Return On Innovation Advisors Ltd. et al.

Headnote

National Policy 11-203 Process for Exemptive Relief Applications in Multiple Jurisdictions -- Labour sponsored investment fund merging with conventional mutual fund managed by different investment fund manager -- Merger approval required because the merger does not meet the criteria for pre-approved reorganizations and transfers in National Instrument 81-102 Investment Funds -- Manager of continuing fund is not an affiliate of the manager of the terminating fund, the fundamental investment objectives and fee structures of the terminating fund and continuing fund may not be considered to be substantially similar, and the merger will not be completed as a 'qualifying exchange' under the Income Tax Act -- Unitholders of the terminating fund are provided with timely and adequate disclosure regarding the merger -- Approval for fund merger sought under paragraph 5.5(1)(b) of National Instrument 81-102 Investment Funds.

Applicable Legislative Provisions

National Instrument 81-102 Investment Funds, s. 5.5(1)(b).

July 14, 2020

IN THE MATTER OF THE SECURITIES LEGISLATION OF ONTARIO (the Jurisdiction) AND IN THE MATTER OF THE PROCESS FOR EXEMPTIVE RELIEF APPLICATIONS IN MULTIPLE JURISDICTIONS AND IN THE MATTER OF RETURN ON INNOVATION ADVISORS LTD. AND STONE ASSET MANAGEMENT LIMITED (collectively, the Filers) AND RETURN ON INNOVATION FUND INC.

DECISION

Background

The principal regulator in the Jurisdiction has received an application from the Filers for a decision under the securities legislation of the Jurisdiction of the principal regulator (the Legislation) for approval pursuant to subsection 5.5(1)(b) of National Instrument 81-102 Investment Funds (NI 81-102) for the merger (the Merger) of Return on Innovation Fund Inc. (the Terminating Fund Corporation) into Stone Growth Fund (the Continuing Fund) (the Merger Approval).

Under the Process for Exemptive Relief Applications in Multiple Jurisdictions (for a passport application):

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

(b) the Filers have provided notice that subsection 4.7(1) of Multilateral Instrument 11-102 Passport System (MI 11-102) is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Newfoundland and Labrador, Prince Edward Island, Northwest Territories, Nunavut and Yukon.

Interpretation

Terms defined in National Instrument 14-101 Definitions and MI 11-102 have the same meaning if used in this decision, unless otherwise defined.

Representations

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

Return On Innovation Advisors Ltd. (the Manager)

1. The Manager is a corporation incorporated under the laws of Ontario with its head office in Toronto, Ontario.

2. The Manager is the investment fund manager of the Terminating Funds (as defined below) and is registered under the securities legislation: (i) in Ontario, Québec and Newfoundland and Labrador as an investment fund manager; (ii) in Ontario as an adviser in the category of portfolio manager; and (iii) in Ontario as a dealer in the category of exempt market dealer.

Stone Asset Management Limited (SAM)

3. SAM is a corporation governed under the laws of Ontario with its head office in Toronto, Ontario.

4. SAM is the investment fund manager of the Continuing Fund and is registered under the securities legislation: (i) in Ontario, Québec and Newfoundland and Labrador as an investment fund manager; (ii) in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario and Nova Scotia as an adviser in the category of portfolio manager; and (iii) in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario as a dealer in the category of restricted dealer.

The Terminating Funds

5. The Terminating Fund Corporation is a corporation governed under and in compliance with the laws of Canada. The Terminating Fund Corporation is registered as a labour-sponsored investment fund corporation (LSIF) under the Community Small Business Investment Funds Act (Ontario) (the Ontario Act) and is registered as a labour-sponsored venture capital corporation under the Income Tax Act (Canada) (the Tax Act) and is therefore subject to restrictions set out in the Ontario Act and the Tax Act. As a labour-sponsored venture capital corporation under the Tax Act, the Terminating Fund Corporation also qualifies as a mutual fund corporation under the Tax Act.

6. The Terminating Fund Corporation consists of Class A, Series I, II and III shares (Series I, II and III), Class A, Series IV -- Private Placements shares (Series IV and together with Series I, II and III, the Terminating Funds) and Class B shares (the Class B Shares).

