Innovation Investment Fund. GUIDE FOR APPLICANTS 2012 Round 3 Tranche 4

Transcription

1 Innovation Investment Fund GUIDE FOR APPLICANTS 2012 Round 3 Tranche 4

2 Commonwealth of Australia 2012 This work is copyright. Apart from any use as permitted under the Copyright Act 1968, no part may be reproduced by any process without prior written permission from the Commonwealth. Requests and inquiries concerning reproduction and rights should be addressed to the Department of Industry, Innovation, Science, Research and Tertiary Education, GPO Box 9839, Canberra ACT Designed and produced by: AusIndustry, a division of the Department of Industry, Innovation, Science, Research and Tertiary Education CS

3 Contents 1 The Innovation Investment Fund Introduction The Innovation Investment Fund objectives What s new for Tranche 4? Other Australian Government support for Venture Capital, R&D and Commercialisation Further information 6 2 The assessment of applications IIF governance Assessment merit criteria The fund s proposed committed capital The applicant s proposed investment strategy The experience of the applicant s investment team Intent Other considerations The assessment framework 12 3 Applications Application SmartForm Multiple applications Lodging applications Eligible Applications Additional information Announcement Feedback to applicants 14 4 Granting of an IIF Licence Invitation to submit an offer for an IIF Licence Offer of an IIF Licence 15 5 Operation of a licensed fund Term of a licensed fund Eligible investments Eligible investee companies Drawdown of capital Management fees Remuneration from investee companies Distributions Changes to key personnel Default Power to vary governing documents Supervisory Board IIF reporting requirements Definition of Research and Development 22 6 Administrative and legal issues AusIndustry fees Confidentiality and obligations Feedback on the IIF Point of contact and further information Other References 24 3

4 1 The Innovation Investment Fund 1.1 Introduction The Australian Government has announced that it is seeking applications from experienced venture capital fund managers for an Innovation Investment Fund (IIF) Licence under the final tranche of IIF Round 3. A$100 million is being made available by the Australian Government to attract fund managers to come forward with additional private sector investment capital to establish IIF funds. The IIF is a venture capital program that supports 10 year innovation funds to develop high growth Australian companies to become globally competitive by commercialising the outcomes of Australia s strong research capability. The Australian Government co-invests capital with private sector investors in IIF funds. To encourage private sector participation, in addition to the leverage offered by the Australian Government s capital, the Government takes only 10 per cent of any fund profits with 90 per cent of any fund profits shared among the private investors and the fund manager. Licensed IIF fund managers make all investment decisions. Public and private sector organisations seeking to commercialise outcomes from research face significant early-stage risks. Successful venture capital financing is based around commercialisation experience in growing companies by identifying and managing these risks. The Australian Government has supported venture capital through its Innovation Investment Fund program since Over the past 14 years, the program has been successful in supporting a range of new companies. Examples of leading Australian companies that have been supported during their early-stage development include LookSmart, Gekko Systems, Pharmaxis, Seek.com.au and Bionomics. This Guide for Applicants outlines how the IIF operates, how Applicants will be assessed and how to develop a competitive application. IIF licences will be awarded to those fund managers that are able to best demonstrate the most optimal outcomes for the IIF program. High growth globally competitive companies are often built around technologies such as biotechnology, information and communications technologies and high value services. These companies are the engines of global growth in a knowledge-based economy. Well-known products and services that have emerged from Australian-grown science and research include the CSIRO high-speed wireless technology, the influenza drug Relenza, the cervical cancer vaccine Gardasil, and Hong Kong s Octopus smart card transit system. 4

