Nicholas dePencier Wright, Barrister and Solicitor

Licensing and Standards Committee Deputation

2012-02-02T16:32:00.000-08:00

Nicholas dePencier Wright gives a deputation at the City of Toronto Licensing and Standards Committee on Ontario municipal jurisdiction

Structuring your Equity Offering

2010-02-06T15:20:00.000-08:00

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 these 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.

Raising Money for your Corporation

2010-02-06T15:15:00.000-08:00

Prior to reading this article see the previous articles on How to Organize your Ontario Business and on How to Incorporate in Ontario.

Once a corporation has been incorporated and organized, entrepreneurs that cannot fund things on their own often turn their minds to how to finance the company. Broadly speaking a corporation can procure financing either by borrowing money (debt) or by issuing and selling shares (equity). There are also hybrid debt/equity instruments that take on characteristics of both, like preference shares.

Debt

If the incorporator has good credit and collateral a simple bank loan from a chartered bank could be the solution. When a corporation has few assets and no revenues the bank can be expected to require that both the corporation and individual be jointly and severally liable for the amount borrowed and to require security on an asset (such as a house). This means that if the corporation can’t pay the individual will be on the hook and vice versa.

Another option is procuring debt financing from an entity other than a chartered bank like an individual or company. This would involve finding a person willing to make the loan (angel investors, investment clubs, venture capital firms and investment banks might help) and then entering into a loan agreement with the creditor(s). When security is being provided (guaranteeing the debt with an asset) a security agreement is also entered into.

Established firms will sometimes sell a debt instrument via an offering. Generally this requires a credit-worthiness, reputation and scale that newer companies do not have, however.

Equity

Common Shares
Common shares are generally shares with equal voting rights, rights to share equally in dividends and rights to an equal proportion of proceeds upon the winding up of the company. This can be considered to be a proportionate ownership of the corporation. The characteristics of the common shares for a given company can be found in the Articles of Incorporation and can vary.

Common shares can be issued and sold to investors in order to raise funds for the company to carry out its business plan. When a company issues new shares of a given class to new investors it will dilute the percentage of ownership held by existing shareholders. If the shares are voting shares this could even lead to a shift in control of the company.

Preference Shares
Preference shares can have many different traits but generally speaking they are non-voting shares that pay dividends and are senior to common shares upon the distribution of assets when winding up. They are used when a company wants to raise money but existing shareholders do not want to dilute control by issuing common shares and the company does not want to show a liability on the balance sheet by borrowing funds.

If meant to replace debt financing preference shares might be non-voting, callable (the corporation can buy them back) and cumulative (outstanding dividends accumulate if not paid).

It is not uncommon for investors in start-up or venture companies to request convertible preference shares (or, in the alternative, convertible debt) rather than common shares. Convertible preference shares can act like debt until the company becomes profitable, at which point the preference shares can be converted into common shares.

Equity Offerings

Usually a company’s founder(s) provide the initial funds to set up business. Shares are usually issued in consideration for the money and uncompensated labour invested and for the value of the business concept. If additional funds are required to develop and operate the business an equity offering may be made.

When a company makes an equity offering of its shares it must be compliant with all applicable securities laws and regulations. The general rule is that a prospectus must be filed and a registered dealer used to broker the transactions. In order to make it easier for start-up and growth stage companies to finance growth via an offering numerous exemptions to these requirements are permitted.

The documents required can vary depending on the nature of the offering. Exempt offerings for a start-up company might use an offering memorandum a subscription agreement and an acknowledgment of obligation binding the new shareholder to the shareholders agreement, if any.

Feel free to get in touch at 'info AT nickwright.ca' if you are raising money for your corporation and have any questions. Stay tuned for the next blog: ‘Structuring your Equity Offering’ for information about how to organize your corporation’s equity offering.

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.

How to Incorporate in Ontario

2010-02-06T15:10:00.000-08:00

If you aren’t sure if incorporation is appropriate for your business, read ‘How to Organize your Business in Ontario’.

A corporation is a separate legal entity set up for the purpose of carrying on business. It limits the liability of the business owners and can be used to defer and reduce taxable income. A corporation is also useful when a company seeks to raise funds by selling shares to investors.

Sometimes people incorporate using an online service provider with template documents. This can be problematic as frequently the individual incorporating does not ensure that the corporation is properly organized and because the documents may not adequately reflect the unique needs of the corporation.

This is especially true when the corporation consists of numerous shareholders or intends to raise funds via an offering. Corporate changes are most easily made at the time of incorporation or soon thereafter when there are few shareholders. The cost of waiting to deal with fundamental issues until the corporation has grown in profitability or number of shareholders can be significant.

