The applicant’s proposed investment straThe applicant’s proposed investment strategy

Commonwealth of Australia

Industry Research and Development Act 1986

Innovation Investment Fund Program Round Three

Direction No. 1 of 2011

I, KIM JOHN CARR, Minister for Innovation, Industry, Science and Research, acting under sections 18A, 19 and 20(1) of the Industry Research and Development Act 1986, give the following direction to Innovation Australia (the Board).

Dated 20 October 2011

KIM CARR

Minister for Innovation, Industry, Science and Research

PART 1—PRELIMINARY

Name of direction

1. This direction is the Innovation Investment Fund Program Round Three, Direction No.1 of 2011.

Commencement

2. This direction commences on the day on which particulars of the direction are published in the Gazette and registered on the Federal Register of Legislative Instruments.

Object of these directions

3. The object of this instrument is to give directions to the Board in relation to:

(a) additional functions of the Board, namely the administration of the IIF program including the provision of competitive merit based assessments and ranking of eligible applications under the IIF program; and

(b) the policies and practices to be followed by the Board in the performance of the function.

Interpretation

4. In this direction:

“applicant” means an entity that makes an eligible application.

“Board” means the Innovation Australia Board and includes its successors.

“Board may” is permissive and not mandatory.

“Commonwealth program capital” means amounts invested in or provided to a licensed fund by the Commonwealth.

“Department” means the Department of Innovation, Industry, Science and Research.

“early stage companies” means companies at the seed, start-up and early expansion stages (as defined in the Innovation Investment Fund Round Three guidelines).

“eligible application” means an application for a licence under the IIF program in a form required by the Program Delegate from time to time that is an application that the Program Delegate has determined is eligible for competitive merit based assessment and ranking by the Board in accordance with the Innovation Investment Fund Round Three guidelines.

“equity” includes any form of debt financing that is approved by the Program Delegate which does not compel the borrower or debtor to pay the interest, coupon or other charge in the nature of interest prior to the end of the term of the debt, except in the event of default.

“governing documents” in relation to a licensed fund includes:

(a) the licence with the Commonwealth;

(b) a constitution or other documents establishing the fund; and

(c) any documents between the fund, its manager and the investors (or any of them).

“Government sourced capital” means amounts invested in a licensed fund by:

(a) a person or persons funded directly or indirectly by the Commonwealth; or

(b) any person whom the Program Delegate considers is directly or indirectly in receipt of funding from a source or sources which is or are funded directly or indirectly by the Commonwealth to such an extent that, in the opinion of the Program Delegate, it is appropriate to treat any amount invested in or provided to the fund by that person as Government sourced capital,

but excludes any amount of that funding that, the Program Delegate considers would be inappropriate to treat as Government sourced capital.

“IIF program” means round three of the Commonwealth’s Innovation Investment Fund Program.

“include” “includes” and “including” do not limit the generality of the words which precede them or to which they refer.

“innovation” means the process whereby ideas are transformed, through economic activity, into sustainable, value-creating outcomes. It can generate changes in output such as new products, processes and services.

“Innovation Investment Fund Round Three guidelines” means the guidelines that are made by the Minister to the Department, as in force from time to time for the delivery of the IIF program.

“key personnel” in relation to a fund manager, means those individuals determined by the Program Delegate to be key personnel because of their level of technical and managerial expertise, time commitment and their day to day involvement in the management of the relevant licensed fund. This includes any additions or replacements to that team approved by the Program Delegate and the Supervisory Board.

“licence” means the licence to be granted to a successful applicant in accordance with the Innovation Investment Fund Round Three guidelines.

“licensed fund” means a fund whose manager has been granted a licence in respect of the IIF program.

“Minister” means the Minister for Innovation, Industry, Science and Research.

“private capital” means amounts invested in or provided to a licensed fund that are not Commonwealth program capital.

“privately sourced capital” means amounts invested in or provided to a licensed fund that are not, in the opinion of the Program Delegate, Government sourced capital.

“Program Delegate” means an employee of the Department who has been empowered by the Minister, or otherwise duly authorised, to carry out the relevant function in respect of the IIF program.

“R&D activities” has the same meaning as in the Income Tax Assessment Act 1997

A reference in this direction to “the IIF guidelines, licensing agreement or other contractual documents” or similar words is a reference to any one or more or all of them.