5 1.2 The Innovation Investment Fund objectives The objectives of the IIF program are: a. to develop managers with experience in the early stage venture capital industry b. by addressing capital and management constraints, to encourage the development of new companies which are commercialising research and development c. to establish in the medium term a revolving or self funding program d. to develop a self-sustaining Australian early stage, venture capital industry. The Australian Government recognises that long term government support for the venture capital industry is required to strengthen Australia s national innovation system and in turn improve Australia s productivity and well being. 1.3 What s new for Tranche 4? There are several important changes for the fourth and final tranche of IIF Round 3: a. the Australian Government will commit up to A$100 million to be matched at least 1:1 with privately sourced capital b. Innovation Australia is seeking high quality applicants that best meet the expanded IIF merit criteria and IIF objectives c. applicants are required to clearly demonstrate their ability to access and secure privately sourced capital d. an applicant may submit more than one application to accommodate alternative investment models, fund structures or capital contribution noting that a maximum of one licence will be granted per applicant e. applications are made via an electronic SmartForm and will close at 7pm local time, Monday, 2 July Late applications will not be accepted. 1.4 Other Australian Government support for Venture Capital, R&D and Commercialisation In the Australian Budget A$9.4 billion was allocated to science, research and innovation. Australia has a world-class public research sector and associated internationally linked research infrastructure through organisations such as the Commonwealth Scientific and Industrial Research Organisation (CSIRO), Australia s Information and Communications Technology research Centre of Excellence (NICTA), the Cooperative Research Centres and internationally recognised and ranked research Universities. A new R&D Tax Incentive is in place offering higher levels of assistance to small and medium sized companies, with the program also available to overseas activities that meet the eligibility requirements. The R&D Tax Incentive is the Australian Government s principal measure to encourage industry investment in research and development. It is a broad-based, market-driven program that aims to boost company competitiveness, improve productivity and deliver economy-wide benefits to Australia. The R&D Tax Incentive provides a targeted tax offset designed to encourage more companies to engage in research and development in Australia. The R&D Tax Incentive has two core components: a. a 45 per cent refundable tax offset (equivalent to a 150 per cent deduction) to eligible entities with an aggregated turnover of less than $20 million per annum b. a non-refundable 40 per cent tax offset (equivalent to 133 per cent deduction) to all other eligible entities. 5

6 Commercialisation Australia is another initiative of the Australian Government. It is a competitive, merit-based assistance program offering funding and resources to accelerate the business building process for Australian companies, entrepreneurs, researchers and inventors. It offers a range of funding options as well as multi-layered networking opportunities to help businesses succeed. Participants in the program work with dedicated Case Managers and benefit from our Volunteer Business Mentor Network. Fund managers that structure their fund as a limited partnership can register under the Venture Capital Act 2002 as either an Early Stage Venture Capital Limited Partnership (ESVCLP) or a Venture Capital Limited Partnership (VCLP). ESVCLP registration entitles a fund to flow through tax treatment, its investors to a tax exemption on returns and the Manager can claim its carried interest on capital account rather than revenue account. In return for these benefits a fund must generally acquire new equity in Australian businesses with total assets of not more than A$50 million that are not undertaking property development or financial services. VCLP registration also entitles the fund to flow through tax treatment but only its eligible foreign investors are entitled to a tax exemption. The Manager of a VCLP can claim its carried interest on capital account. A VCLP fund s range of investments are broader than an ESVCLP and they can invest (either new or pre-owned equity) in Australian businesses with total assets of not more than A$250 million that are not undertaking property development or financial services. More details on the benefits and obligations that come with registration under the Venture Capital Act 2002 can be found at ausindustry.gov.au. 1.5 Further information AusIndustry will be conducting a series of information seminars. Interested parties are encouraged to attend an information seminar. The two hour information seminars present: An overview of the IIF program. The IIF merit criteria. The IIF assessment process. The IIF application SmartForm. Immediately following each information seminar, AusIndustry staff will be available for a limited number of half hour one-on-one meetings to discuss commercial in-confidence issues with potential applicants. To register for a one-on-one meeting, please IIF3@innovation.gov.au. Registration for the one-on-one meetings will close prior to each information seminar. Places are limited. Prior to the information seminars and a one-on-one meeting potential applicants should review the following key documents: Ministerial Media Release Ministerial Guidelines No.1 of 2011 Guide for Applicants (this document) Information Seminar Presentation Assessment Framework These documents and the date, time and location of the information seminars will be available on the AusIndustry website, see ausindustry.gov.au/iif. Note, that the IIF electronic application SmartForm is not available from the AusIndustry website. A link to the secure site will be available after a one-on-one meeting. 6

