Tuesday, September 20, 2005

Workers Want Tax Credits NOT Tax Cuts

Canada discouraging investment says C.D.Howe Institute

The only country that's higher than Canada when it comes to what the CD Howe Institute calls the effective tax rate on capital is communist-led China, according to the think-tank's 2005 Tax Competitiveness Report: Unleashing the Canadian Tiger. Canada's effective rate of tax on capital is 39 per cent while China's is 45.8 per cent, the study found, when all taxes are taken into account including corporate income taxes and other taxes on capital including sales levies. By comparison, the United States' is 37.7 per cent.

But China has billions to spend in the market place, and are a growing global tiger despite the tax regime. Hmmm wonder where all that capital comes from....see my articles on China in the archives.

The think-tank's report comes just as Ottawa and the provinces are drawing up plans for their spring 2006 budgets and Finance Minister Ralph Goodale has been talking up the need to fix Canada's weak productivity growth.

Ho hum we have heard it all before. At least once a week. Tax cuts, tax cuts, what we have to say is tax cuts. Haven't got a clue of what to do but what we can say is tax cuts.

If you want working people in Canada to invest, beause the capitalists don't or won't, you don't offer tax cuts you offer investment incentives, and not RRSP investments for the wealthy. Instead you offer Labour Sponsored Investment Funds with matching provincial and federal tax credits, this has produced the largest source of venture capital in Canada.

Despite some shady dealings with managment of a Manitoba LSIF fund; Crocus, LSIF's they have gotten unwarranted abuse in the press. However given the shady dealings by CIBC, Royal Bank, TD Bank/Price Waterhouse, and the Porteus fund and others which make LSIF's problems pale in comparison, they are still the way to go for working class investors.

Don't kill labour-sponsored funds
The recent debate over the role of labour-sponsored investment funds (LSIFs) in Ontario ignores one critical element: the success of Quebec's Solidarity Fund QFL. The fact that Solidarity Fund QFL manages between 55% and 60% of all capital under management by LSIFs justifies looking at our record before drawing any conclusions about LSIFs.

LSIF's are based on Union start up capital investment based on pension funds, which encourage investment by union members and other workers giving them a very real tax break, due to matching provincial and federal tax credits which can be between 15-20%. Very real money in our pockets, thank you. And given it is held for eight years and has a maximum investment of $10,000 it is a real opportunity for workers to make both a tax credit and interest while directly contributing to the growth of capitalist enterprise.

VENTURE CAPITAL-Startups to face tougher conditions for funds

Canadian startups will face a liquidity crisis soon if current investing trends continue, according to a private equity investment bank. The amount of money investors are committing to venture capital pools has declined steadily since last fall, even as the funds themselves have been financing more companies, according to Toronto-based Fusion Capital Partners Inc. The median deal size in August fell to less than $2-million, the lowest level this year, compared with $3.5-million a year ago, the firm said in its monthly market survey."A lot of companies are going to be scrambling, and the terms and conditions are going to get tighter," said Mike Middleton, managing director of Fusion Capital.

"While there continues to be plenty of money in the system, a significant portion is being held for follow-on investments, and in the case of [Labour Sponsored Investment Funds], to meet their regulatory reserve requirements."Indeed, in the first eight months of the year, Canadian VC funds distributed $1.45-billion, up 23 per cent from the $1.19-billion in the year-earlier period. But Fusion Capital estimates that last month only $1.6-billion of funds were raised on a trailing 12-month basis, compared with approximately $2.6-billion in August, 2004.The slowdown in fund raising comes at the same time that the Ontario government is planning to eliminate the 15-per-cent tax credit for investors in LSIFs.

The government has cited an increase in funds from U.S.-based venture capitalists as one of its reasons for getting rid of the credit. But Mr. Middleton said that most U.S. investments are directed in large chunks to later-stage companies.It's too soon to tell how quickly the crunch could come, as the managers of LSIFs remain in talks with the Ontario government about the policy change, he said.

