Venturelink Fund Inc. and Venturelink Brighter Future (Equity) Fund Inc. - MRRS Decision

Headnote

MRRS -- ss. 5.5(1)(b) and 19.1 of National Instrument 81-102 Mutual Funds (NI 81-102) -- Approval of an amalgamation of labour sponsored investment funds and exemption from the requirements for incentive fees in section 7.1 of NI 81-102 -- approval is required because the amalgamation does not meet all of the pre-approval requirements in s. 5.6 of NI 81-102 -- The performance bonus is based on realized gains and the cumulative performance of the venture portfolio (and not in relation to a benchmark) - Approval is granted because the Amalgamation will benefit shareholders and will make the LSIF market more efficient -- relief for incentive fee payment is granted because there is no appropriate benchmark and the amalgamated fund still needs to meet a threshold return.

Applicable Legislative Provisions

National Instrument 81-102 Mutual Funds, ss. 5.5(1)(b), 7.1, 19.1.

July 21, 2006

IN THE MATTER OF

THE SECURITIES LEGISLATION OF

BRITISH COLUMBIA, ALBERTA, SASKATCHEWAN,

MANITOBA, ONTARIO, NEW BRUNSWICK,

NOVA SCOTIA, PRINCE EDWARD ISLAND,

NEWFOUNDLAND AND LABRADOR

(the Jurisdictions)

AND

IN THE MATTER OF

THE MUTUAL RELIANCE REVIEW SYSTEM

FOR EXEMPTIVE RELIEF APPLICATIONS

AND

IN THE MATTER OF

VENTURELINK FUND INC. AND

VENTURELINK BRIGHTER FUTURE

(EQUITY) FUND INC.

(the Funds)

MRRS DECISION DOCUMENT

Background

The local securities regulatory authority or regulator (the Decision Maker) in each of the Jurisdictions has received an application from the Funds for a decision under securities legislation for:

(a) approval of a proposed amalgamation of the Funds (the Amalgamation) pursuant to clause 5.5(1)(b) of National Instrument 81-102 - Mutual Funds (NI 81-102) (the Amalgamation Approval); and

(b) an exemption from section 7.1 of NI 81-102 to permit the Amalgamated Fund (as defined herein) to pay a performance bonus described in paragraphs 32 and 33 (the Performance Bonus) to the manager of the Amalgamated Fund (the Performance Bonus Exemption).

Under the Mutual Reliance Review System for Exemptive Relief Applications:

(a) the Ontario Securities Commission is the principal regulator for this application, and

(b) this MRRS decision document evidences the decision of each Decision Maker.

Interpretation

Defined terms contained in National Instrument 14-101 Definitions have the same meaning in this decision unless they are defined in this decision.

Representations

This decision is based on the following facts represented by the Funds:

The Filers

VentureLink Fund Inc.

1. VentureLink Fund Inc. (VL) was incorporated under the Canada Business Corporations Act (the CBCA).

2. VL is a registered labour sponsored investment fund corporation (LSIF) under the Community Small Business Investment Funds Act (Ontario) (the CSBIF Act) and is a prescribed labour-sponsored venture capital corporation (LSVCC) under the Income Tax Act (Canada) (the Tax Act). VL's investing activities are governed by such legislation (the VL LSIF Legislation).

3. VL primarily invests in small and medium sized businesses and primarily technology companies, with the objective of obtaining long term capital appreciation and must make "eligible investments" in "eligible businesses" as prescribed under the VL LSIF Legislation.

4. The labour sponsor of VL is the Canadian Federal Pilots Association (the VL Sponsor).

5. The authorized capital of VL is as follows:

(a) an unlimited number of Class A shares issuable in series, which are widely held, of which there are currently 4 series created and issued; and

(b) an unlimited number of Class B shares of which all of the issued and outstanding Class B shares are held by the VL Sponsor.

6. VentureLink LP is the manager of VL under a management contract. VentureLink LP is controlled by VL Capital Inc. a company controlled by Geoffrey D. Horton, W. James Whitaker and John S. Varghese. Its sole business is managing the Funds and four other VentureLink funds and it has approximately $215 million in assets under management.

