Securities Law & Instruments

Headnote

One time transfer of assets of labour sponsored investment fund corporation to a non-investment fund operating entity, both advised by the same portfolio adviser, and one time transfer of securities of the non-investment fund operating entity to the labour sponsored investment fund, to implement a merger whereby the labour sponsored investment fund corporation will convert into the non-investment fund operating entity, which will be a venture capital issuer -- Costs of the merger borne by the manager, among other conditions -- Purchase and sale of securities exempt from the self-dealing prohibitions in paragraphs 13.5(2)(a) and 13.5(2)(b)(iii), National Instrument 31-103 -- Registration Requirements and Exemptions and paragraph 4.2(1)4, National Instrument 81-102 -- Mutual Funds.

Applicable Legislative Provisions

National Instrument 31-103 Registration Requirements and Exemptions, ss. 13.5(2)(a), 13.5(2)(b)(iii), 15.1.

National Instrument 81-102 Mutual Funds, ss. 4.2(1)4, 19.1.

June 13, 2014

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE BUSINESS, ENGINEERING, SCIENCE & TECHNOLOGY DISCOVERIES FUND INC. (the Fund) AND IN THE MATTER OF B.E.S.T. INVESTMENT COUNSEL LIMITED (the Filer)

DECISION

Background

The Ontario Securities Commission (the "Commission") has received an application from the Filer for a decision pursuant to the securities legislation of Ontario (the "Legislation"), for exemptive relief from the following provisions in connection with the Proposed Transaction (as defined below):

(a) Section 13.5(2)(a) of National Instrument 31-103 -- Registration Requirements, Exemptions and Ongoing Registrant Obligations ("NI 31-103"), which prohibits the Filer, as a registered adviser, from knowingly causing an investment portfolio managed by it, including an investment fund for which it acts as an adviser, to purchase a security of an issuer in which a responsible person or associate of a responsible person is a partner, officer or director, unless this fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase;

(b) Section 13.5(2)(b)(iii) of NI 31-103, which prohibits the Filer, as a registered adviser, from knowingly causing an investment portfolio managed by it from purchasing a security from the investment portfolio of an investment fund for which a responsible person acts as an adviser; and

(c) Section 4.2(1)4 of National Instrument 81-102 -- Mutual Funds ("NI 81-102"), which prohibits a mutual fund from selling a security to a person or company, having fewer than 100 security holders of record, of which a partner, director or officer of the mutual fund or its manager or adviser is a partner, director or officer or security holder;

(collectively, the "Requested Relief").

Representations

The Fund

1. The Fund is registered as a labour sponsored investment fund corporation ("LSIF") under the Community Small Business Investment Funds Act (Ontario) (the "CSBIFA") and thus is a prescribed labour-sponsored venture capital corporation for the purposes of the Income Tax Act (Canada) (the "Tax Act").

2. The Fund is technically considered to be a mutual fund under the Legislation but as an LSIF is not subject to certain securities regulatory policies and restrictions which would otherwise govern a public mutual fund.

3. The Fund was incorporated under the laws of Canada on November 21, 1996, and filed its first prospectus to qualify the sale of its Class A shares (the "Existing Class A Shares") on December 31, 1996. The Fund's Existing Class A Shares were in continuous distribution pursuant to a prospectus that was prepared and filed in accordance with securities legislation annually until the sales of the Existing Class A Shares were halted on December 19, 2008 in connection with the Reorganization (as defined below).

4. The registered office of the Fund is located in Toronto, Ontario.

5. The Filer acts as manager of the Fund pursuant to an amended and restated management agreement dated January 22, 2008 between the Fund and the Filer, as amended.

6. The Filer acts as the portfolio adviser for the Fund pursuant to an amended and restated management advisor agreement dated January 22, 2008 between the Fund and the Filer, as amended.

7. The Filer is a registered portfolio adviser, investment fund manager and exempt market dealer in Ontario pursuant to NI 31-103.

