Friday, June 1, 2012

Flow-through shares for the innovation sector

Richard Sutin, head of Norton Rose's cleantech team, suggests that flow-through shares, traditionally used for resource financing, should be extended to the cleantech sector.

"Like the resource sector, innovation is about discovery and commercialization, reliant on large amounts of high-risk, venture capital where revenues are uncertain and remote. Canada has world class capital markets (led by the TSX and the TSX Venture Exchange, with global leadership in the resource sector) and world class scientific research. As with the resource sector (and as with areas like Silicon Valley for tech venture capital), places where risk capital can be accessed will draw innovators, entrepreneurs and investors which, in turn, will draw talent and intellectual capital, becoming a self-reinforcing cluster resulting in high-quality jobs.

Flow-through shares will incentivize risk capital to those areas the government determines by defining qualifying investments; for example, qualified expenditures could be targeted towards jobs.

The competition for a share of the innovation economy is global and stiff, with jobs and prosperity at stake. Canada is competitive in most respects, particularly with respect to our human capital, but risk financing is important enough to offset that advantage. Many governments are engaged in incentive programs to encourage local innovation activity. Flow through shares, unique to Canada, are superior to other financial incentive programs and have the following advantages:

  • flow-through shares represent government facilitation of private risk capital formation, which is far more valuable than direct government funding;
  • flow-through shares have years of demonstrated success creating industry leadership without abuse or discredit;
  • flow-through shares helped Canada introduce public venture capital which is a legitimate alternative to private venture capital;
  • in addition to the benefits of an innovation cluster, flow-through shares will enhance Canada’s stature as a leading financial centre;
  • flow-through shares, according to Department of Finance and National Resources Canada reports, generate significant incremental spending that benefits local economies; and
  • flow-through shares catalyze other private sector investment.

We cannot take the chance that our innovation initiatives are compromised by uncompetitive risk capital formation. Our future prosperity is tied to success in the innovation economy and entrepreneurial endeavours. Flow-through shares, a unique Canadian success, can provide the basis for private sector financial support for commercialization activity. They are not costly according to the government’s own reports. The innovation economy is about taking and funding risk; extending flow-through shares to qualified expenditures in the innovation economy is a small risk for the government to take."

Read the bulletin here.

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