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Private Placement Financing

We have already discussed the differences between seed capital and venture capital. If you are starting a business, the cash you are collecting is called seed capital. What follows seed capital are those funding stages: series a, series b, series c funding. If you are not very informed about the early stage of investment, here you will discover everything you need to know about seed funding and private placement financing.

Every funding round has a different maturity level, different type of investors, the purpose for raising funds as well as how they are allocated. When a business gets seed capital, you should have enough money to build and launch your product.

Series A, B, C Explained

In the series a funding round you can have more money to promote the product on different markets and to expand your user base. That’s why you should have a business model for long-term profit. In the series a funding, there is more politics involved than in the seed capital round. Angel investors don’t have much influence in series A funding.

Series B funding is the next development stage of one company. Investors who fund a business in series b round, make it expand market reach. In this funding round it is more clear how much the business will expand and how much money every investor can obtain. Series b funding round implies investing in further development of business, particularly sales, technology, support, advertisements.

In a Series C funding round, investors continue to invest additional capital with the goal to double the invested money. In the series C round one company has device to acquire another company.

Venture Capital Financing

If you want to raise venture capital, you need to consult a corporate lawyer with experience in structuring a plan for venture capital financing. With professional legal help you can close the investment documents faster. You need to recognize the standard market practice, to clarify the deal terms, when to stay firm and when to hand over to the investor.

It is important to check your legal documentation with a lawyer and have all your paperwork ready for due diligence.

  • employees records
  • past financing
  • corporate structure and establishment
  • client contracts
  • intellectual property
  • cap table

What are typical legal costs for each funding round?

  • Legal Consultation
  • Letter of Intent
  • Term Sheet
    Subscription Agreement
  • Shareholders’ Agreement
  • Amended Articles
  • Board Resolution
  • Board Minutes

Selling Securities in Ontario

If you want to sell your company’s securities in Ontario, you must prepare a document called a prospectus. Every Canadian province has different securities laws, but they are adjusted and well harmonized.

A prospectus contains all the details about disclosure, key information about your company, and the securities you offer. Every security trade has to be made by a person or a company that is registered in accordance with the provisions of the Securities Act (Ontario).

A prospectus can become effective in any other Canadian province as opted by the issuer or selling securities holder through a Passport System.

There are different versions of this prospectus document, and what version you need depends on your company development stage or the nature of your securities offering. Four main types of prospectus documents are:

  • the long-form prospectus
  • the short-form prospectus
  • the shelf prospectus
  • the post-receipt pricing prospectus

In some cases, a securities offering can be done without a prospectus.

This is called private placement offering or exempt distribution. Usually private companies can sell their securities without a prospectus.
One example of exemption is when existing shareholders of the company that has already issued shares have the right to purchase those shares. If you want to know when a prospectus document is not required, you can check the National Instrument 45-106 Prospectus and Registration Exemptions list to find out.

The exempt market alludes to the subdivision of Canada’s capital markets where securities can be sold without a prospectus document (private placement). Investors who buy securities in the exempt market have limitations in the ability of reselling the securities.

Private Issuer Exemption

private placement

Whether the company is private or public, securities law applies to every company that issues shares. Given that you can issue shares in a private company, securities laws apply to you as well.

According to Ontario provincial legislation, the distribution of securities is not allowed unless the company has a prospectus document or has an exemption from that requirement (private issuer exemption).

A company that is not obliged to have a prospectus can issue shares to individuals that are not the public.  However, even if you are sure that exemption is available, you should consult a securities lawyer and fill in the form for risk acknowledgement providing the proof that those individuals are qualified to be excluded.

Private Placement in Canada

Private placement is often issued to save the time and expenses required for preparing and filing a prospectus document. Requirements for disclosure of private placement are more flexible than for disclosure of public offering. That’s why private placement is an alternative and more popular way of distributing securities.

If the public demand for the securities is not broad, share issuers can choose private placement financing to a limited group of investors instead of using a prospectus.

When an issuer doesn’t use a prospectus, liabilities associated with a prospectus offering are avoided.

A reporting issuer is a public entity in Canada with open-ended agreement and disclosure accountabilities. He can access capital through a prospectus offering. A non-reporting issuer is a private entity with few allowances and disclosure accountabilities.

An issuer may become a reporting issuer by certifying a prospectus in one or more Canadian provinces.

In addition, there are other ways to become a reporting issuer in Canada such as exchanging securities with shareholders of a reporting issuer or publishing the securities of an issuer on the Toronto Stock Exchange. Distributing securities in Canada through private placement will generally not evoke an issuer to become a reporting issuer.

The following are some of the most commonly used private placement exemptions:

Accredited Investor Exemption- issuers can distribute securities to individuals and organizations that have certain asset or income thresholds or other set characteristics.

Minimum Amount Exemption
Offering Memorandum Exemption
Asset Acquisition Exemption
Petroleum, Natural Gas and Mining Properties Exemption
Additional Investment in Investment Fund Exemption
Existing Security Holder Exemption
Private Issuer Exemption
Family, Friends and Business Associates Exemption

This is only valid when the initial exempt sale of securities takes place. When an investor wants to resell exempt securities to other investors, he must file a prospectus or to have an available prospectus exemption.

How an exempt offering is structured depends on:

  • the type of securities being offered
  • The prospectus exemptions being relied on
  • the time frame involved

Closing Memorandum and What’s Next

The closing memorandum document is used in completing a private placement of common shares in Canada. The closing agenda identifies the members of the working group, gives a summary of the events that occurred after signing of the engagement letter and prior to closing, and lists the documents that are provided at the closing of the offering and by which party.

What should be done after closing memorandum:

The Company should notify the Exchange
-Press Release and Material Change Report of the company should announce the closing of the offering

-The company should fill the Form 45-106F1s

-The net proceeds of the offering should be applied as set forth under “Use of Proceeds” in the Offering Memorandum.

Starting from the date of the Offering Memorandum, the company will not sell Common Shares or other securities except as contemplated in the Underwriting Agreement

– The Exchange should send confirming listing of Shares

All fees that are paid for filling are at the expense of the corporation. The fillings have to be filed by the corporation itself. The distribution of securities can legally occur in the offering jurisdictions with no need to fill a prospectus or offer memorandum.

Documents that are most commonly used for private placement in Canada include a business plan, an information memorandum, and meetings notes between the company and company counsel regarding corporate housekeeping. The engagement letter and preliminary negotiations and terms of the offering are also used.

Individuals who represent the underwriting syndicate are usually the managing underwriters. If there are more of them, one is chosen to represent on behalf of other underwriters for matters of administration.