Some twit writes to the Windsor Star the following letter to the Editor, which of course is contradicted by the article above. Betcha this idiot is another of the tax cut crowd.

Grits' big plans will offset benefit of LSIF demise
With uncharacteristic good sense, the Ontario government plans to eliminate its 15 per cent tax credit for investors in labour-sponsored investment funds. Such funds, known as LSIFs, have been economic and financial disasters since their creation back in 1991. Now that Ontario's Liberals have taken the plunge, federal Finance Minister Ralph Goodale has an easy political opportunity to remove Ottawa's 15 per cent tax credit, thereby ending the LSIF program after 15 years of unproductive existence, at least in Ontario. British Columbia would surely follow.

LSIF have not been a failure, they are start up venture capital, and as such are a Risky investment, while they may not have made as much in interest as other funds, or bonds, or stocks, they have made interest and they have a 30% tax credit in Ontario. Now the Liberal government in Ontario wants to cut its nose to spite its face.....

Ontario Liberals killing tax credit for labour sponsored funds
Decision will impact 46 funds with $3 billion in assets

First Ontario Fund responds to provincial announcement regarding phase out of LSIF tax credit


The contribution of LSIFs to Ontario's economy over the past decade has
been significant. LSIFs have invested over $2.7 billion in more than
550 Ontario companies, creating 27,000 jobs. In the case of First Ontario Fund
alone, an independent study concluded that total employment of the companies
that received funding more than doubled from 1,111 to 2,339 up to
September 2002, and that the Fund's investment activity contributed
$130 million to the Gross Domestic Product of the Ontario economy.
The Fund was launched in 1995 and has provided capital to over 30 Ontario
mid-sized companies. It currently has about $40 million in net assets, of
which roughly $25 million is invested in the venture portfolio. Liquid
reserves make up more than 35% of the Fund's net assets.

Labour funds reel as Ont. axes tax credit

LSFs are a key source of funding in Ontario with about 40 per cent of VC investment in the province coming from the asset class.

Robin Louis, president of Canada's Venture Capital and Private Equity Association, doubts private and U.S.-based venture capitalists will move quickly to take up the slack in Ontario.

"If the tax credit goes away, that amount will diminish very quickly . . . I think their [LSFs'] participation in new investments is going to dry up very quickly. It's going to be harder to put together substantial-sized financings and that will be bad for everybody."


Alberta has no such LSIF, our Provincially funded Venture Capital fund was sold off years ago, and workers in Alberta do not have the opportunity to benefit in tax credits like workers in other provinces. While LSIF have been responible for investing in start up companies in Alberta. Ironic that. Hey you know its bad when the capitalist press attacks the idea.

Ontario will join Alberta, P.E.I. as labour fund Scrooges

Once it eliminates tax credits for labour-sponsored venture-capital funds, Ontario will join the ranks of the least supportive jurisdictions for these funds. That distinction is currently shared by Alberta and Prince Edward Island, neither of which provides any tax breaks for labour fund investors. Investors in these two provinces receive only the 15% federal tax credit of up to $750, which applies across Canada.

And is it any wonder workers don't invest in RRSP's. Sheesh I get more of a tax credit from my union dues than I do investing in an RRSP! Which is why LSIF are so popular with workers.

Ontario's tax credit currently is 15% to a maximum of $750 a year on up to $5,000 invested. This puts Ontario solidly in the mainstream among the 10 provinces. It's the same level of tax breaks that applies to eligible labour funds in Manitoba, Quebec and New Brunswick.

In addition to the 15% credit for all provincially registered funds, Ontario offers an additional 5% credit for labour funds that qualify under its research oriented investment fund (ROIF) program. The ROIF credit, to a maximum of $250 based on a maximum eligible investment of $5,000, applies to funds with an emphasis on research and development ventures. This tax credit is also being eliminated.