7. The Terminating Fund Corporation is comprised of two mutual funds because Series IV is referable to a separate portfolio of assets than Series I, II and III.

8. The Terminating Funds are sponsored by the ACTRA Toronto Performers, who hold the Class B shares.

9. The Terminating Fund Corporation is a reporting issuer under the securities legislation of Ontario and neither the Terminating Funds, the Terminating Fund Corporation nor the Manager is in default under the securities legislation of Ontario.

10. Other than circumstances in which an LSIF is expressly exempt therefrom, the Terminating Funds follow the standard investment restrictions and practices established under NI 81-102.

11. As all of the provincial tax credits that apply to LSIFs and federal tax credits that apply to labour-sponsored venture capital corporations have been discontinued, the Terminating Funds have ceased to be offered for sale as of August 28, 2015.

The Continuing Fund

12. The Continuing Fund is an open-ended unit trust established pursuant to an amended and restated master declaration of trust dated February 23, 1995, as amended. The Continuing Fund is governed under the laws of Ontario.

13. SAM operates a family of funds that are currently qualified for sale under the simplified prospectus, annual information form and fund facts each dated June 28, 2019, as amended (the Offering Documents). Series R of the Continuing Fund is a new series of the Continuing Fund which will only be available to the Terminating Funds and the shareholders thereof, and for which a simplified prospectus, annual information form and fund facts was filed on June 18, 2020 under SEDAR Project #03063773.

14. The Continuing Fund is a reporting issuer under the securities legislation of Ontario and the Other Jurisdictions and neither the Continuing Fund nor SAM is in default under such legislation.

15. Other than circumstances in which the securities regulatory authority of a province or territory of Canada has expressly exempted the Terminating Funds therefrom, the Terminating Funds follow the standard investment restrictions and practices established under NI 81-102.

Reasons for Approval Sought

16. Regulatory approval of the Merger is required because the Merger does not satisfy all of the criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102. The pre-approval criteria are not satisfied in the following ways:

(a) The manager of the Continuing Fund is not an affiliate of the Manager;

(b) the fundamental investment objective of the Continuing Fund is not, or may be considered not to be, "substantially similar" to the investment objectives of Series I, II and III and the investment objectives of Series IV;

(c) the fee structure of the Continuing Fund is not, or may be considered not to be, "substantially similar" to the fee structure of Series I, II and III and the fee structure of Series IV; and

(d) the Merger will not be completed as a "qualifying exchange" or a tax-deferred transaction under the Tax Act.

17. The investment objectives of the Terminating Funds and the Continuing Fund are as follows:

Terminating Funds	Continuing Fund
<<Series I, II and III:>> The investment objective of Series I, II and III is to provide investors with yield as well as long-term capital gains by making debt and equity investments in a diversified portfolio of small- and medium-sized eligible businesses as required to meet the pacing requirements of the Fund. Series I, II and III also invest a certain portion of their assets in "reserves" that has the meaning ascribed thereto in the Federal Tax Act and the Ontario Act, which for each series of shares includes Canadian dollars in cash or on deposit with qualified Canadian financial institutions, debt obligations of or guaranteed by the Canadian federal government, debt obligations of provincial and municipal governments, Crown corporations, corporations and trusts listed on prescribed stock exchanges, guaranteed investment certificates issued by Canadian trust companies, qualified investment contracts, and securities listed on prescribed stock exchanges.	The investment objective of the Continuing Fund is to provide investors exposure to North American equity securities seeking long-term capital appreciation.
<<Series IV:>> The investment objective of Series IV is to provide investors with yield as well as long-term capital gains by making debt and equity investments in a diversified portfolio of small- and medium-sized eligible businesses as required to meet the pacing requirements of the Fund. Series IV also invests a certain portion of its assets in "reserves" that has the meaning ascribed thereto in the Federal Tax Act and the Ontario Act, which for each series of shares includes Canadian dollars in cash or on deposit with Canadian financial institutions, debt obligations of or guaranteed by the Canadian federal government, debt obligations of provincial and municipal governments, Crown corporations, corporations, and trusts listed on prescribed stock exchanges, guaranteed investment certificates issued by Canadian trust companies, and qualified investment contracts.

18. The management fee of Series I, II and III is 2.5% per annum, which is the same as the management fee of Series R units of the Continuing Fund. The management fee of Series IV is 2.3% per annum, which is 0.2% lower than the management fee of Series R units of the Continuing Fund. Series I, II and III pay the Manager an advisor fee of 1.0% per annum and a financing fee of 0.4% of net asset value, annually, plus an annual base financing fee equal to the aggregate of 1.25% of the original purchase price of Series I shares and 0.75% of the original purchase price of Series II shares (issued after January 1, 2004 that remain issued and unredeemed, provided that such fee ceases for any such shares retained for more than eight years), and pay a sponsor fee of 0.25% per annum to the sponsor of Series I, II and III. Series IV pays the Manager an advisor fee of 1.0% per annum and a financing fee of 0.4% of net asset value annually, plus an annual base financing fee equal to the aggregate of 1.5% of the original purchase price of Series IV shares (that remain issued and unredeemed, provided that such fee ceases for any such shares retained for more than eight years), and pay a sponsor fee of 0.25% per annum to the sponsor of Series IV. The Continuing Fund does not charge an advisor fee, a financing fee or a sponsor fee.

19. The Manager proposes to effect the Merger on a taxable basis because it would be in the overall best interests of the securityholders of the Terminating Funds and the Continuing Fund, as:

(a) the Terminating Funds have sufficient loss carry-forwards to shelter any net capital gains that could arise for it on the taxable disposition of its portfolio assets on the Merger;

(b) substantially all the shareholders in the Terminating Funds have an accrued capital loss on their units and effecting the Merger on a taxable basis will afford them the opportunity to realize that loss and use it against current capital gains or even carry it back as permitted under the Tax Act;

(c) substantially all the shareholders in the Terminating Funds have invested in the Terminating Funds in a registered plan

(d) effecting the Merger on a taxable basis would preserve the net losses and loss carry-forwards in the Continuing Fund;

(e) effecting the Merger on a taxable basis will have no other tax impact on the Continuing Fund; and

(f) the Manager believes that substantially all the shareholders of the Terminating Funds will not incur a negative tax impact, and if there is a negative impact, it will be nominal. Shareholders in the Terminating Funds typically invested no more than $5,000.00 per year in order to maximize the LSIF tax credit benefit.

20. Except as described in this decision, the proposed Merger complies with all of the other criteria for pre-approved reorganizations and transfers set out in section 5.6 of NI 81-102.

The Proposed Merger

21. The Filer intends to merge the Terminating Funds into the Continuing Fund.

22. Shareholders of the Terminating Funds will continue to have the right to redeem units of the Terminating Funds at any time up to the close of business on the business day immediately before the effective date of the Merger.

23. Shares of the Terminating Funds are, and are expected to continue to be at all material times, "qualified investments" under the Tax Act for trusts governed by registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs) and tax-free savings accounts (TFSAs). Units of the Continuing Fund are, and are expected to continue to be at all material times, "qualified investments" under the Tax Act for trusts governed by RRSPs, RRIFs, deferred profit sharing plans, registered education savings plans, registered disability savings plans and TFSAs.

24. In accordance with National Instrument 81-106 Investment Fund Continuous Disclosure, a press release announcing the proposed Merger was issued on June 2, 2020 and filed via SEDAR on June 2, 2020. A material change report with respect to the proposed Merger was filed via SEDAR on June 5, 2020. As the Terminating Funds are not in continuous distribution, no amendment to any offering documents has been filed.

25. SAM has concluded that the Merger will not be a "material change" for the Continuing Fund on the basis that the transaction essentially amounts to an influx of cash from the perspective of the Continuing Fund, which is effectively what an ordinary course investment in the fund constitutes. Additionally, the Merger is being completed on a taxable basis, which means that there will be no tax impact for the Continuing Fund.

26. A notice of meeting, a management proxy circular and a form of proxy in connection with a special meeting of Class A shareholders have been mailed to shareholders of the Terminating Funds on June 26, 2020 and have been concurrently filed via SEDAR.

