Making Your Business Attractive to Investors: The BC Small Business Venture Capital Act

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The Small Business Venture Capital Act, RSBC 1996, c 429 (SBVCA), is designed to encourage arm’s length investors to make equity investments in early stage businesses in British Columbia (BC).  BC angel investors expect technology, biotechnology and manufacturing companies in BC to have applied for recognition as an eligible business corporation under the SBVCA before approaching them for capital.  Failure to obtain this designation may make it more difficult for a company to raise capital and compete with other investments who have obtained this designation.

The BC government under the SBVCA provides individual investors with a refundable BC tax credit equal to 30% of their investment amount, up to a maximum of $60,000 in tax credits annually, in an arm’s length eligible business corporation. There is no annual limit on the tax credit for investors who are corporations; however, the credits are not refundable. Investors may claim a tax credit on an investment made within the calendar year, or within 60 days immediately following that calendar year. Excess tax credits held by individuals and corporations may be carried forward and used in the next four taxation years. The investment may be made either directly into the eligible business corporation or through a specially formed venture capital corporation (VCC).

Individuals may also use funds held in a self-directed registered retirement savings plan, tax free savings account or registered retirement income fund adding a federal tax savings component to their investment.

These tax credits have the potential to reduce an investor’s at risk investment substantially:

INVESTMENT EXAMPLE

Without RRSP

With RRSP

Subscription Amount

$10,000

$10,000

SBVCA Tax Credit

     – $  3,000

     – $  3,000

Net Investment Cost Before RRSP

$  7,000

$  7,000

RRSP Tax Savings

           $         0

    – $  4,570

Net Investment Cost After RRSP

$  7,000

$  2,430

The investor must hold the investment for five years (or reinvest in another eligible business corporation) or pay back a pro-rata portion of the tax credit.

The company must apply to the Investment Capital Branch of the Government of British Columbia to be designated an eligible business corporation and be approved to raise capital under the SBVCA.  To be recognized as an eligible business corporation, a company must:

Substantially engaged is defined as over 50 percent of the assets and expenses of the business or over 50 percent of the business revenue must be related to the above business activities.

Certain business activities are prohibited under the SBVCA such as resource exploration or extraction, financial services, property management, land development, agriculture, restaurants and retail services etc.

The securities being offered by an eligible business corporation under the SBVCA must:

  • be issued from treasury for cash consideration;
  • be common or preferred shares with or without voting rights;
  • if the shares carry a right of retraction or redemption cannot be exercisable for at least five years from the issue date;
  • issued to an investor who is arm’s length and does not control the company directly or indirectly; and
  • carry restrictions on transfer and redemption for five years.

Using sinking funds, dividends and other features that eliminate the risk of an investment to an investor or attempt to guarantee a specific return are restricted under the SBVCA.  Investors also cannot have disposed of a class of type of securities of an eligible business corporation in the two years prior to the investment date.  These restrictions are meant to stop any abuse of the tax credit program.

Investors must complete and sign a share purchase report and keep a copy on file for seven years for audit purposes. The eligible business corporation must file an electronic tax credit application online with the Investment Capital Branch (eTCA system) to claim the tax credit for each investor.  Tax credit certificates are provided on the eTCA system at the end of March each year and the eligible business corporation is responsible for sending out the tax credit certificates to its investors.  An eligible business corporation must file an annual return to ensure it is in compliance with the SBVCA requirements during the investment period.

An eligible business corporation under the SBVCA program may raise under the SBVCA program a maximum of:

  • $5 million from direct investment as an eligible business corporation;
  • $5 million from any one VCC; and
  • $10 million from multiple VCCs in any 2 year period.

The SBVCA has been a very effective in encouraging investment in early stage businesses in BC.  Thomas Hellman, of the Sauder School of Business at the University of British Columbia, looked at the economic impact of the SBVCA program between 2001 and 2008 in An Evaluation of the Venture Capital Program in British Columbia for the Ministry of Small Business, Technology and Economic Development.  It is clear from his research the SBVCA has had a positive impact on early stage businesses in BC particularly in downtown years.  The program also has resulted in favorable investment returns to the government of BC in terms of increased tax revenue from and jobs because of the SBVCA.

If you are interested in more information on accessing the SBVCA program, please call my office.  We can evaluate your company for suitability and help you prepare and file the required government documents.

Alixe Cormick is the founder of Venture Law Corporation in Vancouver, British Columbia and a member of Commercialization Advisory Board of the Life Science Institute at the University of British Columbia, the Advisory Board of the National Crowdfunding Association and two private tech companies. She is also a member of the Pacific Northwest Keiretsu Forum, an association of accredited private equity angel investors, venture capitalists and corporate/institutional investors, and Vantech Angel Technology Network, a Vancouver angel group. You can reach Alixe by phone at 604-659-9188, by email at acormick@venturelawcorp.com, on twitter at @AlixeCormick or on Google+ at +AlixeCormick.
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Making Your Business Attractive to Investors: The BC Small Business Venture Capital Act
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The BC Small Business Venture Capital Act provides a tax credit to investors which makes investing in early stage companies more attractive. This is how it works.
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Venture Law Corporation
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The articles on this blog are not intended to create and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.