In dollar amounts, the province that is the most generous to labour fund investors is British Columbia. The 15% tax credit in B.C. can be as high as $2,000 a year, since it applies to a maximum eligible investment of $13,333.

Labour fund provincial tax credits
Province Credit Maximum eligible investment Maximum tax
credit payable
B.C. 15% 13,333$ 2,000$
Alberta None N/A N/A
Saskatchewan 20% 5,000$ 1,000$
Manitoba 15% 5,000$ 750$
Ontario 1 15% 5,000$ 750$
Quebec 15% 5,000$ 750$
Nova Scotia 20% 5,000$ 1,000$
New Brunswick 15% 5,000$ 750$
P.E.I. None N/A N/A
Nfld. & Labrador 2 15% 10,000$ 1,500$

1 In Ontario, an additional 5% tax credit is available to research-oriented labour funds, for which the maximum tax credit payable is $250, based on a $5,000 investment.
2 In Newfoundland, the maximum tax credit payable in the 2006 tax year will be $750, based on a $5,000 investment.
Source: Government and fund company sources

The current runner-up in tax relief offered is Newfoundland and Labrador, a relative newcomer to labour fund subsidies. For the 2005 tax year, the province's 15% tax credit can be as high as $1,500, since the maximum eligible investment is $10,000. However, the amount eligible for tax relief will be slashed in half to $5,000 for the 2006 tax year, bringing the maximum tax credit down to $750.


The C.D. Howe Institute of course once again calls for an increase in the RRSP ceiling on investment, which benefits the rich but not workers, who have very little in RRSPs.

Other recommendations to “unleash the Canadian tiger” include:

Tax Prepaid Savings Plans at the federal and provincial level that allow individuals to put up to $5,000 per year into accounts where the investment income earned would be free from taxation.

Further liberalize RRSP rules, raising to $30,000 from a planned $22,000 ceiling for the maximum annual contribution. Also, allow Canadians to contribute up to 30 per cent of their earned income instead of 18 per cent and boost to 73 years the maximum age for contributing to retirement savings plans.

And guess where that RRSP money goes........

Canadian investors drop a further $3.7B into foreign securities in July
Canadians continued their shopping spree for foreign securities during the first full month after limits on such purchases were officially abolished. Canadians invested $3.7-billion in foreign securities in July, after a $5.6-billion investment in June, the month the government finally passed budget legislation lifting the 30% ceiling on RRSP and other pension fund investments in non-Canadian securities. It was the sixth straight month of heavy investment in foreign securities, Statistics Canada noted. While Canadians continued to be big buyers of foreign, especially U.S., securities, foreigners in July returned to the Canadian stock market, whose gains outpaced U.S. gains during the month.

Since LSIF are start up capital the majority of it staying in Canada in risky technology start ups and biomedical companies. Without the tax credits start up Canadian companies will have to rely on Amercian Venture Captial. So while the rich in Canada invest their RRSP's abroad, without LSIF venture captial Canadian companies become prey to US Capital. This makes us a Tiger? Nope it makes us a kitten.

Business leaders jeer tax grab
By Ottawa Business Journal Staff
Tue, Sep 6, 2005
News that Ontario will be eliminating the 15-per-cent tax credit it gives investors who pour their money into labour-sponsored investment funds (LSIFs) has been received with loud jeers by local business and financial leaders. The government says the credit is no longer needed "to kick-start the venture capital sector in Ontario." "I am aghast to hear about this potential development," railed Zelos Therapeutics CEO Duffy Dufresne. "It would effectively gut the Canadian VC community, certainly in Ontario and most likely across Canada. I would be happy to do anything I can to help in this situation. "I can certainly give an honest assessment of the pressures that are already in place (from U.S. VCs) to move opportunities entirely out of Ontario (and Canada), and how without a viable Canadian VC industry, early technologies will either no longer be developed or else they will be transferred at the earliest stage to U.S. biotech entities with no resulting economic advantages to Ontario whatsoever. Zelos would never have had a substantial and growing economic presence in Ottawa without the strong Series A financing that we attracted from VenGrowth and Genesys."

