LPS 3-13 - Policy Guidelines for a Venture Capital Issuer Planning to Make a Distribution [Rescinded]
1.1 This Local Policy, Statement has been revised solely to conform with the Securities Act S.B.C. 1985 c.83 and Regulations thereto. Other than consequential amendments, there have been no changes of a substantive nature to this policy. It becomes effective with proclamation of the Securities Act on February 1, 1987.
2.0 TERMS OF REFERENCE
2.1 The prospectus of an investment issuer shall be prepared in accordance with Form 60 and the prospectus of a mutual fund issuer shall be prepared in accordance with Form 15. The Regulations define an "investment issuer", and the Act defines a "mutual fund". A venture capital issuer should use Form 60 insofar as that form is relevant.
2.2 An investment issuer is essentially an incorporated entity managing a portfolio of securities characterized by the continuing investing and reinvesting in securities of other companies. A closed end investment issuer differs from an open end issuer in that it does not continuously offer its shares and it has no obligation to redeem its shares.
2.3 A mutual fund issuer is typically an open end investment issuer. Shares of a mutual fund are usually offered continuously at net asset value plus a sales load. Shareholders may redeem on due notice, at net asset value, shares held in an open end fund. A mutual fund generally offers diversification and liquidity.
2.4 A venture capital issuer is a form of investment issuer having goals and practices which differ markedly from those of the typical investment issuer. The goal of the venture capital issuer is to provide equity financing for business enterprises. Appropriately, venture capital issuers participate in distributions of securities which may not be readily marketable, so that a venture capital issuer may well be "locked" into holding a security pending its growth and development. Usually a venture capital issuer prefers to hold a minority position, leaving management in control. In start-ups and other special situations, however, a venture capital issuer may be in control of the issuer until such time as certain performance standards are met, with control reverting to management upon some agreed-on formula.
2.5 The role played by a promoter in founding and organizing an enterprise differs from the role of a venture capital issuer in providing financing for a developing enterprise. However, where the principals of a developing enterprise lack promotional expertise and experience, it may be appropriate for the venture capital issuer to assist in the promotion of such a developing enterprise. Where a venture capital issuer participates as a promoter, the number of principals' shares acquired by it as a promoter should not exceed the number of "seed capital" shares subscribed for by it, and should not exceed 33 1/3% of the total number of principals' shares issued.
2.6 This Local Policy Statement is directed towards the venture capital issuer. Certain provisions of this Local Policy Statement may be applied to other forms of investment issuers where the Superintendent deems it appropriate.
2.7.1 "Seed capital shares" means shares issued for cash prior to a public offering of securities by way of a prospectus.
2.7.2 "Principals' shares" means those shares issued for cash at a minimum price of $.Ol per share to principals of an issuer, as prescribed in Local Policy Statement 3-07.
3.0 CAPITAL REQUIREMENTS
3.1 An issuer must have raised at least $600,000 on completion of its first offering of which at least $100,000 must have been raised by way of seed capital distributions.
4.0 INVESTMENT RESTRICTIONS ON A VENTURE CAPITAL ISSUER
4.1 Restrictions to be disclosed in the issuer's prospectus
An issuer will not be permitted to:
4.1.1 invest more than 25% of its funds from share subscriptions in any one entity
4.1.2 invest by way of secondary trades in securities of reporting issuers in which no shares are held as a result of a subscription either of seed capital or to some other distribution
4.1.3 engage in the purchase and sale of commodities, commodity options, commodity futures contracts or commodity futures options
4.1.4 invest in the securities of an entity where
188.8.131.52 any of the shares of such entity are held by
184.108.40.206.1 an insider of the venture capital issuer
220.127.116.11.2 an associate or an affiliate of an insider of the venture capital issuer
18.104.22.168.3 a voting trust where the trust votes shares of the venture capital issuer, or
22.214.171.124 such entity, an associate or affiliate of such entity, a shareholder of such entity or an associate or affiliate of that shareholder has provided, directly or indirectly, by means of a loan guarantee or otherwise, any financial assistance to:
126.96.36.199.1 the venture capital issuer
188.8.131.52.2 an associate or affiliate of the venture capital issuer
184.108.40.206.3 an insider of the venture capital issuer
220.127.116.11.4 an associate or affiliate of an insider of the venture capital issuer.
4.1.5 engage in the business of underwriting securities or marketing to the public the securities of any other person or issuer.
4.2 Transactions engaged in prior to the filing of an initial public offering
This Section applies to an entity whose memorandum or articles of incorporation or by-laws or other form of governing rules were drawn up prior to the publication of this local policy, or to an entity formed under the laws of a jurisdiction other than British Columbia.
4.2.1 An issuer which prior to filing an initial public offering has engaged in a transaction described in Section 4.1.1, will be required to demonstrate that the positions will be rectified by the conclusion of the initial public offering on the prospectus.
4.2.2 An issuer which prior to filing an initial public offering has engaged in any of the transactions described in Sections 4.1.2, 4.1.3 and 4.1.4 above must rectify the position as a condition of having the prospectus receipted.
4.3 The Superintendent may, where he deems it not to be prejudicial to the public interest, waive any of the foregoing Section 4.0 restrictions and requirements where the issuer, at the time of filing a prospectus relating to the issuer's initial public offering of shares, discloses retained earnings equal to not less than 20% of the aggregate shareholders' equity.
5.0 CONDITIONS APPLYING TO A VENTURE CAPITAL ISSUER
5.1 An issuer must comply with the following conditions:
5.1.1 the investment restrictions as set out in Section 4.1 of this policy must be set out in the Issuer's Articles
5.1.2 The issuer must be managed by individuals with backgrounds and experience adequate to demonstrate sufficient expertise in making investment decisions
5.1.3 The issuer must maintain enough capital in the form of cash to cover one year's estimated overhead expenses.
5.1.4 The issuer cannot borrow money, if after such borrowing its debt obligations will exceed an amount equal to 50% of the total assets of the issuer.
DATED at Vancouver, B.C., this _____________ day of________ 19-.
B.C. Securities Commission