A revocation and restatement of prior relief granted from certain requirements in National Instrument 81-102 Mutual Funds to a labour sponsored investment fund to pay certain incentive fees to different service providers.
Securities Act, R.S.O. 1990, c. S.5, as am., s. 144.
National Instrument 81-102 Mutual Funds, Part 7 and s. 19.1.
June 30, 2005
Gowling Lafleur Henderson LLP
Attention: Iain A. Robb
New Generation Biotech (Balanced) Fund Inc.
Exemptive Relief Application dated November 27, 2000 pursuant to National Instrument 81- 102 -- Mutual Funds;
SEDAR Project #: 775538; Ont. App. #317/05
By the application letter dated May 2, 2005, and subsequent submissions (the Application), and pursuant to section 144 of the Securities Act (Ontario) (the Act), you applied to the Ontario Securities Commission (the Director) on behalf of New Generation Biotech (Balanced) Fund Inc. (the Fund) to revoke and replace a prior exemption granted to the Fund on January 3, 2001 (the Prior Exemption) with this exemption.
The Prior Exemption exempts the Fund from the restrictions in Part 7 of NI 81-102 relating to the payment of the Performance Bonus (defined herein). In the Prior Exemption, the Fund represented that Genesys (as defined in the Prior Exemption) will initially be entitled to 60% of the Performance Bonus and Triax (as defined in the Prior Exemption) will be entitled to 20% of the Performance Bonus. In the Application, the Fund proposes to pay the Performance Bonus to the Manager (defined herein) and the service providers retained by the Manager in the proportion determined by the Manager from time to time and disclosed to the Fund' shareholders (the Shareholders).
In the Application, the Fund represented the following:
1. The Fund is a corporation incorporated under the Business Corporations Act (Ontario) by Articles of Incorporation dated October 31, 2000 which were subsequently amended by Articles of Amendment dated December 27, 2000 and further amended by Articles of Amendment dated December 19, 2003.
2. The Fund is registered as a labour-sponsored investment fund corporation under the Community Small Business Investment Funds Act (Ontario) (the Ontario Act) and is a prescribed labour-sponsored venture capital corporation under the Income Tax Act (Canada), as amended.
3. A final prospectus for the Fund dated December 27, 2000 (the Prospectus) was filed with and a final receipt was received from the Director. The Fund is a mutual fund as defined in subsection 1(1) of the Act and distributed securities in Ontario until March 1, 2001.
4. NGB Management Inc. is the manager of the Fund (the Manager) pursuant to a management agreement between the Fund and the Manager dated December 22, 2000 (the Agreement). The Manager has retained service providers to perform various investment and administrative services for the Fund.
5. Pursuant to the Agreement, the definition of "Class A Share Investment Portfolio" means, at any point in time, the investments of the Fund, other than investments in reserves, made with capital raised from the sale of Class A Shares.
6. Pursuant to the Agreement, the definition of "reserves" means Canadian dollars in cash or on deposit with qualified Canadian financial institutions, debt obligations of or guaranteed by the Canadian federal government, debt obligations of provincial and municipal governments, Crown corporations and corporations listed on prescribed Canadian stock exchanges, guaranteed investment certificates issued by Canadian trust companies and qualified investment contracts.
7. Pursuant to the Agreement, the definition of "Eligible Investment" means an investment which, at the time of purchase, qualified as an Eligible Business or as an eligible business for a Community Small Business Investment Fund (CSBIF) in which the Fund invests as contemplated in the Ontario Act.
8. Pursuant to the Agreement, the definition of "Portfolio Company" means a business in which either the Fund or a CSBIF, in which the Fund has invested, has made an Eligible Investment.
9. Pursuant to the Agreement, the definition of "Disposition Date" means the date the Fund or the CSBIF in which the Fund has invested receives the proceeds, whether in cash, securities or other property, from the disposition of an investment in a Portfolio Company.
10. Pursuant to the Agreement the definition of "Income" means all interest, dividends, fees, capital gains and other distributions received by the Fund from its investment in a CSBIF.