The real source of Venture Capitalism in Canada are Labour Sponsored Investment Funds, ironic that, isn't it. Another damn fine Proudhonian idea of the working class. So ask yourselves why the Chambers of Commerce, the Canadian Small Business Association and the C.D. Howe Institute aren't crying out against the Liberals in Ontario and also demanding Alberta and PEI institute this marvel of capitalism. Hmmm perhaps they are economically dyslexic, and being EDD can't get their brains around the idea that what workers in Canada need is Tax Credits NOT Tax Cuts.

Annual Review of Labour Sponsored Investment Funds - 2005
Labour Sponsored Investment funds have grown in both popularity and diversity in the last ten years. In fact, the number of new funds in the last few years has made deciding on making an LSIF investment more complicated.While these funds do have to be sponsored or "endorsed" by a Labour group, their real purpose is to invest in small companies and to help create jobs. Federal and provincial governments encourage us to invest in these funds by offering individual investors generous tax incentives.

Labour-sponsored investment funds: FAQs
Have they been successful in raising money?
By some estimates, labour-sponsored investment funds account for up to 40 per cent of all the venture capital raised in Canada.

According to Investor Economics, the country’s 113 LSIFs had $3.7 billion in assets as of April 30, 2005. The largest (Vengrowth II) has almost $500 million under management. But only eight LSIFs have assets of more than $100 million. By comparison, the biggest mutual funds in Canada each have several billion dollars in assets.

LSIFs want to invest in companies that they can either sell at a profit to other companies or take public and clean up on if the stock price soars. The best example of an LSIF success story is Research in Motion, the Waterloo, Ont., wireless mobile company that is now worth more than $17 billion.

How bad have the returns been?
For most LSIFs, the returns have been, shall we say, less than spectacular. Of the 10 biggest funds, nine have a five-year history. All nine lost money over the five years ending May 31, 2005. Over the last year, only one of the “big 10” has made money.

It’s not hard to see why. Most LSIFs invest in high technology and life science companies. Up to 1999, these were the sectors to be in. For instance, the average LSIF made 21.6 per cent in 1999 and 11.6 per cent in 2000.

Alberta Government Discounts the Advantages of LSIF. In 1998 the Alberta Government having experienced its own failure to develop a state capitalist Venture Capital Fund (called Vencap) that was not plaqued by insider disincentives because the government used it to put to pasture its Tory friends,
denies Albertan's access to Labour Sponsored Investment Funds. The main reason is that the Tax Credits are "too genourous" to workers!!!

This report was issued to then Provincial Treasurer, and former Labour Minister, Stockwell Day. Yep same Stockwell Day that was Leader of the Alliance Party and now is a Federal MP in the Conservative Party.

Alberta Tax Review
Committee 1998

Access to patient venture capital

The Committee heard specific concerns about the lack of venture capital, particularly from investors who are willing to wait a considerable period of time before they see a return on their investment for early stage development. On the other hand, the Committee also heard that the problem is less with the availability of investment capital and more with the lack of commercially viable initiatives. Some argued that the problem isn’t a shortage of venture capital – there are many pools of funds available and investors interested in R&D investments. In some cases, a problem lies with the lack of management skills and difficulty some of these businesses have in developing a viable business plan. In others, it’s simply a matter of connecting the person with the ideas with the right venture capitalists. The Committee also heard concerns about regulations that create a bottleneck at the Alberta Stock Exchange.

The Committee reviewed several of the vehicles that had been used in other provinces and in Alberta to establish pools of venture capital.

