Exemption granted to labour sponsored investmentfund corporation to permit it to pay certain specified distributioncosts out of fund assets contrary to section 2.1 of NationalInstrument 81-105 Mutual Fund Sales Practices.
Securities Act, R.S.O. 1990, c. S.5, as am.
National Instrument 81-105 Mutual Fund SalesPractices.
IN THE MATTER OF
THE SECURITIES ACT
R.S.O. 1990, CHAPTER S.5,AS AMENDED (THE "ACT")
IN THE MATTER OF
NATIONAL INSTRUMENT 81-105
MUTUAL FUND SALES PRACTICES("NI 81-105")
IN THE MATTER OF
RETURN ON INNOVATION FUNDINC.
UPON the application (the "Application")of Return on Innovation Fund Inc. (the "Fund") tothe Ontario Securities Commission (the "Commission")for an exemption pursuant to section 9.1 of NI 81-105 from section2.1 of NI 81-105 to permit the Fund to make certain paymentsto participating dealers;
AND UPON considering the Applicationand the recommendation of staff of the Commission;
AND UPON the Fund and Return on InnovationManagement Ltd. (the "Manager) having represented to theCommission that:
1. The Fund is a corporation incorporatedunder the Canada Business Corporations Act by articlesof incorporation dated October 28, 2002. The Fund has appliedfor registration as a labour sponsored investment fund corporationpursuant to the Community Small Business Investment FundsAct (Ontario) and when so registered, will be a prescribedventure capital corporation under the Income Tax Act(Canada) (the "Tax Act").
2. A preliminary prospectus to qualify theissuance of shares of the Fund, dated October 28, 2002 wasfiled with the Commission on October 30, 2002 and a receiptwas issued for the prospectus on that day.
3. The authorized capital of the Fund consistsof an unlimited number of three different series of ClassA Shares, designated Class A Shares, Series I, Class A Shares,Series II and Class A Shares, Series III (collectively, the"Class A Shares") and an unlimited number of ClassB Shares. As of the date of this application there are noClass A Shares issued and outstanding. All of the issued andoutstanding Class B Shares are owned by the sponsor of theFund, ACTRA Toronto Performers (the "Sponsor").
4. The Manager, Return on Innovation AdvisorsLtd. (the "Advisor") and the Sponsor (collectively,the Organizers") formed and organized the Fund.
5. The Prospectus provides that the Fund willpay registered dealers selling Class A Shares, sales and servicecommissions as follows:
(a) with respect to dealers selling ClassA Shares, Series I,
i) a sales commission of 6% of the originalissue price of the shares (the "Series I 6% Commission"),plus
ii) an additional commission of 4% inlieu of any service fee being payable before the eighthanniversary of the date of issue of the shares (the "4%Commission");
iii) after the eighth anniversary of thedate of issue of the shares, dealers will be paid a servicefee equal to 0.75% of the net asset value of the ClassA Shares, Series I held by the clients of the dealer (the"Series I Service Fee");
(b) with respect to dealers selling ClassA Shares, Series II,
i) a sales commission of 6% of the originalissue price of the shares (the "Series II 6% Commission"),plus
ii) a service fee equal to 0.75% of thenet asset value of the Class A Shares, Series II heldby clients of the dealer (the "Series II ServiceFee");
(c) with respect to dealers selling ClassA Shares, Series III,
i) no sales commission will be paid bythe Fund, (however, dealers selling Class A Shares, SeriesIII may receive a commission of up to 2% of the originalissue price of the shares which will be paid by the investor.)and
ii) a service fee equal to 1.25% of thenet asset value of the Class A Shares, Series III heldby clients of the dealer (the "Series III ServiceFee).
6. For accounting purposes, the Fund will:
(a) Defer and amortize the amount paid orpayable in respect of the Series I 6% Commission and theSeries II 6% Commission to retained earnings on a straightline basis over eight years;
(b) Defer and amortize the amount paid orpayable in respect of the 4% Commission to income on a straightline basis over eight years;
(c) Expense the Series I Service Fee, SeriesII Service Fee, and Series III Service Fee (collectively,the "Service Fees") in the fiscal period whenincurred.
7. Due to the structure of the Fund, the mosttax efficient way for the Series I 6% Commission, the SeriesII 6% Commission, the 4% Commission and the Service Fees (collectivelyas the "Distribution Costs") to be financed is forthe Fund to pay them directly.
8. None of the Organizers have sufficientresources to pay the Distribution Costs and would be obligedto finance the obligation to pay the Distribution Costs throughborrowings and would thereby incur borrowing costs.
9. In order for the Fund to comply with section2.1 of NI 81-105, the Fund would have to increase the feespayable to the Organizers by an amount equal to the borrowingcosts incurred by the Organizers, plus an amount requiredto compensate the Organizers for any risks associated withfluctuations in the net asset value of the Fund and therefore,fluctuations in the Organizers' fees. Requiring compliancewith section 2.1 of NI 81-105 would cause the expenses ofthe Fund to increase significantly above those contemplatedin the Prospectus.
10. The Fund undertakes to comply with allother provisions of NI 81-105. In particular, the Fund undertakesthat all Distribution Costs paid by it will be compensationpermitted to be paid to participating dealers under NI 81-105.
AND UPON the Commission being satisfiedthat to do so would not be prejudicial to the public interest;
NOW THEREFORE pursuant to section 9.1of NI 81-105, the Commission hereby exempts the Fund from section2.1 of NI 81-105 to permit the Fund to pay the DistributionCosts, provided that:
(a) the Distribution Costs are otherwisepermitted by, and paid in accordance with NI 81-105;
(b) the Distribution Costs are accountedfor in the Fund's financial statements in the manner describedin paragraph 6 above;
(c) the summary section (the "SummarySection") of the (final) prospectus of the Fund hasfull, true and plain disclosure describing the commissionof Class A Shares, Series I as a 10% initial sales commission,plus service fees after eight years. The Summary Sectionmust be placed within the first 10 pages of the final prospectus;
(d) the (final) prospectus has full, trueand plain disclosure explaining the services and value thatthe participating dealers would provide to investors inreturn for the Service Fees payable to them;
(e) the Summary Section of the (final) prospectushas full, true and plain disclosure explaining to investorsthat:
i) they pay the Series I 6% Commission,the 4% Commission and the Series II 6% Commission indirectly,as the Fund pays these commissions using investors' subscriptionproceeds, and
ii) a portion of the net asset value ofthe Fund is comprised of a deferred commission, ratherthan an investment asset; and
(f) this Decision shall cease to be operativeon the date that a rule replacing or amending section 2.1of NI 81-105 comes into force.
December 6, 2002.
"Mary Theresa McLeod" "RobertL. Shirriff"