8. The Fund is a reporting issuer in Ontario and is not in default of the Legislation.

9. The Filer is not in default of the Legislation.

10. The authorized capital of the Fund consists of an unlimited number of Class A shares issuable in series, (the "Class A Shares"), 25,000 Class B shares, an unlimited number of Class C shares issuable in series (the "Class C Shares"), an unlimited number of Class L shares issuable in series (the "Class L Shares") and an unlimited number of Class P shares issuable in series. Six series of the Class A Shares have been designated, being Series I, Series II, Series III, Series IV, Series V and Series VI. No series of the Class C Shares has been designated, one series of the Class L Shares has been designated, being Series I, and two series of the Class P Shares have been designated, being Manager Series IPA and Advisor Series IPA.

11. The Fund relied on the prospectus exemption in Section 2.11(b) of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") to issue the Class A Shares and Class L Shares in connection with the completion of the Plan of Arrangement (as defined below) pursuant to which the Existing Class A Shares were converted into either Class A Shares or Class L Shares. The one Class B share that is issued and outstanding (the "Class B Share") and the two Class P shares that are issued and outstanding (the "Class P Shares") were also issued pursuant to a prospectus exemption. There are no Class C Shares issued and outstanding.

12. The Class B Share is held by the Fund's sponsor, the International Federation of Professional and Technical Engineers -- Local 164 (the "Sponsor"), and the Class P Shares are held by the Filer.

13. In light of the current unfavourable market conditions for LSIFs, which include the phase out of the tax credit programs as well as the continued difficulty in liquidating private company securities, the Fund's shares have not been in continuous distribution to the public since December 19, 2008.

14. The primary objective of the Fund is to achieve long-term capital appreciation for holders of the Class A Shares and Class L Shares by primarily investing in equity and equity-related securities, such as preferred shares and debt obligations which are convertible into equities, of eligible businesses which have the greatest potential for long-term growth. The Fund primarily maintains an investment focus on niche businesses and other companies with a broader market focus and which are capitalizing on innovative uses of engineering, science and technology. The Fund diversifies its portfolio by investing in eligible companies that are in differing stages of development in a variety of high growth potential industries, which, from time to time, may include telecommunications, information technology, computers and life sciences.

15. As a result of adverse market conditions, the Fund found it difficult to exit a sufficient number of venture investments to generate the cash needed to fund anticipated redemption requests in a manner that would be in the best interests of all shareholders. Consequently, the Fund halted both subscriptions and redemptions of the Existing Class A Shares on December 19, 2008 while the board of directors of the Fund explored strategic options for the Fund which resulted in the Plan of Arrangement (as defined below) in light of the liquidity issues the Fund was facing (the "Reorganization").

16. The Fund underwent a plan of arrangement effective July 24, 2009 (the "Plan of Arrangement"), the purpose of which was to preserve the interests of the holders of the Existing Class A Shares in light of the liquidity issues which had caused the Fund to suspend sales and redemption of such Existing Class A Shares. The Plan of Arrangement was approved by shareholders of the Fund by special resolution at an annual and special meeting of the Fund's shareholders on June 24, 2009.

17. Pursuant to the Plan of Arrangement, each holder of the Fund's Existing Class A Shares received, in accordance with each holder's election or deemed election, new Class A Shares and/or new Class L Shares. The Class A Shares are redeemable at net asset value of the applicable series of shares, and are convertible into the Class L Shares. The Class L Shares are listed on The Canadian Securities Exchange (the "CSE") and are not redeemable at the demand of the holder.

18. The Plan of Arrangement also included a three year suspension of redemptions of Class A Shares, except in limited circumstances, which commenced on July 24, 2009.

19. The Fund suspended redemptions again on June 24, 2013, as a result of reaching the cap on redemptions as set out in its Articles of Arrangement, which provide that the Fund is not required to redeem Class A Shares having an aggregate redemption price greater than 20% of the net asset value of the Class A Shares as of the end of the prior financial year.