7. VL's shares are not listed on an exchange and VL ceased offering Class A shares under a prospectus as of January 20, 2004.

8. As of May 31, 2006, VL had approximately $27 million in net assets.

9. The net asset value of VL is calculated each business day.

10. VL has complied with Part 11 of National Instrument 81-106 - Investment Fund Continuous Disclosure (NI 81-106) in connection with the Amalgamation.

VentureLink Brighter Future (Equity) Fund Inc.

11. VentureLink Brighter Future (Equity) Fund Inc. (BFE) was incorporated under the CBCA.

12. BFE is registered as a LSIF under the CSBIF Act and is registered as a LSVCC under the Tax Act. BFE's investing activities are governed by such legislation (the BFE LSIF Legislation).

13. BFE primarily invests in a diversified portfolio of Canadian businesses developing products, services and technologies in the essential services and infrastructure industries, such as energy, water and waste management and by investing the remainder of the net proceeds in reserves, including debt instruments whose returns are linked to the performance of the Standard and Poor's 500 Index. BFE's objective is to obtain long term capital appreciation and it must make "eligible investments" in "eligible businesses" as prescribed under the BFE LSIF Legislation.

14. The labour sponsor of BFE is the Canadian Federal Pilots Association (the BFE Sponsor).

15. The authorized capital of BFE is as follows:

(a) an unlimited number of Class A shares issuable in series, which are widely held, of which there are 4 series created; and

(b) an unlimited number of Class B shares, of which all of the issued and outstanding Class B shares are held by the BFE Sponsor.

16. VentureLink LP is the manager of BFE under a management contract.

17. BFE offers Class A Series III and Class A Series IV Shares under a prospectus dated August 25, 2005, as amended (the BFE Prospectus).

18. As of May 31, 2006, BFE had approximately $14.5 million in net assets.

19. The net asset value of BFE is calculated each business day.

20. BFE has complied with Part 11 of NI 81-106 in connection with the proposed Amalgamation.

The Amalgamation

21. On June 15, 2006, VL and BFE announced the proposal to amalgamate the Funds and to continue them as one fund (the Amalgamated Fund).

22. The Amalgamated Fund's objective is to realize long-term capital appreciation by making venture capital investments in a diversified portfolio of securities in eligible Canadian businesses.

23. It is anticipated that the shareholders of VL and BFE will vote on the Amalgamation at shareholders' meetings to be held on July 25, 2006 (the Shareholders' Meetings), and, if approved, the Amalgamation is expected to be effective on a date (the Effective Date) to be determined by VentureLink LP, currently expected to be on or about July 28, 2006. The Manager may, in its discretion postpone the implementation of the approved Amalgamation until a later date which shall not be later than October 1, 2006. The boards of directors of the Funds may elect to not proceed with the Amalgamation.

24. In connection with the Shareholders' Meetings, shareholders of VL and BFE will be sent an information circular (the Circular) which will contain details of the proposed Amalgamation, including income tax considerations associated with the Amalgamation.

25. It is proposed that on the Effective Date, the Funds will amalgamate pursuant to section 181 of the CBCA and continue thereafter as a registered LSVCC pursuant to the Tax Act and as a LSIF pursuant to the CSBIF Act under the name the "VentureLink Brighter Future Fund Inc." or such other name that is decided by the Board of Directors. On the Effective Date shareholders of:

(a) VL Class A Shares, Series I, Class A Shares, Series III and Class A Shares, Series IV will be entitled to receive, in exchange for those shares, Class A Shares of the same series in the capital of the Amalgamated Fund equal to the number of VL Class A Shares of the series so held multiplied by the net asset value per Class A Share of the series held of VL divided by the net asset value per Class A Share of the same series of the Amalgamated Fund all as determined on the Effective Date;

(b) BFE Class A Shares Series I, Class A Shares, Series II, Class A Shares, Series III and Class A Shares, Series IV will be entitled to receive, in exchange for those shares, Class A Shares of the same series in the capital of the Amalgamated Fund equal to the number of BFE Class A Shares of the series so held multiplied by the net asset value per Class A Share of the series held of BFE divided by the net asset value per Class A Share of the same series of the Amalgamated Fund all as determined on the Effective Date;

