How To Access Venture Capital Funding in Canada

Growing a business can be one of the most arduous of tasks… and doing it without funding can be almost impossible, so we’ve decided to bring together some information in order to help you scale your business and access venture capital funding that is available for PME - to larger scale companies in Canada.

Let’s begin with the basics. What is a venture capital fund?

A VC fund is a type of investment opportunity accessible for entrepreneurs and new businesses. These public / private funds will collect money from its investors, with the use to expand these companies. These funds are usually available in all sectors, and sometimes specific to particular industries. Venture capital funds can be organized as limited partnerships (LPs), which means that investors contribute money and receive equity stakes in the fund’s companies and also have voting rights at annual meetings and sometimes get a share of profits earned through their investments. Other venture capital funds are organized as closed-end funds (CEFs), which means they issue shares regularly to raise additional capital for new investments. However, closed-end funds don’t offer investors voting rights or other benefits.

What sources do venture capital funds draw from?

Early-stage businesses may find it difficult to secure debt funding due to their lack of cash flow and collateral. The founders of these businesses often provide the funding for them, though they may also rely on friends and family. They might potentially go to other sources such as government funding, or financial organizations. However, further funding might be needed beyond what the founders' network can provide. Angel investors can help in this situation. One kind of investor is an angel investor. In exchange for equity or a portion of the company, they provide funding for new businesses and other endeavors. As contrast to venture capital funds, angel investors could be affluent individuals or family offices that are ready to put their own money into businesses they believe in. Although the terms "angel investor" and "seed investor" are occasionally used interchangeably, they do not have the same meaning. A start-up receives its initial money from a seed investor, after which it may look for additional funding from angel investors or venture capital funds.

What types of venture capital funds exist in Canada?

The varying types of Canadian venture capital funds serve to meet the different needs of start-ups. Five types of venture capital funds are:

1. Private independent venture funds: These funds are professionally managed through pension funds, insurance companies, and other investors (such as high-net-worth individuals).

2. Government-sponsored venture funds: These funds are operated by institutions owned by the Government of Canada; for example, the Business Development Bank of Canada (BDC).

3. Corporate-sponsored venture funds: These funds invest in and support start-up companies that can contribute strategically to their corporate sponsors.

4. Institutionally operated venture funds: These funds are operated by institutions such as banks and Canadian pension funds.

5. Labour-sponsored venture capital corporations: These are a type of mutual fund corporation that is sponsored by a labour union. The corporation invests in venture capital funds focused on small and medium-sized enterprises.

What laws affect the venture capital industry?

For those who are involved in the venture capital business, there are advantages and specific legal exemptions. For instance, the majority of Canadian venture capital funds are organized as limited partnerships, so they are not taxed separately. Instead, they are viewed as channels through which money moves. A venture capital fund will be subject to both federal and provincial securities laws if it seeks to issue securities to raise money in Canada. All businesses that deal in or provide investment fund advice are subject to the national securities regulatory requirement known as National Instrument 31-103. The venture capital fund's promoters, managers, and principals must:

• Register as a dealer if they are trading in securities;

• Register as an adviser if they are advising others on the investment or purchase of securities; or

• Register as an investment fund manager if directing the business operations and affairs of the venture capital fund.

If the person participates in more than one of these activities, multiple registrations might be required. However, if they don't engage in the aforementioned activities of trading and offering securities advice, the venture capital fund manager and the fund itself frequently do not need to register as advisers or dealers. Regarding your potential legal rights and obligations when dealing with venture capital funds, it is always a good idea to seek legal advice.

Schedule a Call with Hathaway Legal so you can hear more details on how we can help you with your business and legal needs during your funding process.