20. On February 3, 2014, the Fund announced the Proposed Transaction (as defined below), and the continued suspension of redemptions of the Class A Shares. The Filer anticipates that, without the Proposed Transaction (as defined below), it might be necessary in the future to suspend the redemptions of the Class A Shares in order to prevent a diminishing asset base as a result of redemptions and the difficultly in issuing new Class A Shares.

21. The Class L Shares are currently trading at a discount to the net asset value for the Class L Shares.

22. Provided that the Class L Shares are listed on a designated stock exchange for the purposes of the Tax Act (which currently includes the CSE), the Class L Shares are generally "qualified investments" under the Tax Act and the regulations thereunder for trusts governed by a registered retirement savings plan (an "RRSP"), registered retirement income fund (an "RRIF"), deferred profit sharing plan (a "DPSP"), registered education savings plan (an "RESP"), registered disability savings plan (an "RDSP") and tax-free savings account (a "TFSA"), as such terms are defined in the Tax Act (each, a "Registered Plan").

23. Class A Shares are generally "qualified investments" for a trust governed by an RRSP, RRIF, or a TFSA, provided that at the time the Class A Share is acquired by the trust, (i) the Fund is registered as a "labour sponsored investment fund corporation" under the CSBIFA, and (ii) the Class A Share is not a "prohibited investment" for the trust (as defined for the purposes of the Tax Act).

The Limited Partnership

24. The Filer is proposing a transaction whereby the assets of the Fund would be purchased by a newly formed Ontario limited partnership, Tier One Capital Limited Partnership (the "Limited Partnership") in exchange for units of the Limited Partnership (the "Units") issued to the Fund (the "Proposed Transaction").

25. The Limited Partnership became a limited partnership effective on February 21, 2014, the date of the filing of its declaration of limited partnership.

26. The registered office of the Limited Partnership is in Toronto, Ontario.

27. The initial limited partner of the Limited Partnership is Peter Hubenaar (the "Initial Limited Partner").

28. Other than the one Unit issued to the Initial Limited Partner under a prospectus exemption, no other Units have been issued.

29. The general partner of the Limited Partnership is T1 General Partner LP (the "General Partner"), who will have day-to-day management and investment responsibility for the investee companies held in the Limited Partnership.

30. The General Partner and the Limited Partnership will enter into an investment advisory agreement pursuant to which the Filer will be engaged to (i) provide oversight and advice to the General Partner in respect of the investment activities of the Limited Partnership; (ii) assist the General Partner in the formulation of the investment objectives, restrictions and procedures of the Limited Partnership; and (iii) assist the General Partner in analyzing and evaluating potential investments.

31. The Limited Partnership will not be an investment fund and will not be subject to the CSBIFA.

32. The Limited Partnership's investment objective will be to provide a return on investment for holders of Units and to provide regular cash distributions. The Limited Partnership's investment objective and strategies are similar to the current Fund, except that (a) the Fund's investment objective does not include providing regular cash distributions, (b) the Limited Partnership will not be subject to the requirements and investment restrictions of the CSBIFA and (c) the Limited Partnership will be permitted to use leverage.

33. The Limited Partnership will continue to invest in businesses as a venture capital investor, remaining actively involved in the management of its investee companies. The Limited Partnership will primarily invest in senior debt, preferred shares and debt obligations which are convertible into equities of eligible businesses which have the greatest potential for long term growth, and may also invest in equity and other equity-related securities. The Limited Partnership will be focused on funding rapidly growing Canadian companies by providing them with the capital needed to execute their growth strategies and acquisition plans. Its primary focus will be on companies with recurring revenue streams in the technology, healthcare and financial services industry. The Limited Partnership will initially focus its investments on companies in the expansion phase of development in mid-to-late stages. In addition, the Limited Partnership may acquire previously issued securities of Portfolio Companies (as defined below) from the holders of such securities. The Limited Partnership will not be subject to any investment restrictions regarding any particular sector, industry or stage of development. The Limited Partnership will be permitted to use leverage up to 50% of its partners' equity as presented on the statement of financial position of the Limited Partnership from time to time.

