One of the greatest challenges faced by a small, growing business is to find sources of financing that will allow them to reach the next stage of their development. The needs of small businesses seeking venture capital financing are commonly met in Canada by what are termed ?angel? investors (i.e. wealthy investors willing to take on considerable risk in the hope of securing above average returns on their investments), and institutional investors such as the BC Investment Management Corporation (who manage pensions for BC public service employees) and the Canada Pension Plan Investment Board.
One of the very few opportunities for the average BC investor to participate in venture capital markets is provided by the BC Discovery Fund. The fund has been open to investors since March, 2003, and according to their public filings, ?aims to provide early-stage companies in the BC technology sector with a source of patient equity capital for the growth and expansion of their businesses and to provide British Columbia investors with an experienced and proven management team capable of maximizing shareholder returns from such investments.? This focus on assisting locally based enterprises is the kind of mandate that should appeal to those who want to make a greater social impact with their investments.
What makes this fund particularly attractive to many investors are the generous tax credits provided by the Provincial government. As our current government considers it prudent to provide incentives to help nurture and develop small BC-based businesses, particularly in the technology sector, investments in the fund provide investors with a 30% provincial tax credit on investments up to $200,000. In order to be eligible for the tax credit, investors must be residents of BC. An investment in the fund is also RRSP/RRIF eligible, potentially providing further tax savings.
Venture Capital Corporation (VCC) tax credits are a fully refundable provincial tax credit. Even if no tax is owed, investors still get a refund from the Province. This is unlike the credits provided to investors in Labour Sponsored Funds, (such as the well known BC Working Opportunity Fund) where investors can only deduct the tax credit from taxes owing. Secondly, you can receive up to $60,000 annually in tax credits under the VCC program whereas the Labour Sponsored Funds only offer up to $2,750 per taxation year.
The BC Discovery Fund is sold by way of prospectus by all the major brokerages and most of the financial planning institutions in BC. The minimum purchase amount is $2,500 to a maximum of $200,000. Minimum additional orders of $100 can be made at later dates. There are a number of restrictions placed under the Small Business Venture Capital Act (SBVCA) encompassing how the capital raised from investors will be deployed, what constitutes an ?eligible? investment, and the rights of investors to redeem their shares (compulsory 5-year hold period), amongst other considerations.
When the fund was set up in 2003, the SBVCA administrator laid out limits as to how much capital the fund was allowed to raise each year. Under these terms, the fund is permitted to raise a further $10 million of equity capital during the period February 15, 2006 to February 15, 2007, after which time there can be no assurance that the fund will be authorized to continue to raise capital.
The fund currently has a very high cash component, again due to stipulations of the SBVCA which require the fund to have made investments, by the end of its next succeeding fiscal year, of at least 40% of the equity capital raised in each fiscal year, and by the end of the second succeeding fiscal year, a further 40% of the equity capital raised in each such fiscal year. This has resulted in the fund carrying high levels of cash that may act as a drag on it?s potential price appreciation, but at the same time serves to limit, to some extent, the potential risks normally associated with venture capital investments.
The BC Discovery Fund is clearly not appropriate for everyone, and even if suitable, should perhaps constitute no more than 5% of a growth-oriented investment portfolio. But with many investors seeking to deploy their capital closer to home, the fund is one of the few easily accessible investments of it?s kind in this province that is worthy of some consideration.
An investment in the Fund must be considered highly speculative in nature, carrying significant risks and should be undertaken only by investors who have sufficient financial resources to enable them to assume such risks and who have no need for immediate liquidity of their investment. Shares should not be purchased by persons who cannot afford the loss of their entire investment, and an investment in shares should not constitute a major portion of an investor?s portfolio. There can be no assurance that an investment in shares will earn a specified rate of return or any return in the short or long term and an investment in shares is not guaranteed by the Province of British Columbia or any other entity. Ensure that you read the fund?s prospectus and consult with a professional Investment Advisor prior to taking action based on the information contained herein.