Frequently Asked Questions
How is a CEDIF defined according to the Securities Act?
A CEDIF is defined under Section 150 of the Securities Act R.S.N.S. 1989, c. 418 O.I.C. 1998-517 (October 15, 1998), N.S. Reg. 79/98. It does not meet the definition of a mutual fund but is a security.
Is a CEDIF an exempt product? One that can be sold by selling agents not regulated under the MFDA or IDA?
The reason for this question is to find out if this product can be sold by registered individuals or firms. MFDA firms can only sell Mutual fund products. It is an exempt product, however only firms that are members of the Investment Dealers Association can sell a CEDIF without any additional regulatory approval. If a MFDA member firm wised to sell this security, that firm would first have to apply to the Commission for an exemption from Sec. 13(c) of the Regulations. This would require the firm to assume all liabilities that come with the sale of the security and the sales would have to be "on the book" of the dealer. If the exemption were to be granted, then the proficiency of the individual salesperson would have to be addressed.
My occupation being a Financial Advisor, does the NSSC see any problem with me being a director on a CEDIF board, provided we are a volouteer board and I provide full disclosure to any clients questionning the CEDIF?
No objection to a financial advisor being a director on a CEDIF board, as long as he does not sell any shares while continuing to be a registrant.
What is a community?
A community is a specific area, without limiting the size. In most cases community is defined by geographical area (i.e. municipal unit, county, etc.). However, other criteria such as cultural may also apply to certain communities. A "spirit of commonality" must prevail. The key is for the CEDIF to define, from the outset, what the community will be.
When groups are deciding upon how they will define their community, they should be mindful of the pros and cons of a broadly defined community. First, the broader the defined community, the larger the pool of potential investors and Board members. However, this must be considered along with the lack of community identification with the defined community beyond a reasonable size.
Can a community start a CEDIF without a specific project?
Yes. While CEDIF groups may find it easier to attract interest within their defined community with a specific project, they can opt to start the Fund prior to identifying a company as long as they meet all of the program regulations.
Is there any money available from government ( i.e. Atlantic Canada Opportunities Agency, Enterprise Cape Breton Corporation, Economic Development and Tourism ) to cover administration or operating costs?
No. There is no existing program to provide for this type of assistance. A community must rely on its own energies and potential, and the drive, and commitment of its residents to develop effective Community Economic Development Corporations.
What do CEDIFs use for start-up capital? Operations?
Potential sources for start-up capital include local corporations that may be users of the fund, municipalities that would have a vested interest in seeing such funds develop, local entrepreneurs, community or business leaders, as well as cultural groups, or even unions. A portion of the funds raised, or investment earnings should be allowed to be used for reasonable administration costs.
Additionally, local business support could be sought to provide some of the required administration (office space, printing, postage, etc.) and/or in-kind services.
Does a CEDIF require staff?
Yes. Volunteers normally fulfil these needs on a part-time basis. No corporation can exist without some administration. However, it's expected that an efficient Community Economic Development Corporation can operate with minimal administrative expenses through the utilization of available resources noted here.
Why is the the Province supporting this initiative? (What is the benefit to the the Province?)
Many individuals in the province have some form of savings or investment. These can be stock market holdings, RRSPs, GICs, Canada Savings Bonds, savings accounts, etc. While these all earn a return for the investor, statistics show that they invest almost exclusively outside Nova Scotia. CEDIFs are designed to channel funds into productive investment within the communities, which would provide important source of capital for many local businesses. This, in turn, would strengthen the local economy and also that of the Province.
Who assesses and/or approves projects?
There can be no guarantee that all projects invested in will be successful. However, by ensuring the Board of Directors (investment committee) consists of local individuals, with appropriate background, that are respected within the community, the CEDIF will have a better chance of long-term success. As previously stated, there is no attempt by any official of the Province to evaluate the attractiveness of the investment.
Can the CEDIF determine its own risk levels and asset mix? What to invest in?
The CEDIF will make its investment based upon the investment criteria outlined in the approved Simplified Offering Document. The means of sourcing potential investments will differ widely between CEDIFs.
Are the CEDIFs targeted only to small business? Can they also be used for quasi business community activities such as community recreation facilities?
Yes. CEDIFs are to involve doing business. They are not a means of carrying out municipal infrastructure. CEDIFs are profit-oriented organizations that promote income and economic growth within the community, as well as increasing the tax base.
What is the minimum dollar amount required to close an issue?
There is no set limit to close an issue. However, persons involved in the process suggest that a minimum effective size is approximately $100,000. The CEDIF will describe the minimum within the offering document, and this amount must be met.
Can an investment be made by means other than cash?
There does not appear to be any restriction contained in the regulations, as to what form of consideration is used to purchase shares. If an investment is to be made by anything other than cash, this item must have a clearly demonstrated market value. Further, all information respecting any purchases of this nature must be fully disclosed in the offering document (who; what; how).
Any investment made in this manner should be pre-approved prior to issuance of shares. Where an appraisal is required, this is the responsibility of the individual, at their cost. Individuals must also consider the income tax implications of an investment by this means (i.e. tax on the value of the service or product provided).
Can a CEDIF have more than one issue?
Yes, as long as they remain consistent to the approved Simplified Offering Document. Any changes must be reported (Material Change Report) as part of on-going reporting requirements. A new issue requires a new application, which can use the original as a template. The Issuer should consult with the Nova Scotia Securities Commission in the early planning stages of a subsequent issue.
Should persons who become directors be concerned with potential liability issues?
It's advisable to seek independent legal advice and/or insurance in this area (Directors liability) as part of the formative process.
Within a CEDIF, will loans be approved in addition to equity investments?
The program is designed to encourage equity participation in Nova Scotia companies. Any loans will be for subordinated debt only. This is debt which ranks below other creditors in case of liquidation. Debt does not participate in capital appreciation of the company in which the funds were invested.
In summary, debt limits both the downside and upside risk to the lender; equity limits neither downside nor upside risk; and, subordinated debt takes the worst of the other two by providing marginally less downside risk, while fully limiting upside potential.
The "exit strategy" for equity investments is weak for the type of community economic development projects that are seen as likely candidates for the funds. Has this been addressed?
This has been discussed, but at this point still not satisfactorily resolved. A successful CEDIF will be able to buy back shares from investors who wish to sell (after the required hold period). However, a workable exit plan from marginal Funds has not yet been provided. Work will continue in this area, with input sought from investors, promoters and government officials from both within and outside Nova Scotia.
If there is difficulty in finding good investments for the CEDIF, are there provisions to allow the CEDIF to hold capital if they are not able to place it responsibly?
In developing this program, a problem was not envisioned in this area as there are many excellent small companies throughout the Province who would be interested in equity investments. However, should investment difficulties arise, each situation will be assessed by staff of EDT to determine the CEDIF's adherence to "spirit and intent".
Will it be possible for the administration of the CEDIF to be coordinated through a partnership arrangement (i.e. bank, credit union, trust company, etc.)?
Yes. If such a partnership can be arranged by the Community Economic Development Corporation.