(c) VL Class A Shares Series II will be entitled to receive, in exchange for those shares, Class A Shares, Series V in the capital of the Amalgamated Fund equal to the number of VL Class A Shares of the series so held multiplied by the net asset value per Class A Share of the series held of VL divided by the net asset value per Class A Share of the same series of the Amalgamated Fund all as determined on the Effective Date; and

(d) VL and BFE Class B Shares will be entitled to receive, in exchange for those shares, 200 Class B Shares in the capital of the Amalgamated Fund.

26. While the Amalgamation will not be a "qualifying transaction" within the meaning of section 132.2 of the Tax Act, more than 95% of the issued and outstanding shares of VL and BFE are held in tax sheltered registered retirement savings plans. Moreover, based on historical selling prices and the anticipated relative values of the shares issued by the Amalgamated Fund and the Class A shares of VL and BFE on the Effective Date, very few of the shareholders of VL or BFE will realize a capital gain as a result of the Amalgamation.

27. Shareholders of the Funds are permitted to dissent from the Amalgamation pursuant to the provisions of section 190 of the CBCA, as applicable. A shareholder who dissents will be entitled, in the event the Amalgamation becomes effective, to be paid by the Amalgamated Fund, the fair market value of the Class A Shares of a Fund held by such shareholder determined as at the close of business on the day before the Amalgamation resolution was passed. Where a shareholder dissents from an amalgamation and receives a cash payment for his shares from the amalgamated corporation, the shareholder is considered to have realized proceeds of disposition equal to the amount of the payment received by the shareholder. The proceeds of disposition will be reduced by the amount withheld and paid to the Receiver General for Canada as a return of the federal tax credit, the amount withheld from the proceeds and paid by the Amalgamated Fund to the Ministry of Finance (Ontario) as a return of the Ontario tax credit and applicable early redemption fees.

28. VentureLink LP will continue to serve as manager for the Amalgamated Fund (the AF Manager).

29. The costs of implementing the Amalgamation including the legal, incremental printing, mailing and regulatory costs will be borne by VentureLink LP. The cost of the solicitation of proxies for the Shareholders' Meeting will be borne by the Funds.

30. As a result of the terms of the Amalgamation, and the nature of VL and BFE as LSIFs, the Funds require approval of the Amalgamation and cannot rely on section 5.6(1) of NI 81-102 for the following reasons:

(i) a reasonable person would not consider the Amalgamated Fund to have substantially similar fundamental investment objectives and management fee structure as the Funds, as required by Section 5.6(a)(ii) of NI 81-102;

(ii) the Amalgamation is not a "qualifying exchange" within the meaning of section 132.2 of the Tax Act, as required by Section 5.6(1)(b) of NI 81-102;

(iii) the Amalgamation does not contemplate the wind up of the Funds;

(iv) the materials to be sent to shareholders of VL and BFE will not include: a copy of the current long form prospectus of the Amalgamated Fund, or a copy of the annual and interim financial statements of the Amalgamated Fund, as required by section 5.6(1)(f)(ii) of NI 81-102 because such documents do not yet exist.

31. Management of the Funds believes that the Amalgamation will be beneficial to shareholders for the following reasons:

(a) Greater Venture Portfolio Diversification - The shareholders of the Amalgamated Fund, will become shareholders of a fund which has a broader, more diversified venture portfolio which is composed of a greater number of portfolio companies than that held by each individual fund. Diversification is the main tool available to reduce the high level of risk inherent in venture investing.

(b) Improved Liquidity - After the Amalgamation, the Amalgamated Fund is expected to have a stronger overall liquidity position than each of the Funds would have had alone. Maintaining adequate liquidity is important for a number of reasons. Cash is needed to meet the follow-on investment requirements of investee companies and to meet the redemption requests of shareholders. Adequate liquidity avoids the need to sell portfolio positions at inopportune times to generate cash, which can result in lower values being realized. Adequate liquidity which allows the Amalgamated Fund to meet follow-on fundraising commitments to investee companies also prevents shareholders from suffering the dilutive effects of "down round" financings.