34. Although the fee structure of the Limited Partnership will differ from that of the Fund, the aggregate quantum of fees payable by the Limited Partnership is not intended to be higher than the aggregate quantum of fees payable by the Fund. The fee structure differs as a result of the differences between the corporate structure of the Fund and the use of the limited partnership vehicle, as well as the fact that as an operating entity, the Limited Partnership will not calculate fees based on a net asset value. The Fund's fee structure includes payment of a management fee, an advisory fee, and a sales and marketing fee based on a percentage of the net asset value of the Fund, a flat monthly fee for accounting and administration services and its operating expenses. The Fund also pays an incentive participation amount to management based on the realized gains and cumulative performance of the Fund once certain performance criteria has been met. The Limited Partnership's fee structure includes a management fee, priority profit allocation and performance allocation as well as payment of its operating expenses. The Limited Partnership's fee structure is intended to better align the interests of management with the interests of the holders of the Units as compared to the Fund because to the extent the net income of the Limited Partnership is insufficient in any year to fully allocate amounts relating to the priority profit allocation and performance allocation for the year to the General Partner, the differential will be carried forward and factored into the allocation of the net income of the Limited Partnership in subsequent years. In addition, as a result of being outside of the CSBIFA, the Limited Partnership is expected by the Filer to have lower operating costs than the Fund.

35. It is intended that the valuation methodology used by the Limited Partnership for the investee companies will be substantially similar to the valuation methodology used by the Fund for its portfolio companies (the "Portfolio Companies"), except that the Limited Partnership will not be subject to the valuation requirements under the CSBIFA. The Limited Partnership will value its portfolio investments on at least a quarterly basis.

36. On March 26, 2014, the Limited Partnership applied to list the Units on the CSE (the "Listing").

37. The Fund expects that the Limited Partnership will become a reporting issuer in Ontario upon completion of the Proposed Transaction and the listing of the Units on the CSE.

38. As the Circular (as defined below) included prospectus level disclosure of the Units and the Limited Partnership, the Limited Partnership is relying on the prospectus exemption in Section 2.11(b) of NI 45-106 to distribute the Units.

39. Provided the Units are listed on a "designated stock exchange" as defined in the Tax Act (which currently includes the CSE), the Units will generally be "qualified investments" under the Tax Act for trusts governed by a Registered Plan.

Proposed Transaction

40. Pursuant to the Proposed Transaction, following the sale of all or substantially all of the assets of the Fund, which consist primarily of securities of Portfolio Companies, to the Limited Partnership, the existing Class A Shares and Class L Shares will be redeemed in exchange for the Units and the Fund will be dissolved as soon as reasonably possible.

41. Holders of the Class A Shares and the Class L Shares will ultimately receive Units, the value of which are equal to the net asset value of the Class A Shares and Class L Shares held by such shareholder in the Fund.

42. The Proposed Transaction will occur at an exchange ratio for Units that is based on the net asset value of the applicable series of shares of the Fund on the valuation day immediately prior to the Effective Date (as defined below) of the transaction.

43. At a meeting held on January 31, 2014, the board of directors of the Fund (the "Board") unanimously approved the Proposed Transaction.

44. At a meeting held on February 3, 2014, the Fund's Independent Review Committee reviewed and considered the Proposed Transaction and concluded, after reasonable enquiry, that the Proposed Transaction achieves a fair and reasonable result for the Fund.

45. The Proposed Transaction is a material change for the Fund. A press release announcing the Proposed Transaction and the Meeting (as defined below) was filed and disseminated on February 3, 2014, and the corresponding material change report was filed on February 7, 2014. Upon the completion of the Proposed Transaction, a press release announcing the completion of the Proposed Transaction and the ratio by which Units were exchanged for Class A Shares and Class L Shares and the corresponding material change report will be filed and disseminated, as applicable.