The Committee also reviewed the option of labour sponsored venture capital corporations (LSVCCs) and other publicly-funded venture capital funds. With LSVCCs, individual taxpayers receive a tax credit against their federal and provincial income tax for investments in eligible venture capital corporations. All provinces except for Newfoundland, Prince Edward Island and Alberta have adopted some form of LSVCCs.

Legislation varies from province to province, but generally the objectives of LSVCCs are to create jobs and to strengthen economies by increasing the availability of equity capital to support small and medium sized business opportunities. Another objective is to build a liaison between business and labour. LSVCCs must be sponsored by a labour organization or professional organization. The specific purposes of LSVCCs in various provinces range from concentrating investment in health technology to broad objectives of creating superior long-term value for shareholders and contributing to the prosperity of the Canadian economy.

LSVCCs have generated substantial controversy. Concerns most often cited include a slow pace of investment and extensive tax benefits. In the early years, LSVCCs were successful in raising investment funds but had more difficulty in placing the funds in business ventures. The performance of individual funds in different provinces varies considerably. At best, their success has not been proven to date. While the investment community would benefit from the marketing of LSVCCs, the Investment Dealers Association recommended against establishing them in Alberta. Also the significant administrative costs for government and for the LSVCCs was a concern.

In terms of publicly-funded venture capital funds, Alberta’s experience has not been positive. Vencap was established by the Alberta government with funding of $240 million and the objective of investing in venture capital. Vencap experienced many of the same problems as LSVCCs – a lack of good investments and a reluctance to take risks. As a result, a relatively small percentage of Vencap’s equity ended up in new Alberta ventures. The Alberta Opportunity Company faced similar problems in operating a program to support investments in start-up knowledge-based industries.

3. The province should not introduce any type of provincial tax incentives for investment in venture capital funds, including Labour Sponsored Venture Capital Corporations.

The Committee reviewed various Labour Sponsored Venture Capital Corporations funds in other provinces and heard views from the Investment Dealers Association of Canada, KPMG, and the Alberta Science and Research Authority on these funds.

As noted previously, LSVCCs are controversial and have had varying degrees of success or failure. Most of these funds have not been able to invest more than half the money they received, and in most cases, they do not address the need or gap for seed and early stage capital in emerging high tech firms. All similar programs in Alberta such as Vencap, Small Business Equity Corporations, and the Alberta Stock Savings Plan, have been costly failures for the Alberta government.

In the Committee’s view, the refundable nature of the R&D tax credit proposed under recommendation 1 will help address the problem of access to capital since it will provide additional funds for R&D investment.

The hand picked Tax Review Committee was made up of Tory insiders, hangers on and MLA's. Under the Ralph Reich LSIF never stood a chance of being objectively assessed.

1998 Tax Review Committee

    Co-Chairs

    Gary G. Campbell, Q.C.
    Jack C. Donald

    Committee Members

    Brian A. Felesky, Q.C.
    Richard W. Forest
    Denis A. Herard, MLA
    Ron Hierath, MLA
    Leo R. Kelly, FCA
    Audrey E. Luft
    Michael Procter
    Dr. Roger S. Smith

    Executive Co-ordinator

    Al Kalke


And as a result of this lack of venture capital in Alberta, small cap technology companies which are one of the fastest growth industries in the province suffer from lack of capital investment to start up with. Five years after the government tax report found that the province suffered a lack of R&D investment capital, well nothing had changed. However had the province had approved LSIF then these are exactly the kind of high tech businesses that would have benefited. All because LSIF were too generous in their tax credits for the average worker investor. Now Ontario intends to follow Alberta's lead, which will result in the same short fall of investment capital as Alberta small high tech companies have faced.

Between 1999 and 2004 LSIF were a growing source of venture capital for start up businesses in Canada except in Alberta, which had decided for politcal reasons to not allow Albertans the opportunity to take advantage of this . Another economic mistake by the Ralph Reich driven by their neo-con ideology. One that has been a costly mistake. And the Ontario government is about to make the same mistake.

