Structuring your Equity Offering

Prior to reading this article see the previous articles on How to Organize your Ontario Business, How to Incorporate in Ontario and Raising Money for your Corporation.

When setting up a new corporation and/or preparing for an initial equity offering one important consideration is the share structure that will be used for the company. One must consider not only the number and price of shares to be issued to the founders and initial investors but also all other anticipated subsequent rounds of investment required to implement the business plan. This article provides an overview of important considerations when planning your share structure and equity offering.

Founder Shares

Seed money (the money required to pay for initial costs) is commonly provided by the incorporators / founders in exchange for common shares. The number and value of these founder shares are best determined by combining the value of the money invested, uncompensated work performed and the value of the business concept.

When the money provided by the founders is insufficient to implement the business plan a second round of equity financing may be required.

Equity offerings should always be made as part of a broader long-term plan to ensure that control of the corporation is maintained as is appropriate and that ownership is not unnecessarily diluted. The price and quantity of shares to be issued in future raises must be taken into account.

Exempt Offerings

An exempt offering is commonly used for early-stage financing. The general rule in Ontario is that all equity offerings must issue a prospectus (documentation providing information about an offering to potential investors in a prescribed form) and must be sold through a broker / dealer that is registered with the Ontario Securities Commission (OSC).

Exemptions to propspectus requirements are permitted in certain instances. Two commonly relied upon exemptions are the private issuer exemption and the accredited investor exemption.

Generally speaking, when certain requirements are met, the private issuer exemption permits a company that has fewer than fifty shareholders to issue securities to friends, family, close business associates and others that are not the public.

The accredited investor exemption permits a company to issue securities to individuals that qualify as ‘accredited investors’ as defined in the Ontario Securities Act and its Regulations. Simply put accredited investors are persons of sufficient wealth to be exempted from certain restrictions.

Public Offerings

A public offering is an offering that does not rely upon an exemption.

When an Ontario company files a prospectus, offers its securities to the public or is listed on a recognized stock exchange it becomes a ‘reporting issuer’ and is required to comply with continuous disclosure requirements including the reporting of material changes and financial statements, among other things.

A public company does not necessarily trade on an exchange or market.

Exchange Listings

Stock exchanges or over-the-counter (OTC) markets facilitate the purchase and sale of securities. Existing public companies, or those that plan to become public via an initial public offering (IPO), often want to list on an exchange or OTC market in order to increase the liquidity of the shares in the company. Increased liquidity makes shares more desirable to investors and makes it easier for a company to raise funds via an offering.

Exchanges and OTC markets have their own rules to determine whether or not a company is eligible to be listed or traded.

The Toronto Stock Exchange (TSX), The TSX Venture Exchange (TSX-V) and the Canadian National Stock Exchange (CNSX) are Canadian exchanges. The New York Stock Exchange (NYSE) is a large and popular American exchange.

The National Association of Securities Dealers Automated Quotations (NASDAQ) is a large and popular American OTC market. The OTC Bulletin Board (OTCBB), Pinksheets and Frankfurt Open Market Exchange are well known OTC markets that have limited listing requirements.

This blog and the contents herein are for informational purposes only and do not constitute legal advice. Readers are advised to seek legal counsel prior to acting on any matter discussed herein. I take no responsibility for any third-party sites linked, nor is the presence or absence of a link an indication of my endorsement of views expressed.