27. Fund facts relating to the relevant series of the Continuing Fund have been mailed to shareholders of the Terminating Funds on June 26, 2020.

28. Holders of Class A shares of the Terminating Funds will be asked separately to approve the Merger at a special meeting to be held on or about July 23, 2020.

29. The Merger will also be approved by the sole Class B shareholder of the Terminating Fund Corporation, as required under applicable corporate law.

30. The closing of the Merger is subject to a number of conditions customary for a transaction of this nature. The Manager is confident that the conditions will be satisfied.

31. The Merger will be effected on a taxable basis.

32. The Manager will be responsible for the costs of the Merger. These costs consist mainly of legal, proxy solicitation, printing, mailing and regulatory fees.

33. The Merger has been approved by the board of directors of each of the Terminating Fund Corporation, the Manager and SAM.

34. If the required regulatory and shareholder approvals for the Merger are obtained, it is intended that the Merger will occur after the close of business on the Effective Date (as defined below). The Manager therefore anticipates that each shareholder of the Terminating Funds will become a unitholder of the Continuing Fund after the close of business on the Effective Date.

35. The tax implications of the Merger, differences between being a shareholder of a mutual fund corporation and a unitholder of a mutual fund trust, the fact that the Terminating Funds' classification as a LSIF will be terminated, differences between the investment objectives as well as the differences between the fee structures of the Terminating Funds and the Continuing Fund, a description of SAM, and the approval by the Independent Review Committee (IRC) for the Terminating Funds are described in the management proxy circular so that the shareholders of the Terminating Funds can consider this information before voting on the Merger. The meeting materials also describe the various ways in which investors can obtain a copy of the Offering Documents for the Continuing Fund and its most recent interim and annual financial statements and management reports of fund performance.

36. The Terminating Fund Corporation will be dissolved as soon as reasonably possible following the Merger, and the Continuing Fund will continue as a publicly-offered open-ended mutual fund.

37. As required by National Instrument 81-107 Independent Review Committee for Investment Funds (NI 81-107), an Independent Review Committee has been appointed for each of the Terminating Funds (the ROI IRC) and an IRC has been appointed for the Continuing Fund (the Stone Funds' IRC). The Manager presented the potential conflict of interest matters related to the proposed Merger to the ROI IRC for a decision. The ROI IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation on June 16, 2020, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for the Terminating Funds. The Stone Funds' IRC reviewed the potential conflict of interest matters related to the proposed Merger and provided its positive recommendation on June 24, 2020, after determining that the proposed Merger, if implemented, would achieve a fair and reasonable result for the Continuing Fund.

Merger Steps

38. The proposed Merger of the Terminating Funds into the Continuing Fund will be structured as follows:

(a) The Terminating Fund Corporation will notify the Minister of National Revenue (Canada) of its intent to deregister itself under the Tax Act as a labour-sponsored venture capital corporation and request termination of all penalties.

(b) The Terminating Fund Corporation will notify the Minister of Finance (Ontario) of its proposal to dissolve pursuant to the Community Small Business Investment Funds Act (Ontario).

(c) The Manager will cause all assets of the Terminating Fund to be liquidated at fair value for cash. The Terminating Fund is currently fully invested in liquid assets. As a result, the Terminating Fund will not be invested in accordance with its investment objective prior to the Merger being effected.

(d) The Terminating Fund Corporation may declare, pay and automatically reinvest ordinary dividends and/or capital gains dividends to its shareholders, as determined by the Manager on or prior to the effective date (the Effective Date) of the Merger, which is anticipated to be on or about October 16, 2020.

(e) After the close of business on the Effective Date, the Manager will transfer all of the assets of the Terminating Funds which will consist exclusively of cash (after reserving sufficient assets to satisfy its estimated liabilities and the value of the Class B Shares, if any, as of the Effective Date) to the Continuing Fund. In consideration, SAM will issue to the Terminating Funds Series R units of the Continuing Fund, having an aggregate net asset value equal to the total value of the assets acquired.