46. Under the Canada Business Corporations Act (the "CBCA"), the sale of all or substantially all of the assets of the Fund requires the approval of the Fund's shareholders by special resolution on a class basis.

47. A management proxy circular dated February 24, 2014 describing the Proposed Transaction was mailed to the shareholders of the Fund on March 6, 2014 (the "Circular"). The Circular contained prospectus level disclosure of the Units. The Circular also described the Proposed Transaction, the Limited Partnership, the principal income tax considerations of the Proposed Transaction for the Fund and the Limited Partnership and their shareholders, and the material differences between being a shareholder of a corporation and a security holder of the limited partnership. The Circular also contained an unqualified audit report in respect of the opening statement of financial position of the Limited Partnership.

48. The Circular provided sufficient information about the Proposed Transaction to allow the shareholders of the Fund to make an informed decision about the Proposed Transaction.

49. The Fund's audited financial statements for the year ended September 30, 2013 were publicly filed and sent to shareholders of the Fund upon request, in accordance with securities legislation.

50. Shareholders of the Fund approved the Proposed Transaction by special resolution at an annual and special meeting of the Fund on March 28, 2014 (the "Meeting"). The special resolution at the Meeting also authorized the amendments to the Fund's Articles of Arrangement necessary to facilitate the Proposed Transaction.

51. The Fund does not require approval from the CSE for the Proposed Transaction. The Fund will follow any applicable CSE rules and policies to delist the Class L Shares of the Fund.

52. The Proposed Transaction is conditional on the approval of the CSE of the Listing, which approval has been granted subject only to the completion of the Proposed Transaction and the filing of any remaining required documents as set out in the letter of conditional approval issued by the CSE and payment of the balance of the listing fee.

53. Holders of Class A Shares and Class L Shares have dissent rights under the CBCA with respect to the Proposed Transaction, which provide that shareholders who properly exercise their dissent rights will be entitled to be paid the fair value of their shares.

54. The holders of Class A Shares and Class L Shares will have the same proportion of ownership in the Limited Partnership upon the completion of the Proposed Transaction as they did in the Fund prior to the Proposed Transaction.

55. The portfolio assets of the Fund to be acquired by the Limited Partnership as a result of the Proposed Transaction are acceptable to the General Partner and the Filer, as the portfolio manager of the Limited Partnership, and are consistent with the investment objectives of the Limited Partnership.

56. The Proposed Transaction would be executed on a taxable basis, which could give rise to taxable income for shareholders, depending on individual circumstances. However, the tax implications to shareholders of the Proposed Transaction are expected to be minimal due to the small number of Class A Shares and Class L Shares held directly by individuals. The Fund believes that a majority of the Class A Shares and Class L Shares are held by registered plans and that there should be no material tax impact of the Proposed Transaction to registered plans.

57. The Fund has received advance rulings from the Ontario Ministry of Finance (the "Ministry Ruling") with respect to the Proposed Transaction stating that:

(a) subject to the requirements of the CSBIFA, the wind-up provisions of the CSBIFA will apply to the Fund such that the holders of Class A Shares who have held Class A Shares for less than eight years will not have to effectively repay tax credits (through special taxes) claimed in accordance with the CSBIFA on the original purchase of Class A Shares as a result of the Proposed Transaction;

(b) the Fund will not be in contravention of any provision of the CSBIFA by reason only of the Proposed Transaction;

(c) the Proposed Transaction will not contravene the spirit and intent of the CSBIFA;

(d) the registration of the Fund under the CSBIFA will not be revoked by reason of the Proposed Transaction; and

(e) the Minister of Finance (Ontario) will not assess any penalty against any person under subsection 18(13) of the CSBIFA by reason of the Proposed Transaction.