Alberta Technology Report - 2003 - Analysis Ernst and Young

Alberta technology sector leaders remain cautiously optimistic about their future. However, the growing competitive nature of global outsourcing, several lean years of scarce funding, and comparatively low use of government programs are issues that require the attention of those interested in the sustainability of the sector in this province.

The very small companies that make up the majority of the technology sector (90% of respondents have fewer than 50 employees) are looking for relatively small amounts of seed capital. This means they are completely off the radar of the venture capitalists who are, as reported by MacDonald & Associates, looking to fund larger deals in traditional businesses, with 70% of their funds invested last year in follow-on deals.

The lack of funding in the early stages is evident. In 2003, 38% of companies looking for less than $1 million received no funding whatsoever, and 25% of companies seeking $1 million to $5 million received nothing. On the other hand, every company surveyed that was looking to raise more than $5 million raised at least some capital—and 52% raised more than $5 million.

Recently created angel investment networks in Alberta (Deal Generator, Keiretsu Forum and the Calgary Angel Network) have proved to be timely additions to the financing landscape. The number of companies citing angel investment rose to 25% from just 17% a year ago. However, the importance of these networks is much greater than their significant contributions of capital—the input available from angel investors who have successfully run one or more businesses can be a major success factor for a new technology company.

Provincial government programs that suit the needs of the smaller, more nimble companies—be they investment tax credit programs, programs to promote excellence in sector education and research, incentives to attract outsourcing opportunities into the province, more of the already proven support of the angel network, or simply raising companies’ awareness of federal support programs—could make a difference in addressing the early-stage seed fund challenge.

Government Programs
In a poor funding environment, one avenue that Alberta technology companies do not appear to be taking full advantage of is government incentives.

Alberta technology companies continue to underutilize the Industrial Research and Assistance Program (IRAP) and the Scientific Research & Experimental Development (SR&ED) tax credit. More than half (56%) of survey respondents either don’t know about IRAP or have never benefited from it and don’t expect to. The same holds true for 41% of tech company executives concerning SR&ED. Overall, just 30% of companies have benefited from IRAP, and only 43% have utilized the SR&ED program.

Statistics from the National Research Council Web site indicate that the use of IRAP by Alberta companies has been significantly lower than by companies in other provinces. IRAP contributed to only 298 projects worth $8.92 million in 2001-2002 in Alberta/Northwest Territories/Nunavut, compared to 501 valued at $13.96 million for British Columbia/Yukon and 1,115 valued at $39.88 million for Ontario.

Examination of the projects funded by Technology Partnerships Canada (TPC)—including $33.9 million to Research In Motion, $33 million to IBM and $41.4 million to CAE—suggest it would be worthwhile for Alberta technology companies to pursue TPC support for their strategic research and development projects. However, they seem to be underrepresented here as well, receiving only 2% of the contributions made by TPC.

Would a matching provincial SR&ED tax credit help? Asked to comment on the potential impact of a 10% SR&ED provincial/investment tax credit, respondents anticipated only a modest success in increasing R&D budgets.

Is there an alternative solution? Alberta technology leaders show very broad support for an investor tax credit that would encourage investment in emerging companies. Because the credit would be investment-based, it could be used to support a broader range of business initiatives, such as sales and marketing, operations, hiring, and expanding production capacity. Such a credit could result from direct investment by investors in eligible technology companies—similar to the flow-through share incentives currently available in the resource sector, the Alberta Stock Savings Plan that existed in the 1980s, and the recently introduced BC Equity Capital Program. Alternatively, a program could be designed to encourage investment in venture capital pools of managed equity capital, which in turn would invest in defined types of technology businesses.

Survey respondents want the provincial government to focus on assistance with technology commercialization, promoting Alberta as a technology destination, and supporting research and development. Technology executives also believe the government’s policy of minimizing corporate and personal taxes provides a key support to their industry. In view of the tremendous opportunity that outsourcing represents for the province, it is important to recognize that competing on a cost basis means Alberta technology businesses will benefit from any efforts to encourage global trade, reduce border restrictions, minimize the costs of transporting goods, promote Alberta businesses and assist in building industry focus and centres of excellence that encourage economies of scale.