(f) All of the issued and outstanding Class A shares of the Terminating Funds will be redeemed for portfolio assets attributable to the Terminating Funds, being units of the Continuing Fund, such units to be distributed by the Manager pro rata to the Class A Shareholders based on such Shareholders' proportionate net asset value of Class A Shares, so that Class A Shareholders become unitholders of the Continuing Fund.

(g) The Terminating Fund Corporation will pass a corporate resolution under the Canada Business Corporations Act to dissolve as soon as reasonably possible following the Effective Date.

(h) The Terminating Fund Corporation will send the Minister of National Revenue (Canada), a certified copy of the director's resolution seeking the voluntary revocation of its registration under the Tax Act.

(i) At least 30 days prior to the actual dissolution, the Terminating Fund Corporation will send a notification to the Minister of National Revenue (Canada) of the dissolution.

(j) Articles of dissolution in the prescribed form, will be filed with the Director of Corporations Canada pursuant to section 210(3) of the Canada Business Corporations Act.

39. The Terminating Funds are not mutual fund trusts under the Tax Act and so are not qualified investments for registered retirement savings plans, registered retirement income funds, deferred profit sharing plans, registered education savings plans, registered disability savings plans or tax-free savings accounts (collectively, Registered Plans).

40. The Continuing Fund is, and is expected to continue to be at all material times, a mutual fund trust under the Tax Act. Accordingly, units of the Continuing Fund are qualified investments under the Tax Act for Registered Plans.

Benefits of the Merger

41. The Merger will be beneficial to securityholders of the Terminating Funds and the Continuing Fund for the following reasons:

(a) The Continuing Fund is managed by an established independent asset manager located in Canada.

(b) Shareholders of the Terminating Funds will gain access to a wider range of expertise and asset management services at a lower cost to achieve their financial, regulatory and capital objectives.

(c) Shareholders of the Terminating Funds will also benefit from the SAM management team. The individuals principally responsible for the investment fund management of the Continuing Fund have the requisite integrity and experience, as required under Section 5.7(1)(a)(v) of NI 81-102.

(d) Shareholders of the Terminating Funds and unitholders of the Continuing Fund will enjoy increased economies of scale as part of a larger combined Continuing Fund that accepts new subscriptions.

(e) Following the Merger, the Continuing Fund will have a portfolio of greater value, which may allow for increased portfolio diversification opportunities if desired and not be restricted as a labour-sponsored investment fund corporation.

(f) The Terminating Funds will waive any applicable redemption fees prior to the Merger.

(g) The Terminating Funds will confirm with applicable tax authorities that any applicable LSIF tax credit claw backs will be waived in connection with the Merger and subsequent termination of the Terminating Fund Corporation.

(h) The Terminating Funds' investment objective is to provide investors with yield as well as long-term capital gains by making debt and equity investments in a diversified portfolio of small- and medium-sized eligible businesses as required to meet the pacing requirements of the Funds. These pacing requirements have been met and it no longer prudent for the Manager to invest in illiquid pacing eligible business if Shareholders can redeem without a redemption penalty or a LSIF tax credit claw back.

(i) The Terminating Funds are fully invested in cash or liquid securities and no longer invest in eligible illiquid business to meet the pacing requirements of the Funds. In turn, the Merger can be completed in cash and at fair value.

(j) Shareholders of the Terminating Funds can redeem at any time since redemptions are not restricted in any manner at this time.

(k) It is expected that the Merger will be a smooth transition for all shareholders of the Terminating Funds and (in particular, shareholders that own shares of the Terminating Funds in a registered locked-in plan or a client-held account), as the custodian and the registrar and transfer agent for both the Terminating Funds and Continuing Fund are the same.

Decision

The Principal Regulator is satisfied that the decision meets the test set out in the legislation for the Principal Regulator to make the decision.

The decision of the Principal Regulator under the Legislation is that the Merger Approval is granted, provided that before implementing the Merger, the Filers obtain the prior approval of the shareholders of the Terminating Funds at a special meeting held for that purpose.

"Darren McKall"

Manager, Investment Funds and Structured Products Branch

Ontario Securities Commission