Canada: Show Me The Money - Raising Capital For Start-Up Businesses

This article has been reproduced by permission and originally appeared in the November, 2011 edition of "Rely on TDS", the e-newsletter of TDS Law and in Country Guide Magazine (2011). The article was written by Glen Agar of the TDS Business Law Practice Group.

Source: Thompson Dorfman Sweatman LLP (TDS Law)

You have an idea which you believe you could turn into a business, and you are certain that it is a good idea, defining a "good" idea as one that makes lots of money. You talk to your confidants and are reassured that it is a good idea, and in fact, most of them think this is a fantastic idea - and there is no telling how much money a "fantastic" idea can make, but it is surely big.

You have always fashioned yourself as an entrepreneur and you can easily envision yourself in the oversized leather chair leading the charge in the board room. Your mind drifts as you conjure up the parting conversation with your boss, saying goodbye to the drudgery of your 9 - 5 job.

Or maybe your vision is not as wildly exciting, and you are already an entrepreneur, and your good idea involves expanding your existing business or branching into a new area of business.

In either case, you quickly come to the conclusion that you need more money than your personal resources will provide. So what's next?

Fortunately, you have a good financial advisor and when you sit down with her, she explains that the sources of funds can be grouped into four categories. First, and most obvious, is your own. Second, is from friends, family and close business associates. Third, is from financial institutions who lend money, such as banks and credit unions. And fourth, is from equity investors, such as equity funds or high net-worth investors.

She explains that as you move down the list, the cost of the money gets more expensive. You and your family, friends and close business associates are prepared to risk capital in the hope and expectation that you will make a lot of money once the business is successful. These funds may be provided to the business in many ways, but typically they will be advanced by way of a subscription for shares or a non-interest bearing promissory note, without a requirement for your personal guarantee.

The third group, being the financial institutions, will not purchase shares in your company but will lend the money to your company and charge interest on the funds. The rate of interest charged will be based on the perceived risk of the loan. To reduce the risk, the financial institution will require security, which usually is a charge over all of the assets of the company and additionally, in most cases, will require personal guarantees from you and your business partners.

The benefit of the financial institution is that it is less expensive than the fourth group of equity investors. However, the financial institution, a.k.a bank, has no inkling of altruism and it (and all of its deposit holders of which you may be one) will want the money back, with interest, regardless of whether or not your business is successful. This can add a level of stress which may cause you to look for investment from the fourth group - the equity or angel investor.

The equity investor invests in shares in your company, so there is no debt to repay nor are personal guarantees required from you. You like the option of getting an equity investor as you happen to know a number of very wealthy individuals who may be interested in investing in your company, and you are not keen on the idea of debt and personal guarantees. But equity investors take a conservative view of your business and factor in all of the risks, which means that they will likely want to take a substantial percentage of the shares in your company. It may seem expensive, but in the long run you are better off having a smaller percentage of a successful business than a larger percentage of a business that fails. You are an avid fan of "Dragon's Den", so this starts to make sense. Your financial adviser wisely suggests to you that prior to talking to any potential investors, you meet with a securities lawyer to ensure that you do not run afoul of the securities laws in your province.

The securities lawyer explains that the role of the Securities Commission is to protect the unsuspecting public from snake oil salesmen. As a result, companies trying to raise capital must file a prospectus with the Securities Commission and retain the services of a broker to effect the sales of the shares in the company. This is a time consuming and expensive process. But there is relief in the form of exemptions from these requirements. Your ears perk up as he explains the "accredited investor" exemption. This exemption applies to individuals who fit within a number of criteria including having significant annual incomes, in excess of $200,000, or liquid assets in excess of $1,000,000, thereby being an "accredited investor". Given the accredited investor's financial strength, the Securities Commission deems these investors not to need the protection of the Securities Commission in making their investment decisions.

The securities lawyer sees the gleam in your eye and warns you to be careful and ensure that you are only talking to accredited investors, and not the public, about a potential investment; otherwise, you will be offending the securities laws and potentially subject to serious sanctions.

He also advises you that the provincial government may have a tax credit available* of up to 30% of the investor's investment to make your job of raising funds a little easier, but of course, you need to follow their rules and regulations.

You thank the securities lawyer for this valuable information, and you leave his office full of confidence that accredited investors will be beating a path to your door, begging to invest in your company.

And then the challenge begins!

* Tax credits are currently available in British Columbia, Manitoba and New Brunswick.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions