Labor-Sponsored Investment Funds

Date: 9 Mar 2003 | posted in: Banking | 0 Facebooktwittergoogle_plusredditpinterestmail

In the early 1980s, high unemployment and the rapid exodus of capital from Quebec led the province to offer seed capital and tax incentives for a new kind of venture capital fund that provided equity to small and medium-sized businesses. The Solidarity Fund was created in 1983 and controlled by the Quebec Federation of Labor. In 1988, the federal government enacted its own tax credit for labor sponsored investment funds (LSIFs), using the Solidarity Fund as a model. Since then about 25 such funds have been created: two national and the rest provincial. More than 400,000 Canadians are shareholders in the funds, which generate $500-$700 million a year, equivalent on a per capita basis to $5-$7 billion in the United States.

Each province sets its own rules for its own funds, but all have social objectives in addition to their economic and fiduciary goals. Most require that the enterprise have a majority of its holdings in the province, that the tax credits are available only for residents of the province, and that a labor union or federation appoint a majority of the board of directors.

The Canadian venture capital experiment, at a minimum, will provide valuable lessons about how a country’s small and medium-sized businesses benefit when their venture capital comes primarily from union-controlled funds. At a maximum, the Canadian experiment will teach Americans how to tap into household assets to build equity investments that marry social and economic ends.