58. As a result of the Ministry Ruling, the Filer understands that no provincial and federal tax credit amounts claimed in accordance with the CSBIFA on the original purchase of Class A Shares should be required to be repaid in connection with the Proposed Transaction.

59. All costs and expenses associated with the Proposed Transaction for the Fund and the Limited Partnership will be paid by the Filer. No sales charges, redemption fees or other fees or commissions will be payable by the Fund, the Limited Partnership, shareholders of the Fund or unitholders of the Limited Partnership in connection with the Proposed Transaction.

60. The Proposed Transaction is currently expected to become effective on or about June 24, 2014 (the "Effective Date").

61. The Proposed Transaction is expected to involve the following steps:

(a) prior to the Effective Date, amendments to the Articles of Arrangement of the Fund will be executed in order to add a redemption procedure to enable the Fund to redeem the Class A Shares and Class L Shares in exchange for Units in order to implement the transfer of the Units by the Fund to the holders of the Class A Shares, and the Class L Shares, respectively;

(b) prior to the Effective Date, if necessary, the Fund will sell any securities in its portfolio necessary to meet redemption requests from Dissenting Shareholders (as defined below);

(c) effective as of the close of business on the Effective Date, the Class L Shares of the Fund will be de-listed from the CSE;

(d) in accordance with the Fund's valuation policies (as described in further detail in the Circular and the Fund's annual information form dated December 17, 2013) the value of the Fund's portfolio and other assets will be determined at the close of business on the valuation day immediately prior to the Effective Date;

(e) the Fund will purchase for cancellation for fair value the Class A Shares and the Class L Shares held by any shareholders who properly exercise their dissent rights under the CBCA ("Dissenting Shareholders");

(f) the Limited Partnership will acquire all of the assets of the Fund (other than liquid assets needed to satisfy all liabilities, including payments to Dissenting Shareholders), in consideration for the appropriate number of Units;

(g) the Limited Partnership will not assume liabilities of the Fund and the Fund will retain sufficient assets to satisfy its estimated liabilities, if any, as of the Effective Date;

(h) the Units received by the Fund will have an aggregate NAV equal to the value of the Fund's portfolio assets and other assets that the Limited Partnership is acquiring, and the Units will be issued at a deemed issue price of $14.00;

(i) the Fund will increase the stated capital in respect of its Class A Shares by an amount equal to the capital gains earned by the Fund in respect of the current taxation year on or prior to that time, and will elect for the full amount of the dividend deemed to have arisen as a consequence of such stated capital increases for the purposes of the Tax Act to be "capital gains dividends" for the purposes of the Tax Act, such that it should not be subject to any material tax under Part I of the Tax Act in respect of net realized capital gains earned in respect of its taxation year that includes the Effective Date;

(j) each issued and outstanding Class A Share and Class L Share (other than those held by the Dissenting Shareholders) will be redeemed by the Fund in consideration for Units, which will be distributed to the holders of Class A Shares and Class L Shares;

(k) each holder of Class A Shares and Class L Shares (other than Dissenting Shareholders) will receive a specified number of Units based on the exchange ratio as described in complete detail in the Circular; and

(l) as soon as reasonably possible following the Proposed Transaction, the Fund will be dissolved.

62. The holder of the Class B Share and the holder of the Class P Shares will not receive Class A Shares or Class L Shares or Units as a result of the Proposed Transaction. The Class B Share and Class P Shares will remain outstanding until the corporate dissolution of the Fund is completed. Immediately prior to the dissolution of the Fund, in accordance with the Articles of Arrangement, the Sponsor, as holder of the Class B Share, is entitled to receive an amount equal to the amount received by the Fund as consideration for the issue of the Class B Share. The Filer, as holder of the Class P Shares, is entitled to receive an amount equal to the amount received by the Fund as consideration for the issue of the Class P Shares but has waived any rights pursuant to the Articles of Arrangement to receive any payments as a result of the Proposed Transaction. The Class B Share and Class P Shares will be cancelled at the time of dissolution of the Fund.