(c) Improved Competitive Position - As the sector consolidates, investment advisors are expected to favour larger, stronger funds. This is expected to be a positive factor for future capital raising ability which will benefit the Funds' shareholders over the remaining period that the Ontario Government is providing tax credits for LSIFs (particularly in the next three years wherein the full 15% tax credit will continue to be offered).

(d) Reduced Costs - As compared to continuing each of the Funds as a single entity, shareholders of the Amalgamated Fund can expect to bear a modestly reduced level of fixed, recurring fees and expenses post-Amalgamation such as those of professional services fees and shareholder communication expenses.

Performance Bonus

32. The Performance Bonus proposed for the Amalgamated Fund does not satisfy the requirements of Section 7.1 of NI 81-102. The Performance Bonus is based on realized gains and the cumulative performance of the venture portfolio (and not in relation to a benchmark). The Performance Bonus is not based on the total return of the Amalgamated Fund because reserves are not included in the venture portfolio and because the quantum of the Performance Bonus is calculated on an investment-by-investment basis.

33. The AF Manager will be entitled to a Performance Bonus based on the realized gains and cumulative performance of the venture portfolio of the Amalgamated Fund. The Performance Bonus will consist of two parts.

34. The first part pays the AF Manager a 5% performance bonus for returns in excess of current market value of an eligible investment plus the threshold rate of return. Before the 5% performance is paid by the Amalgamated Fund on the realization of an eligible investment, the venture portfolio must have:

(a) earned sufficient income to generate a rate of return on eligible investments in excess of a cumulative annualized threshold return of 6%. The income on eligible investments includes realized and unrealized investment gains and losses earned and incurred since the merger date;

(b) earned income from the eligible investment which provides a cumulative investment return at an average annual rate in excess of 6% since the merger date; and

(c) fully recouped an amount equal to all principal invested in the eligible investment.

Subject to all of the above, the Performance Bonus will be an amount equal to 5% of: [proceeds (including realized gains and income) less (the greater of: current market value on the merger date plus 6% per annum; and original cost)]. The payment of the Performance Bonus must not reduce the return of the venture portfolio from the merger date below a cumulative annualized return of 6%. Otherwise, the Performance Bonus will be reduced to an amount that preserves the threshold return of 6%.

35. The second part pays the AF Manager a 10% performance bonus for returns over current cost. Before the 10% performance bonus can be paid the following conditions will have to be satisfied.

(a) earned sufficient income to generate a rate of return on eligible investments in excess of original cost of the portfolio plus a cumulative annualized threshold return of 6% since the merger date. The income on eligible investments includes realized and unrealized investment gains and losses earned and incurred since the merger date; and

(b) fully recouped an amount equal to all principal invested in the eligible investment.

Subject to all of the above, the Performance Bonus will be an amount equal to 10% of all income earned from the eligible investment. The payment of the Performance Bonus must not reduce the return to shareholders of the venture portfolio from the merger date below original cost (approximately $52 million at April 30, 2006) plus a cumulative annualized threshold return of 6%. Otherwise, the Performance Bonus will be reduced to an amount that preserves the threshold return of 6%.

36. The Performance Bonus set out above is different from other incentive plans in the industry, such as currently used by the Funds, which provide that 20% of any realized gains will be paid as a Performance Bonus provided that the portfolio return is in excess of 6% after payment of the bonus. The Amalgamation and the Performance Bonus were approved by the independent members of the Board of Directors of the Funds after a formal process setting out the benefits to the Class A shareholders of the merger and evaluating various alternatives for the Performance Bonus. Possible alternatives varied from carrying forward all balances from BFE and VL to a full reset of the incentive plan whereby cost for all investments would be deemed to be the carrying value as at the date of the merger. The net impact of the recommended plan is to provide a limited incentive (5%) to the Manager for portfolio performance in excess of 6% and a greater incentive (an additional 10%) for portfolio performance that produces returns in excess of cost plus 6%.