7 2 The assessment of applications 2.1 IIF governance The Australian Government through the Minister for Innovation, Industry, Science and Research issues Ministerial Directions and Guidelines. These provide the framework for the governance of the IIF program. The Directions and Guidelines include, among other things, the selection of fund managers and the operational functions of an IIF fund. The Australian Government has established Innovation Australia (the Board) as an independent statutory body with non-financial administrative responsibility for the IIF. The Board s functions include the technical assessment and merit ranking of applications for an IIF licence in accordance with the Ministerial Directions and Guidelines. The Board also provides advice to the Minister and the Department on the administration of the IIF. The Ministerial Guidelines provide for an IIF Program Delegate. This is an officer of the Department within AusIndustry, the program delivery division of the Department of Industry, Innovation, Science, Research and Tertiary Education. The IIF Program Delegate has the authority to make decisions in relation to the administration of the program and is responsible for: a. obtaining recommendations and advice from the Board on matters of technical merit, and proposals for variations to governing documents b. giving final approval for the awarding of an IIF licence to a successful IIF applicant c. entering into agreements on behalf of the Australian Government with applicants whose eligible application and subsequent offer for an IIF licence has been accepted d. authorising Australian Government payments. Within this Guide, a reference to the Board is a reference to Innovation Australia exercising its powers and responsibilities. A reference to AusIndustry means those administrative functions and decisions made under the authority of the IIF Program Delegate. A reference to the Commonwealth is to the Australian Government as an investor in an IIF fund. 2.2 Assessment merit criteria The IIF Round 3 Tranche 4 merit criteria (see clause 36 of the Ministerial Guidelines) form the basis of the comparative assessment of applications. The criteria are: The fund s proposed committed capital: a. the proposed size of the fund b. the ratio of privately sourced capital to Commonwealth program capital (subject to the Commonwealth program capital not exceeding a 1:1 ratio to the privately sourced capital and the Commonwealth program capital being no more than A$100 million) c. the fund s proposed investors and the amount of capital to be committed by each investor d. the amount of capital, if any, to be committed by the proposed key personnel of the manager 7

8 The applicant s proposed investment strategy: e. the extent to which the fund s proposed investment strategy is consistent with the objectives of the IIF program, including the establishment and management of a balanced portfolio of investments in early stage companies f. the number and the size of investments the fund proposes to make and the proposed investment sector by activity g. the level and structure of management fees proposed The experience of the applicant s investment team: h. whether the applicant has a balanced management team including relevantly qualified and skilled personnel i. the applicant s capacity and experience in early stage equity investing giving particular attention to realising returns from investments, sourcing investment opportunities and managing an investment portfolio j. whether the applicant has an understanding of and experience in dealing with issues related to Australian and international investments, products, services and markets k. whether the proposed applicant has effective strategies to contribute to training and developing of Australian based staff in all aspects of making venture capital investments in early stage companies Intent: l. whether the applicant has a demonstrated willingness to operate within the intent of the IIF program. General guidance on these merit criteria is covered in more detail below. 2.3 The fund s proposed committed capital To be competitive an application should clearly identify its approach to raising the fund s privately sourced capital. While a fund manager will draw on investors capital over the period of the fund, the total private capital commitment is an important element of the assessment process and must be confirmed prior to execution of an IIF licence. a. The proposed size of the fund Please specify the size of the proposed IIF fund. Explain why the proposed fund is of this scale and discuss the benefits this will create. Explain the proposed structure. Please provide a fund structure diagram detailing governance arrangements, investors and fund manager relationships including the ownership of the various entities. Note that an IIF fund cannot be structured as a Pooled Development Fund. If there is to be a companion fund, provide details on its size, composition and the relationship with the proposed IIF fund. b. The ratio of privately sourced capital to Commonwealth program capital (subject to the Commonwealth program capital not exceeding a 1:1 ratio to the privately sourced capital and the Commonwealth program capital being no more than A$100 million) State the proposed ratio of Australian Government and privately sourced capital identifying the amount of Commonwealth capital sought and the amount of private and other capital proposed. If it is proposed to have subsequent closings, identify the proposed timing and conditions for any newly admitted private Limited Partners. Note: the Commonwealth capital and matched private capital must be committed in full at the first close. 8

9 c. The fund s proposed investors and the amount of capital to be committed by each Please clearly identify the proposed approach to raising the fund s privately sourced capital. This should include the source, amount and any terms and conditions of the fund s private capital raising strategy. Clearly identify: i. Private investor capital commitments. These can be demonstrated with signed letters of support, specifically identifying any existing relationship the investor has with the fund manager, the investor s understanding of the IIF program, and any terms and conditions the investor may place on the capital commitment. Note, shortlisted applications will be provided with IIF model governing documents and these will form the basis of the due diligence discussions with the private investors. ii. Identify any other capital. Note: other capital can include other government sourced capital. However, this is not counted as privately sourced capital for the purposes of matching Commonwealth IIF capital. Where private and other capital is sourced directly or indirectly from other funds under management, these funds must be identified in the application, should already be established and have the mandated ability to be deployed for matching private capital purposes. If these funds include some government capital they may count as privately sourced capital. If in doubt, an applicant can seek a determination from the IIF Program Delegate on the eligibility of capital. iii. If foreign government capital, including any sovereign wealth fund capital is to form part of the IIF fund, this must be clearly identified at the time of application. It is important to note that successful applicants invited to make an offer for an IIF licence will only have six months from notification of success to confirm the matching private capital. d. The amount of capital, if any, to be committed by the proposed key personnel of the manager Clearly identify the amount of private capital to be committed by the fund management entity including the terms, conditions and arrangements for this capital commitment. The application should identify the individual amounts and which key personnel are committing the capital. Also specify how any carried interest will be distributed within the the management team. 2.4 The applicant s proposed investment strategy e. The extent to which the fund s proposed investment strategy is consistent with the objectives of the IIF program, including the establishment and management of a balanced portfolio of investments in early stage companies Under this criterion discuss how the proposed fund s investment strategy, investor relationships, management team and longer term business model will contribute to the IIF program objectives. f. The number and the size of investments the fund proposes to make and the proposed investment sector by activity Describe in detail the proposed investment strategy including: i. the approach to portfolio construction including the timing, number and size of investments proposed, the proposed source of deal flow and investment criteria including tranching and follow-on funding options, and anticipated exit strategies ii. the nature of the investment arrangements (e.g. ordinary shares, convertible notes, convertible preference shares, level and types of control at each funding round, etc) and the types of typical investment terms and conditions with details such as protective covenants, veto rights and any service provisions associated with the funding iii. the approach to portfolio performance monitoring including objectives, milestones, reporting etc iv. the role of any companion fund. 9