Reasons for the Proposed Transaction

63. The Board unanimously concluded that, in its opinion, the Proposed Transaction is fair and reasonable and is in the best interest of the Fund and its shareholders.

64. In the opinion of the Filer and the Board, the Proposed Transaction will not adversely affect shareholders of the Fund and is in the best interest of the shareholders of the Fund. The Filer and the Board believe that the Proposed Transaction will be beneficial to shareholders of the Fund for the following reasons:

(a) the Fund's shareholders, as holders of Units, will have a liquidity option through the proposed listing of the Units on the CSE, and all of the Fund's shareholders, as holder of Units, are expected to have increased liquidity through the proposed listing on the CSE when compared to the current Class A Shares, which only have a limited redemption right;

(b) the Fund's shareholders, as holders of Units, will have the opportunity to participate in a structure that can better provide regular distributions of income because, among other reasons, the Limited Partnership's constating documents and governing legislation are more flexible than those of the Fund with respect to the payment of distributions, the Filer expects that there will be lower operating costs associated with the Limited Partnership, and the Limited Partnership will not be an investment fund and will therefore not be required to reserve cash to satisfy redemption requests;

(c) the Fund's shareholders, as holders of Units, will have the opportunity to continue to access the Filer's expertise in venture investing;

(d) the Fund's shareholders, as holders of Units, will have exposure to additional venture capital investments and greater venture portfolio diversification due to the Limited Partnership not being subject to the investment restrictions that the Fund is subject to under the CSBIFA, and thus will not be subject to restrictions on the number, size or geographic location of its investee companies nor will it be subject to any investment pacing requirements;

(e) as a result of being outside the CSBIFA, the Limited Partnership is expected to have lower costs than the Fund;

(f) the Limited Partnership will have the potential for additional capital raising, which is not currently practical given recent developments applicable to LSIFs; and

(g) if the Limited Partnership holds venture capital investments for sufficient time to permit the Filer, as investment adviser to the Limited Partnership, to identify and implement suitable exit opportunities, the Filer believes that this will provide a better opportunity to optimize the exit value potential of the specific holdings.

65. It is intended that the Proposed Transaction address concerns such as the diminishing asset base of the Fund as a result of redemptions of Class A Shares as well as the trading discount to the net asset value for the Class L Shares by:

(a) providing a more stable asset base for all unitholders of the Limited Partnership, as the liquidity option for the Units will not diminish the asset base of the Fund;

(b) all Units will be traded on the CSE, in contrast to the current structure of the Fund, in which only the Class L Shares trade on the CSE and the Class A Shares only have a limited right of redemption. The greater number of Units traded on the CSE as compared to the shares of the Fund should increase the trading frequency and liquidity of the Units as compared to the shares of the Fund, which should result in a reduction of the trading discount currently experienced by holders of the Class L Shares (who will hold Units instead);

(c) the lower cost structure of the Limited Partnership is expected to promote a higher valuation and trading price of the Units; and

(d) the regular distributions to the unitholders of the Limited Partnership will increase the investment return for such unitholders, which is expected to increase the trading price of the Units and thereby reduce the trading discount to the net asset value of the Units.

66. Since the government phased out the Ontario tax credit program for LSIFs at the end of the 2011 taxation year, and the federal government's announcement that it will phase out the federal tax credit by 2017, the Filer and the Board have been evaluating the Fund's options. The Filer and Board are of the view that winding-up the Fund is not in the best interests of the Fund's shareholders. While the Filer believes that the Fund holds a high quality portfolio of investments, the Filer is of the view that it is not currently possible to liquidate the investments for the value that the Filer believes should be realized and it is difficult for the Filer to predict when the liquidity situation will improve.

