Investment for Certain Purposes Prohibited

  Control of Eligible Small Business

  Prohibited Share Rights and Restrictions

Investment for Certain Purposes Prohibited 

Under section 12 of the Small Business Venture Capital Act (the "Act"), a VCC must not make or hold an investment in a small business if the proceeds of that investment are directly or indirectly used or intended to be used by the small business for any of the following purposes:

• lending;

• investment outside B.C.;

• investment in land, unless the investment is incidental or ancillary to the prescribed activities;

• purchasing goods or services from the VCC or its director officer, shareholder, or their associates, for a price greater than fair market value;

• payment of a debt obligation;

• purchase or redemption of previously issued shares of the small business or its affiliates;

• retirement of a liability to a shareholder of the small business or its affiliates or to a shareholder's associate or affiliate;

• payment of dividends; and

• purchasing all or a substantial portion of the assets of a business as a going concern.

A VCC should keep appropriate documentation on file to support its investment.

Control of Eligible Small Business

Under section 13 of the Act, a VCC must not make or hold an investment in a small business if the VCC, either alone or in conjunction with one or more their

• associates or affiliates,

• shareholders or their associates or affiliates,

• directors or their associates,

• officers or their associates, or

• any other VCC or employee venture capital corporation.

will own, directly or indirectly, shares carrying 50% or more of the votes for the election of directors of the small business or will, in any manner, control the small business.

Prohibited Share Rights and Restrictions

Investors must hold a true equity investment that is at risk both as to return of capital and return on capital.

Mechanisms which create a debt between the VCC and the investors or which downsize the risk to the investors of holding a small business investment will be considered prescribed rights and restrictions.  Generally, this also means that the rights and restrictions attached to the share or rights and restrictions contained in or forming part of an agreement, commitment or understanding in respect of the share cannot provide a financial guarantee or other security to the investors in respect of the investment in a small business.

Under section 3 (1) of the Act, prohibited rights and restrictions:

• create a debt between the holder or beneficial owner of the share and any other person,

• impair or will impair the ability of a VCC to maintain the levels of equity capital invested in eligible investments required by section 8 of the Act,

• impair or will impair the ability of a corporation, in which a VCC has made an eligible investment, to carry on an ongoing business with a reasonable expectation of profit, or

• will entitle the holder or beneficial owner of the share to reduce the impact of any loss he/she will sustain in
  holding or disposing of the share.

  Equity Shares Policy Statement

Consequences of Non-Compliance

If an investor makes an investment in a VCC other than by way of
equity shares, then that investment will not qualify under the Act.  Ultimately, this could lead to revocation of the VCC’s registration and lead to a liability to repay previously issued tax credits. Since the consequences of non-compliance can be serious, program users are urged to consult with your legal and financial advisors.

Under Section 14 of the Regulations, a VCC must within 30 days notify the Administrator of failure to comply with the Act.