Agenda

Overview

Private equity is an asset class consisting of securities not publicly traded on a stock exchange. Provided by a private equity firm, venture capital firm or an angel investor.

1. Investment Banking (IPOs) 2. Leveraged Buyouts (LBOs) 3. Mezzanine Financing 4. Venture Capital

Each category has its own set of goals, preferences and investment strategies to provide working capital for business expansion, product development, or restructuring of a company’s operations, management, or ownership.1 Venture Capital is equity capital investment in high risk/high growth companies. Common in high-tech companies because assets are often not tangible and cannot be pledged for debt financing. 1. Wikipedia, website: http://en.wikipedia.org/wiki/Private_equity, accessed March 2012

Access to Equity Capital

The Venture Capital Programs give small businesses continuous access to early-stage venture capital.

• Conventional financing may be difficult to obtain as proven cash flow is typically required to service debt obligations

• Encourages investment in ‘value added’ sectors needing capital for creation/expansion of small businesses

• Fund raising is market driven investors are involved in due diligence process

Access to Equity Capital

• The Province of British Columbia provides a tax credit: 30% of investment for investor (maximum 60,000/year), with no limit for a corporation

• Used tax credits can be carried forwarded up to four years

• Investors can be individuals or corporations that reside in the province and investment must be held for five-years before tax credit liability is fully forgiven

• Prorating of tax credit liability after three years and consideration for losses if the business fails

Investment Capital Branch

Investment Capital Programs

Tax credits offered under the Small Business Venture Capital Act and the Employee Investment Act help small businesses raise capital directly from angel and employee investors. The tax credits support up to $160 million of equity capital annually.

- Eligible Business Corporations (EBCs)

- Venture Capital Corporations (VCCs)

- Labour Sponsored Investment Funds (LSIF)/Employee Share Ownership Program (ESOP)

Tax credits offered under the Acts also support venture capital fund managers who raise funds from retail investors and invest in a diverse portfolio of small businesses.

B.C. Renaissance Capital Fund Ltd. – Institutional Investors The B.C. Renaissance Capital Fund Ltd. is a Crown corporation, wholly-owned by the BC Immigrant Investor Fund Ltd. Since 2008, the BCRCF has made capital commitments totalling $82 million with 6 venture capital fund managers.

Access to Equity Capital

Structure – Investment Capital Programs

Investment Capital Programs

Small Business Venture Capital Act

Equity Capital Budget

Community Budget

New Media Budget

Cleantech Budget

Employee Investment Act

EVCC ESOP

BC Venture Capital Act

Direct Model

EBC ESOP

Portfolio Model

VCC Retail VCC Retail EVCC

Program Outcomes

• From 2001 to 2008, $256 million in tax credits issued helped to attract $2.3 billion of equity investments and helping to create over 4,000 jobs.

• Venture capital raised by companies under the programs represent between 30% to 40% of the venture capital invested in province, annually.

• Every $1 in tax credits generates nearly $2 in provincial tax revenue and another $1 in federal tax revenues.

Source: An Evaluation of the Venture Capital Program in British Columbia Sauder School of Business – University of British Columbia, June 2010

• ESB’s experienced a higher growth rates to similar sectors manufacturing, R/D, non-agriculture and accommodation/entertainment sectors

• The ESB’s also had a lower debt/equity ratio illustrates the reliance on equity rather than debt financing

Source: Cost Benefit Evaluation of Venture Capital Programs Grant Thornton, March, 2001

Program Activity – Venture Capital Programs

• The Investment Capital Branch has administered $1.3 billion in funds raised from over 900 registrants

• Of these funds, over $100 million originates outside of Metro Vancouver and the Capital Regional District

• Of the 292 EBC registrants active in 2011, 207 raised capital and 58 were located outside the Metro Vancouver

• Reflects a clustering of economic activity around access to capital, labour and infrastructure.

Program Activity – Venture Capital Programs

Source: “2011 Sub-Provincial Population Estimates”, BC Stats, website:

http://www.bcstats.gov.bc.ca/StatisticsBySubject/Demography/PopulationEstimates.aspx, accessed March 2012

Population (2011)

Cariboo 162,775 3.6%

Kootenay 152,833 3.3%

Mainland/Southwest 2,691,892 58.9%

Northcoast/Nechako 123,571 2.7%

Northeast 6,905 0.2%

Thompson Okanagan 562,045 12.3%

Vancouver Island/Coast 873,300 19.1%

Total 4,573,321

Regional Participation by Clients

Eligible Business Corporations (2011) participation by region

Investment activity in the Lower Mainland represented by:

• high-technology sectors

• new media

• life sciences

• manufacturing

Business activities vary in the regions primarily represented by:

• manufacturing

• software

• other sectors (tourism & non-traditional agriculture)

