TORONTO — The Business Development Bank of Canada (BDC) has said it will remove restrictions that have prohibited some VCs from investing in companies that make and sell military equipment, The Logic has learned.

In an email sent to investors on Monday and seen by The Logic, Geneviève Bouthillier, executive vice-president of BDC Capital—the Crown corporation’s venture capital arm—said BDC was prepared to “alleviate” restrictions on fund documents to allow investors to back companies making military products and services for Canada’s defence and security sectors, and those of allied nations.

In exchange for removing the barriers, Bouthillier said that BDC will ask fund managers to conduct enhanced due diligence and to work with it on a new reporting framework for defence-related investments. 

BDC did not answer The Logic’s questions about the changes ahead of publication. The move comes as the federal government ramps up spending to grow Canada’s military and defence industry. The 2025 budget committed $6.6 billion over five years to the effort, including a $1-billion BDC program to finance small and medium-sized businesses in the sector. 

BDC has a massive reach across lending and investment in Canada. It committed $11.5 billion in new loans and equity financing to small and medium-sized businesses in fiscal 2025 and serves as Canada’s largest venture capital investor, backing startups and scaleups directly, along with many of the VC funds that invest across the country. 

Investors who spoke to The Logic confidentially because they weren’t authorized to speak to the press said BDC’s investment conditions made it difficult for them to raise a defence fund in Canada or invest directly in companies in the sector. 

It’s typical for banks, fund managers and investment firms such as BDC to have “exclusion lists” that blacklist companies operating in sectors they deem ethically dubious. One fund manager said BDC’s conditions on defence spending were particularly strict. They said their firm recently passed on investing in a defence-tech startup because their limited partner’s contract with BDC prohibited it. 

The general partner said BDC’s offer to roll back restrictions is necessary to grow Canada’s defence sector in proportion to Ottawa’s ambitions. “We have to build up a domestic defence industry, and for that, we also need venture capital investing into it so it feels like it’s going in the right direction,” they said. 

Another investor who manages a fund-of-funds—which received BDC money and invests in other VC funds—said BDC’s offer won’t automatically translate to more investment for defence funds and startups.

They said that BDC is just one of many investors that back their funds and others like them—all of which have different rules around how funds can spend their money. That means that while BDC may remove its defence restrictions, other limited partners, like a bank or pension fund, for instance, may not. “It’s a very important step,” the investor said, “but it doesn’t unlock all this new money for the sector in and of itself.” 

In its email to fund managers, BDC said defence investments still need to comply with laws and regulations, as well as Canada’s strategic national security objectives and international human rights commitments.