Requested Relief

67. The Filer is a wholly-owned subsidiary of 1209762 Ontario Inc. Mr. John Richardson ("Mr. Richardson") controls 1209762 Ontario Inc. and is a director and officer of 1209762 Ontario Inc. All of the issued and outstanding voting preferred shares of 1209762 Ontario Inc. are owned by Mr. Richardson. Mr. Richardson is also an officer and director of the Filer and is therefore a "responsible person" (as defined in Section 13.5(1) of NI 31-103) of the Filer.

68. The Filer, as the adviser of the Fund and the Limited Partnership, is a responsible person.

69. The initial limited partner of the General Partner is 1209762 Ontario Inc., and its general partner is T1 General Partner Corp., which is owned by 1209762 Ontario Inc. As a result, Mr. Richardson beneficially owns and controls the General Partner. The General Partner is therefore an "associate" (as defined in the Securities Act (Ontario), the "Act") of Mr. Richardson, as he currently beneficially owns and controls voting securities carrying more than 10 per cent of the voting rights attached to all outstanding voting securities of the General Partner.

70. Mr. Richardson is an officer of the Fund.

71. Mr. Richardson is an indirect beneficial security holder of the Limited Partnership for the purpose of Section 4.2(1)4 of NI 81-102 as a result of the General Partner's 0.001% interest in the net income or loss of the Limited Partnership and the net assets upon dissolution of the Limited Partnership.

72. In order to complete the Proposed Transaction, the Filer requires relief from Section 13.5(2)(a) of N1 31-103, which prohibits the Filer, as a registered adviser and the adviser of the Fund, and therefore a responsible person, from knowingly causing the Fund to purchase Units, because the Limited Partnership is an issuer in which the General Partner, who is an associate of Mr. Richardson (a responsible person of the Filer), is a partner, unless this fact is disclosed to the client and the written consent of the client to the purchase is obtained before the purchase. It would be practically impossible and prohibitively expensive for the Fund to obtain such written consent from each and every shareholder of the Fund. In lieu of such consent, the Fund held the Meeting where the shareholders of the Fund approved the Proposed Transaction by special resolution.

73. In order to complete the Proposed Transaction, the Filer also requires relief from Section 13.5(2)(b)(iii) of NI 31-103, which prohibits the Filer, as a registered adviser and the adviser of the Limited Partnership, from knowingly causing the Limited Partnership's investment portfolio, which is in part managed by the Filer, to purchase the securities of the Portfolio Companies from the Fund, because the Filer is also the adviser of the Fund, and therefore a responsible person.

74. In order to complete the Proposed Transaction, the Filer also requires relief from Section 4.2(1)4 of NI 81-102, which prohibits the Fund from selling the securities of the Portfolio Companies to the Limited Partnership, because at the time of sale, the Limited Partnership will have fewer than 100 security holders of record, and Mr. Richardson, an officer of the Fund, is an indirect beneficial security holder of the Limited Partnership for the purpose of Section 4.2(1)4 of NI 81-102.

75. In the absence of the Requested Relief, the Proposed Transaction will not be able to occur.

Decision

The Commission is satisfied that the decision meets the test set out in the Legislation for the Commission to make the decision.

The decision of the Commission under the Legislation is that the Requested Relief is granted, provided that the Filer ensures that:

(a) the Fund has an unqualified audit report in respect of its audited terminating financial statements;

(b) if the audit report accompanying the audited financial statements for the Limited Partnership's first completed financial year after the Proposed Transaction contains a modified opinion in respect of the value of the portfolio assets acquired by the Limited Partnership from the Fund pursuant to the Proposed Transaction, the Filer will send a copy of those financial statements to each person or company that was a shareholder of the Fund on the day immediately preceding the Effective Date;

(c) the CSE shall have conditionally approved the listing of the Units;

(d) dissent rights under the CBCA are not exercised by the shareholders of more than 10% of the Class A Shares and Class L Shares in the aggregate; and

(e) the Fund and the Limited Partnership bear none of the costs and expenses associated with the Proposed Transaction.

"Vera Nunes"
Manager, Investment Funds and Structured Products Branch
Ontario Securities Commission