Access to Equity Capital Issues
Equity Capital and the Commercialization of
Early Stage Technology in Alberta

Alberta Economic Development
April 10, 2002

EXECUTIVE SUMMARY
ISSUE: Access to equity capital in Alberta – Status, actions and issues.
BACKGROUND:
· Most analysts agree that Alberta’s banking marketplace is adequately meeting the debt
financing needs of Alberta businesses. Alberta industry stakeholders are not expressing
concern with access to debt financing. In 1998, knowledge-based businesses made up 2.22%
of major bank customers in Alberta compared to 2.34% for all of Canada and 2.86% in
Ontario and 2.47% in Quebec. In the same year, one and a half percent of Canadian
chartered bank business loan authorizations in Alberta were to knowledge-based industries as
opposed to 2.14% for Canada as a whole. Alberta businesses also have access to other
lenders such as the Alberta Treasury Branches and the Alberta Opportunity Company.
· Access to equity capital in Alberta as opposed to debt financing has been under extensive
review since 1996. It focuses on the perceived lack of seed and venture capital funding for
new and emerging industries. Alberta has averaged between 2% and 6% of the total
Canadian venture capital investment over the past 10 years. Alberta’s economy made up
about 14% of total Canadian GDP in 2001.
· The institutional supply of venture capital in Canada grew dramatically in the 1990’s and2000. The development of Labour Sponsored Venture Capital Corporations (LSVCCs) inparticular, offered a new tax shelter to individuals and doubled the institutional supply of venture capital during the decade. Alberta is one of only two provinces in Canada that doesnot piggyback federal LSVCC tax credits with provincial tax credits.
· The concern of some industry leaders is that the emerging manufacturing and technology industries in Alberta may be limited by a gap in the availability of equity capital at the early stage of commercialization.
· The comparatively low level of venture capital investment in Alberta in the 1990’s has been
explained in different ways:
o Alberta’s relatively small presence of locally managed venture capital does not attract the same interest as proposals from provinces that have more local venture capital and therefore greater local support.
o Alberta is not generating a sufficient deal flow (outside of the energy sector) to justify
establishment of venture capital funds in Alberta.
o Canadian Venture Capital Association statistics may be under reporting Alberta
venture capital activity due to a low Alberta membership in the Association.
· Over the past two years, steps have been taken by both the Alberta and federal governments
to facilitate private equity investment in business. Insufficient time has passed to assess their
impact.

Canadian Labour Sponsored Venture Capital Corporations:

Bain or Boon?

Douglas J. Cumming

School of Business

University of Alberta

Edmonton, Alberta


Jeffrey G. MacIntosh

Toronto Stock Exchange Professor of Capital Markets

Faculty of Law

University of Toronto


Draft: March 2002

Abstract


We provide an empirical analysis of the legal and economic factors that affect the supply and demand for venture capital and the integration of venture capital markets across the Canadian provinces over the 1977-1999 period. The data provide strong support for the propositions that venture capital requires an active stock market, and that the supply of and demand for venture capital is affected by the real interest rate, and changes in real gross domestic product. The effect of government sponsorship on the supply of venture capital is also considered. The evidence suggests Labour-Sponsored Venture Capital Corporation (LSVCC) legislation has crowded out the supply of venture capital in some jurisdictions, particularly where both federal and provincial LSVCCs are allowed to operate in the jurisdiction. On the demand side, the data indicate that venture capital in a province increases with the number of new federal incorporations from that province, but not provincial incorporations. This incorporation evidence is consistent with the existence of a separating equilibrium in which a more expensive federal incorporation enables higher quality entrepreneurs to signal their ability to prospective venture capital investors