37. The Performance Bonus as recommended is meant to achieve a number of objectives including the following:

(a) Alignment with Class A shareholders as the proposed plan provides for some potential to the AF Manager provided the post merger portfolio returns over 6% per annum but only for that portion of the return in excess of 6%. It should be noted that any potential payouts are relatively low until portfolio returns are at a sustained level of 10% or greater.

(b) The Performance Bonus makes no distinction between which of the Funds a particular investment originates from. This avoids any bias affecting investment selection, follow-on investing or exiting decisions.

(c) The Performance Bonus, while less generous than industry standard plans, provides a reasonable opportunity for potential payouts. This avoids a potential disincentive for the AF Manager to incur the costs of raising further share capital for the Fund.

(d) The Performance Bonus provides the AF Manager with some incentive to bear the cost of merging the funds for the benefit of the Class A shareholders.

38. The Manager believes that the basis for payment of the Performance Bonus is appropriate in light of the nature of venture capital investing and is consistent with the incentives used in the venture capital funds. The Amalgamated Fund believes that it needs to be able to offer the Performance Bonus in order to attract and retain the necessary professional expertise to be able to carry out the investment operations and its mandate.

39. The prospectus for the Amalgamated Fund will:

(a) fully disclose that the AF Manager considers the Performance Bonus to be appropriate given the disclosed investment objectives and strategies of the Amalgamated Fund;

(b) provide an explanation of why the Performance Bonus is appropriate for the Amalgamated Fund; and

(c) provide an explanation of the Performance Bonus calculation for partial dispositions of an eligible investment.

Shareholder Disclosure

40. The Circular sent to VL and BFE shareholders will:

(a) include disclosure about the Amalgamation and prospectus like disclosure concerning the Amalgamated Fund and the shares to be issued under the Amalgamation including information regarding fees, expenses, investment objective, investment strategy, valuation procedures, the manager, the investment manager, redemptions, income tax considerations, dividend policy, net asset value and risk factors;

(b) disclose that shareholders can obtain audited annual financial statements of VL and BFE as at and for the periods ended December 31, 2005, any management reports of fund performance produced by VL and BFE, and the annual information form for VL, at no cost by accessing the SEDAR website at www.sedar.com, by accessing the VentureLink Funds website at www.venturelinkfunds.com. Note that financial statements have been delivered, in the normal course in accordance with the requirements of NI 81-106, to those shareholders of VL and BFE that requested them.

41. Although the materials sent to shareholders of VL and BFE will not include a copy of the current long form prospectus or annual and interim financial statements of the Amalgamated Fund, the Circular sent to these shareholders will contain detailed information about the Amalgamated Fund as it would be should the Amalgamation occur. The Circular will also contain a pro forma statement of net assets of the Amalgamated Fund compiled from he balance sheets of the Funds at December 31, 2005.

42. The Circular will contain a description of the Amalgamation, including the tax considerations associated with the Amalgamation and a description of the role of the Board of Directors of the Funds in approving the Performance Bonus, which will allow VL and BFE shareholders to make an informed decision with respect to the Amalgamation.

Decision

Each of the Decision Makers is satisfied that the test contained in NI 81-102 that provides the Decision Maker with the jurisdiction to make the decision has been met.

The decision of the Decision Makers under NI 81-102 is that:

1. the Amalgamation Approval is granted subject to the following:

(a) the Funds have disclosed in the Circular of VL and BFE that shareholders can obtain the most recent annual and interim financial statements of VL and BFE that have been made public, at no cost, by accessing the SEDAR website at www.sedar.com, by accessing the VentureLinks website at www.venturelinkfunds.com or by calling a toll-free telephone number; and

(b) the Funds include prospectus-like disclosure concerning the Amalgamated Fund in the Circular of VL and BFE; and

2. the Performance Bonus Exemption is granted provided that the prospectus of the Amalgamated Fund discloses:

(a) that the AF Manager considers the Performance Bonus to be appropriate given the disclosed investment objectives and strategies of the Amalgamated Fund;

(b) an explanation of why the Performance Bonus is appropriate for the Amalgamated Fund; and

(c) an explanation of how the Performance Bonus is calculated for partial dispositions of an eligible investment.