A reference in these directions to the singular includes the plural and vice versa.

"Supervisory Board" means the body whose function is described in clause 17 of these directions.

PART 2 - CONSIDERATION OF APPLICATIONS TO PARTICIPATE IN PROGRAM

Board to have regard to certain policy objectives

5. The Board must have regard to the following policy objectives in giving effect to these directions:

(a) to develop fund 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 scheme; and

(d) to develop a self-sustaining Australian early stage, venture capital market.

Procedure

(a) Subject to clause 7, the Board will assess eligible applications and provide a technical merit ranking of those applications to the Program Delegate.

(b) The Board must consider eligible applications as soon as practicable after those applications have been provided to the Board.

(c) The Board may interview any applicant as part of the merit ranking process for applications.

(d) The Board and Program Delegate may request additional information from applicants after the lodgement of an application in order to assist in ranking and assessing eligible applications.

Board may decline to provide merit ranking

7. The Board may decide to refuse to provide a merit ranking in respect of a particular eligible application if it is not satisfied with the level of merit of an eligible application in relation to one or more of the merit criteria.

PART 3 – ASSESSMENT AND MERIT RANKING OF APPLICATIONS

Assessment of applications

8. Subject to clause 7, the Board must assess each eligible application on its merit according to the extent to which the application meets the merit criteria (as set out in clause 9 below).

Merit Criteria

9. The technical merit of eligible applications must, amongst other things, be assessed against the following criteria:

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 $100 million);

(c) the fund’s proposed investors and the amount of capital to be committed by each;

(d) the amount of capital, if any, to be committed by the proposed key personnel of the fund manager;

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.

Other Matters

10. The Board may, in its absolute discretion, attribute a higher level of relative importance to one or more of the merit criteria.

11. Applicants may, at the request of the Program Delegate, be required, at the time of lodgement of application, to demonstrate to the satisfaction of the Board their ability to access the required level of privately sourced capital.

12. The Board may have regard to the accessibility of the program for industry around Australia.

13. The Board may have regard to additional criteria and undertake other enquiries in order to consider the suitability of applicants.

14. The Program Delegate may make policies of general application in relation to the administration of the IIF program. When making such policies the Program Delegate will seek the advice of the Board.

15. The Program Delegate may make decisions and guidelines in relation to the administration of the IIF program. When making such decisions and guidelines the Program Delegate may seek the advice of the Board.

16. The Program Delegate will seek the advice of the Board on the following matters:

(a) new investments by a licensed fund beyond the fifth anniversary of the granting of a licence;

(b) changes to the key personnel of a licensed fund;

(c) changes in the structure of a licensed fund;

(d) the application of sanctions against a manager or investor;

(e) the suspension of funding in relation to a licensed fund;

(f) the termination of a licence;

(g) investee company eligibility; and

(h) influence or control of manager by investor.

17. The Supervisory Board for a licensed fund will be established and maintained by the manager and make decisions about matters in relation to the administration of that IIF3 fund as shall be set out in the governing documents. The decisions made by the Supervisory Board in relation to these matters shall be binding on the manager except where a matter is one for which the Program Delegate has responsibility under the licence. In such an event the decision of the Program Delegate, if contrary to that of the Supervisory Board, shall be final and binding upon the manager.

PART 4 – ASSESSMENT OF PROPOSALS FOR VARIATION TO GOVERNING DOCUMENTS

18. In making a decision on whether to vary any provision of the governing documents, the Program Delegate may seek the advice of the Board and may seek the advice of other third parties.

PART 5 - BOARD TO HAVE ADMINISTRATIVE RESPONSIBILITY FOR THE PROGRAM

19. The Board has administrative responsibility for the IIF program, subject to the restrictions imposed by the Industry Research and Development Act 1986, in particular section 19A, on the functions that may be conferred on the Board.

Where the Board provides advice to the Program Delegate in accordance with these directions, the Program Delegate must consider the advice of the Board and advise the Minister of any such advice where requested to do so by the Board.

20. The Board may advise the Minister, or the Minister may request advice from the Board, on non-financial administration matters relating to the program, including the extent to which the program is meeting its objectives.

21. The Board may collect and analyse data on the performance of the program, provide advice to the Minister on such performance, and will cooperate with any independent evaluation of the program.