Cariboo, 1.0%

Kootenay, 2.4%

Mainland / Southwest,

72.1%

Thompson - Okanagan,

10.6%

Vancouver Island / Coast, 13.9%

Qualifying & Non-Qualifying Activities

Qualifying

• Manufactured goods from within the province

• Research and Development

• Economic Diversification (run of the river/film production)

• Community Diversification (destination tourism)

• Non-Traditional Agriculture

Non-Qualifying

• Financial services

• Retail

• Real estate development

• Resource extraction

• Restaurants/service oriented businesses

Direct Investment Option

The Eligible Business Corporation (EBC)

• Has less than 100 employees

• Pays at least 75% of wages to BC residents

• Minimum of $25,000 in equity capital

• At least 50% of the assets and expenditures relate to a qualifying activity

Eligible Investor

• Arms-length from the owners of the Eligible Business Corporation

• Maximum of $5 million in investments

• Shares may not be transferred, redeemed, acquired or cancelled for 5 years

Venture Capital Corporation (VCC)

Eligible Small Business (ESB)

• Less than 100 employees • Pays at least 75% of wages to BC residents • Funds received must be used for eligible

purposes • Business must be engaged in eligible

activities

Venture Capital Corporation (VCC)

• Must Invest 80% of the funds raised in Eligible Small Businesses (ESB) for 5 years

• Can not hold more than 50% Voting Control in the ESB

Eligible Investor

• Common shares • Must be at arms-length from ESB major

shareholders • Max of $10 million in any given 2 year

period

Benefits of the Direct Investment Model

(Eligible Business Corporation)

Differences in requirements between a VCC and an EBC

• VCC has to incorporate in the province, register with the program and has annual reporting requirements

• VCC has to establish Investment Protection Account to ensure investments made in qualifying small businesses

• Investors can invest in EBC if they (or associates) do not hold more than 50% of voting share

• VCC cannot invest in ESB if one of VCC’s shareholders (or an associate) holds 10% or more of ESB’s voting share

Employee Share Ownership Program

Employee Investment Act

Eligible Employees: • BC Residents • Work more than 20 Hrs/Wk • Shares held for at least 3 yrs

ESOP must: • CDN Company that pays ≥ 25% of

its wages to BC residents • ≤ $500M in assets

ESOP Shares:

• Fully participating, voting & at risk • equal opportunity for all employees

to acquire shares • Annual share valuation

Step #1

Registration Application - Eligible Business Corporation

• John Doe submits an registration as an Eligible Business Corporation (EBC) along with a business plan for Cariboo Designs Inc to the Investment Capital Branch

• The review process takes about two weeks, based on receipt of complete application

• If the company meets the qualifications of the program, a registration letter is issued outlining various compliance requirements

Step # 2 - Fund Raising and Tax Certificate

• Funds raised from investors are reported through our web-based system (eTCA)

• Businesses apply for tax credits

• Validates tax credit applications

• Businesses print tax credit certificates for distribution to their investors

• Tax credit certificates are issued, early in the following year for distribution to investors

Electronic Tax Credit Application System (eTCA)

Step #3 - Continuing Compliance

• Within six months of its fiscal year end, Cariboo Designs Inc submits an Annual Return

• A portfolio manager reviews the Return to ensure continuing compliance with legislation

• Returns have to include financial information at a ‘reviewed engagement’ level

• After the investors have held their investments for five years, the EBC’s registration can be revoked and the tax credit liability can be waived

Prohibitions on Raising Equity Capital

Tax credits are issued with the understanding that:

• Eligible investors can acquire either common/preferred shares but not in the form of a debt instrument

• Warrants/option are possible but not if they contain special redemption rights

• Investment have to be made during a valid authorization period

• Shares can not be transferred or redeemed for five and registrant to provide an Annual Return each of the five years

• Dividends have to be made from retained earnings or through capital appreciation

Expand program uptake and increase participation:

• Increase the awareness of our tax credit programs outside of the GVRD/CRD, through relocation of a portfolio manager in Kamloops

• Make legislation changes to consolidate Employee Investment Act (EIA) with Small Business Venture Capital Act (SBVCA)

Program Development

David Baleshta, BA, MBA Portfolio Manager

#205 – 455 Columbia Street, Kamloops, BC, V2C 6K4 Cell: 250-574-6851 E-mail: david.baleshta@gov.bc.ca

Investment Capital Branch PO Box 9800, Stn Prov Govt, 7th Floor – 1810 Blanshard Street Victoria, British Columbia, V8T 4J1

Toll Free: 1-800-665-6597 Internet: www.equitycapital.gov.bc.ca Email: ecp@gov.bc.ca Fax: 250-828-4542/952-0371

Contact Information - Investment Capital Branch