10 Describe in detail the proposed investment sector or field of specialisation for the fund including: i. the geographic, industry, technology or other areas of specialisation and the associated risks, benefits and any special considerations related to this specialisation ii. existing and proposed linkages and networks to relevant institutions and stakeholders for technology validation or investee company acquisition and disposal, both domestically and internationally. g. The level and structure of management fees proposed The proposed management fees are a competitive element of the application. The fee needs to be sufficient to cover all expenses of the fund and represent value for money for investors. Detail the proposed management fees (GST inclusive), noting that this needs to be consistent with the size of the fund, the compositions of the management team, the appropriate maintenance of professional skills and the investment strategy over the life of the fund. Include detailed discussion on: i. The fee structure over the life of the fund. This should cover the first five years during the investment phase; the impact of reduced fees after the fifth year based on adjusted committeed capital; and the implications if the fund extends for the optional three year extension after the tenth year when no management fees are payable. Include the risks that may be associated with the reducing fee structure. iii. Identify any management services proposed by the fund manager to be provided to the investee companies. Note, there will be limits and conditions in the governing documents on any fees to be charged to investee companies. It is also important to note that where a key person is a director of an investee company, this is due to the fund s investment, and therefore any directors fees payable are to be treated as for the benefit of the fund and not for the benefit of the General Partner, unless otherwise agreed. iii. Detail the projected costs and expenses to manage the licensed fund through to wind-up. Include a budget for the life of the fund. Projected income should include management fees, revenue form any investee company services and all other income. Projected expenses should include, for example, administration, auditing, insurance, taxation, training and travel. Note, an IIF fund will not reimburse recoverable expenses, the management fee must meet all fund expenses. 2.5 The experience of the applicant s investment team h. Whether the applicant has a balanced management team including relevantly qualified and skilled personnel The quality of the proposed team is a critical element of a successful application. i. Describe how the individuals form an effective management team. Discuss how the complementary skills, such as commercial, management, legal, technical and financial expertise operates across the team. What are the work specialisations? Discuss the ability of the team to work together, including the extent to which the individuals have previously worked together and any other additional roles individuals may have within the team ii. Discuss the formation and composition of the team as a business entity including the sustainability of the management entity over time, the approach to succession planning. 10

11 For each key person provide a summary that includes: i. Full name; work address (street, postal, phone and ); current position and period of employment and most recent previous occupation and period of employment; qualifications ii. The proportion of their time that will be allocated to the IIF fund and the proportion of their time to be allocated to other commitments iii. Whether the key personnel have any shareholding or other interest (whether direct or indirect) in the fund management entity. Those applicants identified for short listing will undergo a due diligence process that will review management experience, undertake referee checks and sight original qualifications for each of the key personnel. i. The applicant s capacity and experience in early stage equity investing giving particular attention to realising returns from investments, sourcing investment opportunities and managing an investment portfolio i. Discuss in detail with demonstrated examples the management team s capacity to source high quality deals, assess commercial and technical investments, contribute to the effective management of high-growth early-stage companies and sucessfully exiting companies. ii. Demonstrate the applicant s achievements in managing a venture capital fund to the satisfaction of both investors and investee companies. This should include discussion that demonstrates previous capital raising, performance reporting and the composition of any governance boards and advisory committees, and an exit history including rates of return and discussion on investment write offs. j. Whether the applicant has an understanding of and experience in dealing with issues related to Australian and international investments, products, services and markets Outline the management team s expertise and: i. International strengths. Include discussion on experience in raising non domestic investment capital, managing companies and their activities or negotiating and realising exits which have occurred in a country other than that of the fund manager s. iii. Technical strengths. Include discussion on how the team is networked to test product analysis and market potential, competitor identification, R&D validation and best practice knowledge management. k. Whether the proposed applicant has effective strategies to contribute to training and developing of Australian based staff in all aspects of making venture capital investments in early stage companies Outline the fund manager s staff development plan. This should cover all staff involved in the management of the fund. Matters for consideration include the overall training strategy for the team to ensure individual professional capabilities are maintained and further developed. Discuss the proposed costs and resourcing strategy and access to suitably experienced trainers, mentors and service providers. Also consider the breadth of the proposed strategy over time, the personnel involved and consider the potential to bring-in and skill additional personnel. 11

