Securities Law & Instruments


Exemptiongranted to labour sponsored investment fund corporation to permitit to pay certain specified distribution costs out of fund assetscontrary to section 2.1 of National Instrument 81-105 Mutual FundSales Practices.


SecuritiesAct, R.S.O. 1990, c.S.5, as am.


NationalInstrument 81-105 Mutual Fund Sales Practices.












WHEREAS the Ontario Securities Commission (the"Decision Maker") has received an application (the "Application")from CMDF Early Stage Fund Inc. (the "Fund") and Medical DiscoveryManagement Corporation (the "Manager") for a decision pursuantto section 9.1 of National Instrument 81-105 Mutual Funds SalesPractices (the "NI 81-105") that the prohibition contained insection 2.1 of NI 81-105 against the making of certain paymentsby the Fund to participating dealers shall not apply to theFund;

AND WHEREAS, the Commission has consideredthe Application and the recommendation of staff of the DecisionMaker;

AND WHEREAS the Fund and the Manager have representedto the Decision Maker as follows:

1.The Fund is a corporation formed under the laws of Canada onOctober 31, 2001. The head and registered office of the Fundis at 100 International Blvd., Toronto, Ontario, M9W 6J6.

2.The Manager is a corporation incorporated under the laws ofOntario on August 26, 1994 and acts as the manager of the Fund.

3.The Fund has applied to be registered as a labour sponsoredinvestment fund corporation under the Community Small BusinessInvestment Funds Act (Ontario) (the "Ontario Act") and, onceregistered, will be a prescribed labour sponsored venture capitalcorporation under the Income Tax Act (Canada), (collectivelythe "Tax Legislation").

4.The Fund is a mutual fund as defined in subsection 1(1) of theAct and will distribute securities in the Ontario under a prospectus.The Fund filed a preliminary prospectus dated November 1, 2001(the "Preliminary Prospectus").

5.The authorized capital of the Fund consists of an unlimitednumber of Class A Shares, 25,000 Class B Shares and an unlimitednumber of Class C Shares issuable in series. As at November1, 2001, the Fund had no Class A Shares or Class C Shares and10 Class B Shares issued and outstanding.

6.The Fund proposes to pay directly to participating dealers certaincosts associated with the distribution of its Class A Shares.These costs are:

(i) a sales commission of 6% of the subscription price for eachClass A Share subscribed for (the "6% Sales Commission"),

(ii) an annual service or trailer fee equal to 0.5% of the averagedaily net asset value of the Class A Shares held by customersof the sales representatives of the dealers, such fee to bepaid quarterly (the "Trailing Commission"). This fee is paidto compensate dealers for mailing and other expenses incurredby such dealers in communicating on an ongoing basis with respectto the Fund with their clients who are Class A shareholdersof the Fund.

7.The Fund may also, from time to time, enter into co-operativeadvertising programs with dealers distributing Class A Shareswhich provides for the reimbursement by the Fund of advertising,mailing and other expenses incurred by such dealers in the promotionof Class A Shares (the "Co-op Expenses").

8.For accounting purposes, the Fund will

(i) amortize the 6% Sales Commission paid or payable by theFund on a straight line basis to retained earnings over eightyears. The 6% Sales Commission is recoverable on a decliningbasis at the rate of 0.75% per annum, in the event Class A Sharesof the Fund are redeemed by the holders thereof prior to theexpiry of an eight year period following the purchase thereof.

(ii) expense the Trailing Commission and the Co-op Expensesin the fiscal period when incurred.

9.The structural aspects of the Fund relating to the payment ofcommissions are consistent with the requirements of the TaxLegislation and such payment of commissions is an event contemplatedunder the Tax Legislation. Gross investment amounts will becontributed to the Fund in respect of each subscription. Thisis to ensure that the entire subscription amount contributedby the investor is counted for the purpose of the applicablefederal and provincial tax credits in connection with the purchaseof Class A Shares.

10.The Preliminary Prospectus discloses, and the Fund's final prospectuswill disclose, that the Fund will pay directly and is responsiblefor payment of the costs of distributing its shares, includingthe 6% Sales Commission, the Trailing Commission and the Co-opExpenses (collectively, the "Distribution Costs").

11.The Manager is capitalized only to the extent necessary forits operations, and is dependent on management fee revenue derivedfrom the Fund and the two other labour sponsored investmentsfunds managed by it for the purpose of satisfying its ongoingobligations. As a result, the Manager itself has no resourcesfrom which to pay the Distribution Costs and, unless the requesteddiscretionary relief is granted, would be obliged to financethese costs through borrowings.

12.Any loans obtained by the Manager to finance the DistributionCosts would result in the Manager needing to renegotiate itsmanagement fee to increase the management fee chargeable tothe Fund, by an amount equal to the borrowing costs incurredby the Manager plus an amount required to compensate the Managerfor any risks associated with fluctuations in the net assetvalue of the Fund and, therefore, fluctuations in the Manager'sfee. Requiring compliance with section 2.1 of NI 81-105would cause the expenses of the Fund to increase above thosecontemplated in the Preliminary Prospectus.

13.Requiring the Manager to pay the Distribution Costs while grantingan exemption to other labour funds permitting such funds topay similar Distribution Costs directly, would put the Fundat a permanent and serious competitive disadvantage with itscompetitors.

14.The Fund and the Manager undertake to comply with all otherprovisions of NI 81-105. In particular, the Fund undertakesthat all Distribution Costs paid by it will be compensationotherwise permitted to be paid to participating dealers underNI 81-105.

AND WHEREAS the Decision Maker is satisfiedthat to do so would not be prejudicial to the public interest;

THE DECISION of the Decision Maker under section9.1 of the NI 81-105 is that the Fund shall be exempt from section2.1 of the NI 81-105 to permit the Fund to pay directly theDistribution Costs, provided that:

(a)the Distribution Costs are otherwise permitted by, and paidin accordance with, NI 81-105;

(b)the Distribution Costs are accounted for in the Fund's financialstatements in the manner described in paragraph 8 above;

(c)the summary section of the final prospectus includes full, trueand plain disclosure explaining to investors that

(i) they pay the 6% Sales Commission indirectly, as the Fundpays the 6% Sales Commission using investors' subscription proceeds,and

(ii) the services and value that the participating dealers wouldprovide to their clients who are Class A shareholders of theFund in return for the Trailing Commission payable by the Fundto the dealers, and

(iii) a portion of the net asset value of the Fund is comprisedof a deferred commission, rather than an investment asset; and

this summary section must be placed within the first 10 pagesof the final prospectus.

(d)this Decision shall cease to be operative with respect to aDecision Maker on the date that a rule replacing or amendingsection 2.1 of NI 81-105 comes into force.

December 21, 2001.

"Paul M. Moore"      "Robert W. Korthals"