Nova scotia has put in place a unique fund to help small and medium-sized businesses, especially those in rural communities, raise much-needed capital.

The fund is speculative, however, and isn’t intended for small investors looking to tuck money into an RRSP, says the head of the Investment Dealers Association of Canada in Atlantic Canada.

The Community Economic Development Investment Fund program, now in its sixth season, was launched to help firms access funds in their home province. It’s also meant to stem the flood of investment money flowing out of the province, says Chris Payne, investment manager with the province’s Office of Economic Development.

He says about $600 million leaves Nova Scotia each year in RRSP funds, and “very little comes back.”

In fact, the government estimates that less than 2% is returned to the province. CEDIF investments, on the other hand, are intended to increase the amount of capital reinvested in Nova Scotia to the tune of 5% by the end of 2010.

Companies prepare a simplified offering document, one of the few in the country that are in a question-and-answer format, says Les O’Brien, chairman of the Nova Scotia Securities Commission. The offering must first be approved by the Office of Economic Development and the Department of Finance before it lands at the NSSC’s door. Once satisfied everything is in order, the commission issues a letter of non-objection.

“The offering is proceeding then without a full prospectus having been prepared,” says O’Brien. “It’s also being sold without the need to involve licensed market actors.”

For a period of 90 days, companies can raise up to $3 million. They can also request an extension for up to six months, and come back again the next year for a subsequent offering.

For their part, investors receive a 30% equity tax credit and a 20% guarantee for four years. CEDIFs also have approved holding status for a self-directed RRSP. It is this aspect that concerns David Beazley, the IDA’s director for the Atlantic Region.

“People should be very careful as to how they treat these,” he says. “The investment merits don’t justify putting in a large portion of their investment funds.”

Beazley is concerned about a number of aspects related to CEDIFs. First, there is the risky nature of the investment. “Properly sold, they will help rural communities,” he says. “Unfortunately, sometimes they’re sold as providing two tax write-offs. But [the chance of] realizing any benefit on return when you retire is minimal.”

Payne notes that success is all in the measurement, and it’s still early in the CEDIF program’s history to talk about return on investment. What is known is that there are currently 27 CEDIFs in Nova Scotia that manage more than $15 million in assets. The funds have closed a total of 43 offerings in four years and have 2,525 investors, including some repeat business. One fund has yielded a return.

“Risk is a concern, no matter what you’re investing in. The nature of these funds is that they’re very stringently reviewed,” says Payne. Still, he adds, “These are a speculative investment. [They] should be a piece of an investment.”

Beazley also expresses concern about individuals being both involved in a project and selling it to investors: “There is a conflict.”

There is also a great deal of support for the funds, caught up as they are somewhere between a calculated investment and an act of provincial patriotism.

It certainly seems that other provinces are taking note of the Nova Scotia investment program. “There is great interest in what we are doing here,” says Payne.

Such interest is encouraged. “The more jurisdictions that offer [this type of program], the more it will be taken on by investors. It would help to grow the program considerably,” he says. IE