12 2.6 Intent l. Whether the applicant has a demonstrated willingness to operate within the intent of the IIF program The applicant must demonstrate an understanding of the IIF program. As a co-investment fund the governing documents will clearly define the governance and operation of the fund and the licence conditions for the fund manager. It is also important to acknowledge that the program is established under Ministerial Guidelines and that the Australian Government s capital is provided through an appropriation from the Australian Parliament. If possible, outline the applicant s experience of conforming with Government programs or operating a fund within the intent of investor governing arrangements. 2.7 Other considerations For Tranche 4, the competitive process is open for both existing and new managers to apply for an IIF licence. Other optional considerations that the Board or the IIF Program Delegate may exercise in the assessment process are: a. applicants must demonstrate at the time of lodgement of application, their ability to access the required level of privately sourced capital b. the IIF merit criteria can be weighted c. the accessibility for industry around Australia may be considered d. other matters that may have an impact upon the suitability of the applicant. 2.8 The assessment framework The IIF program applies a competitive assessment process to identify the most meritorious applications. The process is fair and equitable to all applicants. The assessment framework filters applications during the assessment stages and allows the Board to assess merit. The assessment framework is consistent with the Ministerial Guidelines and builds upon experience from previous assessments. A probity advisor will oversee the selection process against the assessment framework. 12 Stage 1 Preliminary assessment Stage 1 is a preliminary assessment after the conflict of interest procedures. The IIF Program Delegate will check each application for eligibility and will then refer each eligible application to the Board for a preliminary merit assessment. The basis of the preliminary assessment is only the information provided in the application. The outputs from Stage 1 are: a. a preliminary merit assessment of all applications b. a rating of each application, whether shortlisted for due diligence or not recommended for further assessment c. early identification of inadequate and uncompetitive applications. At the end of the Stage 1 the Board will select a number of applications (shortlisting) for due diligence and interview. Stage 2 Detailed assessment Due diligence is assessed by an independent industry consultant contracted by AusIndustry. This involves interviewing the proposed management team, investors and reference checks. At Stage 2 the shortlisted applicants will be provided a set of model IIF governing documents. The Board will consider the due diligence report of each shortlisted applicant and further review the applicant s claims against the IIF merit criteria. The Board will then interview the shortlisted applicants. The purpose of the interview is to allow the Board to understand each applicant s proposal as defined against the IIF merit criteria and ask questions to clarify and expand on claims made in the written application. Stage 3 Finalisation The third stage is for the Board to prepare a final ranking and confirm the most meritorious applicants. The Board will conclude the application round by finalising a recommendation report for the IIF Program Delegate. This will include the Board s assessment of each applicant s claims against the IIF merit criteria. The IIF Program Delegate will then write to the successful applicants inviting them to make an offer for an IIF licence. Successful applicants will have six months from the date of the invitation to raise private sector capital commitments and to conclude contractual negotiations.