11. Pursuant to the Agreement, the Fund has agreed to pay a performance bonus payable on the Disposition Date (the Performance Bonus) based on the realized gains and the cumulative performance of the Class A Share Investment Portfolio. Before any Performance Bonus is paid by the Fund on the realization of an investment, the Class A Share Investment Portfolio must have:
(a) earned sufficient Income to generate a rate of return on investments in excess of accumulative annualized threshold return of 6%. The Income on Eligible Investments includes investment gains and losses (realized and unrealized) earned and incurred since the inception of the Fund;
(b) earned Income from the investment which provides a cumulative investment return at an average annual rate in excess of 6% since the date of the investment; and
(c) and fully recovered from the investment an amount equal to all principal invested in the investment.
Subject to all of the above, the Performance Bonus will be an amount equal 20% of all Income earned from each investment provided that the payment of the Performance Bonus does not reduce the return to Shareholders on a Class A Share Investment Portfolio below the threshold outlined in (a) above. The Fund will pay the Performance Bonus to the Manager and the service providers (Service Providers) retained by the Manager in the proportion determined by the Manager from time to time and disclosed to Shareholders.
The threshold return shall be calculated on a compound annual basis only on capital actually invested in Eligible Investments.
12. Section 7.1 of NI 81-102 provides that a mutual fund shall not pay, or enter into arrangements that would require it to pay, and no securities of a mutual fund shall be sold on the basis that an investor would be required to pay, a fee that is determined by the performance if the mutual fund, unless the calculation and payment of the fee complies with paragraphs 7.1(a) and 7.1(b). Paragraph 7.1(a) and 7.1(b). Paragraph 7.1(a) requires that the fee be calculated with reference to a benchmark or index. Paragraph 7.1(b) requires that the payment of the fee be based on a comparison of the cumulative total return of the mutual fund against the cumulative total percentage increase or decrease of the benchmark or index for the period that began immediately after the last period for which the performance fee was paid.
13. The Performance Bonus does not conform to the requirements of section 7.1 of NI 81-102. The Performance Bonus is based on realized gains and the cumulative performance of the Class A Share Investment Portfolio (and not in relation to a benchmark). The Performance Bonus is not based on the total return of the Fund because reserves are not included in the Class A Share Investment Portfolio and because the quantum of the Performance Bonus is calculated on an investment-by-investment basis.
14. The Fund is a labour sponsored fund; a labour sponsored fund is designed to encourage the public to invest in a vehicle that makes venture capital investments. The making of venture capital investments is substantially different from the types of investments generally made by public mutual funds. This fundamental difference is recognized in subsection 240(a) of the Regulation to the Act, which exempts labour sponsored investment fund corporations from a number of the ordinary investment restrictions contained in a rule, policy or practice of the Commission (including NI 81-102).
15. The basis for payment of the Performance Bonus, as described in Recital 11 (the Incentive Arrangement), is appropriate in light of the nature of venture capital investing and is consistent with those commonly used in the venture capital industry, and in particular, in private venture capital funds. The Fund believes that it needs to be able to offer an incentive fee arrangement similar to those of other venture capital funds in order to attract the necessary professional expertise to be able to carry out the investment operations and its mandate, which is a mandate already recognized by the Regulation to the Act.
16. The Prospectus for the Fund:
(a) Fully discloses that the Manager considers the Performance Bonus and the Incentive Arrangement to be appropriate given the disclosed investment objectives and strategies of the Fund; and
(b) Provides an explanation of why the Performance Bonus and the Incentive Arrangement are appropriate for the Fund.
This letter confirms that, based on the information and representations contained in the Application, and for the purposes described in the Application, the Director hereby revokes and replaces the Prior Exemption with this exemption that the Fund is exempt from section 7.1 of NI 81-102 in respect of the Performance Bonus and Incentive Arrangement provided that:
i) the Manager fully discloses to Shareholders that the Manager considers the Performance Bonus and the Incentive Arrangement to be appropriate given the disclosed investment objectives and strategies of the Fund and provides an explanation of why the Performance Bonus and the Incentive Arrangement are appropriate for the Fund; and
ii) the Service Providers are not dealers distributing securities of the Fund.
The relief provided herein is conditional upon compliance with all other applicable provisions of NI 81-102.