13 3 Applications 3.1 Application SmartForm The electronic SmartForm application will be available from AusIndustry after the one-on-one meetings with potential applicants. The SmartForm application is accessible from a secure link. The SmartForm application is in three parts: Part A Contact Details of the Applicant Part B IIF Fund Proposal Part C Referees and Supporting Documents The application comprises an electronic SmartForm (PDF format) and two mandatory templates: Proposal Against the IIF Merit Criteria (attach as Word or PDF format) Disclosure of Interest (Word format only) Applicants can download and save these documents to a computer. Part B is completed using the template Proposal Against the IIF Merit Criteria and is to be attached to the SmartForm. The completed Part B attachment should address the twelve merit criteria in 12,000 words or less. The second template, the Disclosure of Interest is to be attached to the SmartForm and must be a Word document. This document must list all relevant entities (both people and companies) identified in the application. To assist the impartial assessment of all applications it is important that applicants clearly disclose all appropriate information in the Disclosure of Interest template. The SmartForm also allows other supporting documents such as the investor letters of support, CVs or spreadsheets, to be attached as PDF, Word or Excel files. The SmartForm, with all attachments, should be less than 20 megabytes. Therefore, please avoid excessive use of graphics. AusIndustry treats applications as commercial-inconfidence and strict conflict of interest processes apply to all staff, contractors and members of the Board. For any assistance with the application form please IIF3@innovation.gov.au. 3.2 Multiple applications Applicants may submit more than one application. This may be to accommodate alternative investment models, fund structures or different levels of Government capital contribution (not exceeding A$100 million and a minimum 1:1 ratio of Commonwealth program capital to privately sourced capital). Where an applicant makes multiple applications they will need to identify this separately in each application form. Each application can only contain one proposal. That is, it cannot have more than one investment model, fund structure or level of Government capital contribution etc. If it does, the IIF Program Delegate may rule the application ineligible. Note, that the IIF Program Delegate will only issue a maximum of one licence to each applicant. Where an applicant submits multiple applications, the IIF Program Delegate will only charge a fee for the first application. 3.3 Lodging applications Applications must be submitted via the electronic SmartForm by 7pm local time, Monday 2 July There is no consideration of late applications. The SmartForm applications must include all attachments as PDF, Word or Excel files other than the completed Disclosure of Interest which must be a Word document. 13

14 To contribute towards application assessment due diligence costs there is a A$5,000 application fee. Payment is by electronic funds transfer and payment details can be provided. An application is not complete until the application fee is paid. Application fees are not refunded under any circumstances. Note, if the application is shortlisted and proceeds to the Stage 2 detailed assessment (see the Assessment Framework) there is a second fee of A$5, Eligible Applications AusIndustry will acknowledge receipt of all applications at the close of the application period. The IIF Program Delegate will then determine the eligibility of each application. Specifically whether the: a. application is complete and contains sufficient information to undertake a merit assessment, including completion of the Proposal against the merit criteria and the Disclosure of Interest attachments; b. applicant is or will be an Australian based fund manager; c. application is a single proposal with no more than one investment model, fund structure or level of Government capital contribution; and d. applicant has paid the A$5,000 application fee. The IIF Program Delegate will then pass eligible applications to the Board for technical merit assessment. 3.5 Additional information The application is the basis of the merit assessment. AusIndustry may request clarification in order to assess the merit of the proposal. This may include an interview. During this process, the applicant may provide additional information but there can be no alteration to the application. Contact AusIndustry if there is an unintentional error in the application. The IIF Program Delegate will consider this in consultation with the Board. The IIF Program Delegate may exclude an application from further consideration at any stage if the applicant (including their officers, employees, agents or advisers) violates any of the following: a. makes false or misleading statements. Giving such false or misleading information is an offence; b. offers any inducements in connection with their application; or c. engages in any collusive bidding, anti competitive conduct or any other similar unlawful conduct with any other applicant or any other person in relation to their application. All costs and expenses incurred by an applicant in connection with an IIF application are the sole responsibility of the applicant and are not recoverable from the Commonwealth. Nothing in this Guide should be construed to give rise to any contractual obligations or rights, express or implied, by the issue of this Guide or the submission of an application. No contract will be created until a formal written contract is executed between the Commonwealth and an applicant. 3.6 Announcement The Minister may announce the successful applicants. This and other public statements may include: a. name, size and structure of the fund b. a summary of the fund s investment strategy c. contact details of the fund manager. The IIF Program Delegate will confirm this information with the successful applicants prior to its public release. Such releases are made with the co-operation of the applicant. 3.7 Feedback to applicants The IIF Program Delegate will notify all applicants in writing at the conclusion of the assessment process. As reasonably possible, this will coincide with the announcement by the Minister. AusIndustry will also offer all applicants feedback on their application. Note, that the feedback cannot breach any confidentiality in respect of other applicants. 14

15 4 Granting of an IIF Licence 4.1 Invitation to submit an offer for an IIF Licence Following the recommendation of the Board, the IIF Program Delegate will invite selected applicants to submit an offer for an IIF licence. This invitation will include the terms and conditions that will apply specifically to that IIF licence. The invitation period is valid for six months from the date of the invitation. No extension beyond this period to raise private sector capital commitment or conclude contractual negotiations can be expected. As part of the offer, the applicant, the investors and the IIF Program Delegate must agree on the governing documents. The governing documents regulate the operation of a licensed fund and its fund manager and include: a. the IIF licence from the Commonwealth to the fund manager b. a partnership deed, or equivalent investment vehicle, establishing the fund and the investor commitments c. any other documents, policies or arrangements between the fund, its investors and the fund manager and any associated entities. 4.2 Offer of an IIF Licence Before the end of the invitation period and upon investor agreement and satisfactory confirmation of the private capital, to execute an offer to the IIF Program Delegate the applicant must provide: a. two copies of the deed and IIF licence signed by the applicant b. a subscription deed poll signed by each investor (other than the Commonwealth) c. a detailed entity structure diagram including the names of all directors, shareholders and any associates related to the fund manager. The Australian Government will then execute and date the IIF licence and the Commonwealth s subscription deed poll. The date of the IIF licence is the commencement date of the fund, unless otherwise agreed. The IIF licence may also include a number of conditions precedent. These do not need to be finalised before the commencement date but are required before any call or utilisation of capital. These may include: a. confirmation that an acceptable conflict of interest policy is in place b. confirmation that an acceptable insurance policies are in place c. certification that all necessary authorisations, licences and power of attorney are in place d. documents relating to the establishment of a Venture Capital Management Partnership (VCMP), if appropriate e. unconditional registration as an Early Stage Venture Capital Limited Partnership (ESVCLP) or Venture Capital Limited Partnership (VCLP) if applicable. Note, that where it is proposed that an IIF licensed fund will also be required to be registered as an ESVCLP or a VCLP, the fund manager must remain compliant under both programs. Each party is to bear its own legal costs in relation to the preparation of governing documents. This includes any stamp duty, fines and fees payable. These costs are not recoverable from the IIF fund. 15

16 5 Operation of a licensed fund The following sections highlight key features of the governing documents of an IIF licensed fund. The actual governing documents will have more detail than outlined here. Note, that the governing documents of an individual fund may impose conditions different from those outlined in this Guide. Note, the model governing documents are not available to applicants prior to the close of applications and are only provided after selection by the Board to shortlisted applicants. 5.1 Term of a licensed fund Licensed funds have a term of 10 years. At the end of 10 years, the fund must be wound up. However, there is provision for an extension of up to three years to permit the orderly disposal of assets. A licensed fund must make all its investments in the first five years. New investments after this date are at the discretion of the IIF Program Delegate. Consideration of this is only given where the fund manager can demonstrate that: a. the investment negotiations commenced before the fifth anniversary b. an agreement on the investment will be reached within a reasonable period. In rare circumstances, it is necessary to liquidate a licensed fund early. For example, if: a. the licensed fund is required to be wound up by a court order b. the licensed fund becomes insolvent or suffers a substantial loss of capital c. the investors require the fund to be wound up. 5.2 Eligible investments A licensed fund: a. must invest in eligible investee companies by means of an equity purchase or convertible notes. The equity purchased must be a new issue and any conversion of notes must similarly lead to a new issue b. may not invest in an eligible investee company in such a way that the licensed fund becomes or may become liable for the debts or liabilities of that company or any other entity c. must not invest in, or provide finance to, an eligible investee company by means of a leveraged buyout, or in a manner consistent with a leveraged buyout d. must not control an eligible investee company. 5.3 Eligible investee companies A licensed fund must invest in eligible investee companies. An eligible investee company is a company that, on the date of the initial investment: a. is incorporated under the Corporations Act 2001 and has an Australian Business Number (ABN) b. is at the seed, start-up or early expansion stage of its business development c. has a majority of its employees (by number) and assets (by value) inside Australia, or will use the whole of the initial investment within Australia d. has an average annual revenue over the previous two years of income that does not exceed A$5 million per year. The calculation of revenue for a year of income will exclude any abnormal items e. is not, an associate of a company (other than a qualifying enterprise) that has an average annual revenue, over the previous two years of income, in excess of A$5 million per year, excluding any abnormal items. 16

17 In addition, at all times the company must be: a. commercialising research and development (R&D) (see section 5.13) activities or will, under the investment arrangement with the licensed fund, be required to commercialise R&D activities b. providing all of the goods and services it produces through commercialising R&D activities to persons who are not associates. The governing documents will include provisions in the event a company ceases to be an eligible investee company. The governing documents may recognise investments in an eligible investee company by a fund made after the lodgement of an application but prior to the awarding of an IIF licence. Seed, start-up and expansion stages Factors indicating that a company is in the seed stage of development include that the initial concept of its business is being formed, prototypes or concepts of the company s products or services are being developed and the management team is beginning to form. Factors indicating that a company is in the start-up stage of development include that the investment is necessary for product development, staffing, initial marketing and other start-up costs, or the company is setting itself up to sell its product or service commercially. The management team is substantially in place. Factors indicating that a company is in the early expansion stage of development include that the relevant investment will provide necessary working capital to help launch the production and sale of the company s products or services. Typically, the company is not profitable and frequently will be cash flow negative. The early expansion stage can encompass an established business undertaking the commercialisation of R&D activities, the size and scale of which results in the company being at a similar stage of development. Where there is doubt as to whether a company is an eligible investee company the fund manager can apply to the IIF Program Delegate for a determination. The Delegate will seek the advice of the Board but the Delegate s decision is final. A determination fee applies as set out in 6.1 of this Guide. Ineligible investments The licensed fund must not invest in, or provide finance to, companies: a. whose primary business activity involves, directly or indirectly, providing capital to others, purchasing debt obligations or factoring b. which are passive companies. A passive company is a company which: i. is not undertaking any significant product development or other operations ii. is likely to pass substantially all of the proceeds of the investment to another entity or iii. proposes to use the investment or finance for purposes other than commercialising R&D activities c. whose business is substantially that of mining d. which purchase, or will purchase, goods or services from a supplier that is an associate of a licensed fund, its fund manager or trustee, except under the following conditions: i. the amount of goods and services purchased from the associate with the investment, or with capital released as a result of the investment, is less than five per cent of the total amount of the investment ii. the price of such goods and services is no higher than that charged other customers of the associate or market price e. which are, or are the managers of, another licensed fund, or a fund whose manager is licensed under the IIF, the PreSeed Fund, the Renewable Energy Venture Capital Fund or any other government supported venture capital program in operation from time to time f. which carries on business in the capacity of trustee of a trust or in any nominee or representative capacity g. which proposes to use all or any part of an investment made by the licensed fund to finance the acquisition of land used or intended to be used for agricultural, horticultural or forestry purposes h. which is a non-profit health and medical research centre i. which is, or is in a class of companies, determined by The IIF Program Delegate to be ineligible. 17

18 Portfolio diversification Licensed funds cannot invest more than 20 per cent of the fund s total committed capital, in any one eligible investee company. Co-investment in an eligible investee company with other licensed funds, whether licensed under the IIF program, the PreSeed Fund program, the Renewable Energy Venture Capital Fund program, or any other government supported venture capital program in operation from time to time, is permitted. However, no more than A$15 million of the total Commonwealth program capital for all the funds in the IIF program may be invested in, committed for investment in, or otherwise made or agreed to be made available for, any one eligible investee company by licensed funds. Generally, an IIF licensed fund must not invest in an investee company of a fund manager s existing fund or a companion fund. However, a companion fund may make follow-on investments in an IIF investee company. 5.4 Drawdown of capital The licensed fund may make a call or utilisation for: a. making an eligible investment b. paying a management fee The fund manager calls for management fees at the beginning of each quarter. The fund manager may adjust this to reflect any income attributable to the fund such as directors fees, occasional interest or GST rebates. The fund manager draws capital for investments only when it is required and invests this within 30 days. In certain circumstances, there are restrictions on drawdowns. For example, a fund manager may request a determination from the IIF Program Delegate on a particular investment. The fund manager then cannot call capital for that investment until and unless the manager receives a positive determination. If a fund manager makes an ineligible investment then the fund manager must not make any further drawdowns in respect of that investment. The fund manager then has a period to rectify this breach of the IIF licence. 5.5 Management fees The fund manager is paid an annual management fee by the licensed fund, as agreed by the investors. Management fees are a competitive element of the application for an IIF licence. The management fee, paid quarterly, in advance, is to remunerate the fund manager for all costs associated with the management and operation of the licensed fund. A licensed fund will not reimburse its fund manager any expenses in excess of the management fee. The governing documents fix the management fees for the first five-year investment period. After the fifth anniversary of the fund, the annual management fee is reduced based upon adjusted committed capital. This is the fund s committed capital less: a. the uncalled capital unless reserved by the fund manager b. the cost of realised investments c. the cost of any assets which have been written off. Management fees are not payable beyond the ten-year term of a licensed fund, even if the term of the fund is extended up to the optional three year extension for the orderly disposal of remaining assets and wind-up of the fund. 5.6 Remuneration from investee companies The fund manager may charge investee companies for management services provided that the fees: a. must be optional for the investee company b. must be provided by persons other than the fund manager or an associate c. must be provided on terms agreed in writing between the fund manager or its associate and the investee company d. may be charged out at no more than commercially reasonable rates. All other fees paid by the investee company, such as directors fees, are paid to the Partnership unless agreed otherwise by the Supervisory Board. 18