With these points in mind here is an overview of the steps involved in incorporating and organizing a corporation in Ontario.

Federal or Provincial

In Ontario a corporation can be created under Federal law or under Provincial law. The laws in the respective jurisdictions are similar but not identical. Although there is no rule, often times those starting a company that will operate solely in Ontario incorporate Provincially while those also operating in other jurisdictions incorporate Federally. I like incorporating Federally because of the Federal government fees and the online service centre located at: http://www.corporationscanada.ic.gc.ca/eic/site/cd-dgc.nsf/Intro

Naming your Corporation

One can either incorporate a numbered company (with a number as a name) or a named company. When incorporating a named company, prior to incorporation you must perform a NUANS search to ensure that the name is not confusingly similar to other existing names. A corporation's name must be distinctive from existing business names and trademarks and contain a legal element such as ‘incorporated’, ‘inc.’, ‘corporation’ or ‘corp.’, among others. Companies that wish to protect their corporate name may also wish to register it as a trademark. Non-share corporations do not have a legal element to their name.

Filing Articles of Incorporation / Letters Patent

After a successful NUANS search you then file your Provincial or Federal Articles of Incorporation (for share companies) or Letters Patent (for non-share companies). This document structures your corporation stating for share companies the number of authorized directors, the permissible classes of shares and their characteristics and restrictions placed on the activities of the corporation, among other things.

The Articles / Letters Patent should be tailored to the corporation as is appropriate. For example, professional share corporations usually must have restrictions on the corporation’s activities and share corporations seeking to do an exempt offering can be required to have certain clauses in the Articles.

Corporate Organizing

Once incorporated the corporation is required by law to be properly organized. This includes having bylaws, appropriate founding resolutions, issuing shares and having the appropriate registers and ledgers.

Shareholder Agreement

In addition to organizing the share corporation it is often wise to have a unanimous shareholder agreement. A unanimous shareholder agreement is an agreement between the shareholders of a corporation and the corporation itself that governs the relationship between the shareholders and between shareholders and the board of directors. At a minimum a shareholder agreement usually puts restrictions on the transfer of shares to ensure that unwanted partners are not introduced to a closely held company. Shareholder agreements can also include other clauses such as requiring shareholder approval for certain actions and guaranteeing continued involvement and/or control for founding shareholders.

Feel free to get in touch at 'info AT nickwright.ca' if you are incorporating your company and require assistance. Stay tuned for the next blog: ‘Raising Money for your Corporation’.

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. The third-party links may not be applicable or appropriate for incorporating in Ontario and may contain out of date or inaccurate information.

How to Organize your Ontario Business

2010-02-06T15:05:00.000-08:00

Business owners often have questions about how to organize their business and whether or not it is appropriate for them to incorporate. An understanding of the different ways a business can be structured is necessary to decide what is appropriate for your business and its needs.

In Ontario a business can be organized in one of four different ways: as a sole proprietorship, a partnership, a limited liability partnership or as a corporation.

Sole Proprietorship

A sole proprietorship is when an individual carries on business as an individual. The sole proprietor is liable for the obligations of the business and income is taxed as the individual’s yearly income. A sole proprietorship might make sense when a new business is expected to lose money initially (losses can be deducted against individual income), funds do not need to be raised through an offering and there is negligible risk of liability.

If an individual wishes to carry on a sole proprietorship under a name other than his or her own, he or she is required to register the name with the government under the Business Names Act (Ontario). Failure to do so could cause problems if the individual wishes to commence an action in the name of the business.

Partnership

A Partnership is similar to a sole proprietorship except that there is more than one proprietor. All partners are jointly and severally liable for the liabilities of the business. A partnership can only deduct losses against the profits of the partnership.

If you are working in conjunction with one or more people in a business venture the business may be deemed to be a Partnership pursuant to the Partnerships Act (Ontario). It is wise for partners to have a partnership agreement that puts the nature of the relationship in writing. If there is no agreement the Partnerships Act (Ontario) will apply.

A Partnership might make sense if two or more people are starting a business, trust one another, and are not concerned about potential liabilities.

Limited Liability Partnership

A limited partnership, governed by the Limited Partnerships Act (Ontario), is a partnership where the liability of the partnership is limited to the general partner(s) that exercise control of the business. The general partners must file a declaration in order to form a limited partnership.

A limited liability partnership might make sense for partnerships involving numerous partners where liability is a concern. Professional firms where the practitioners are also owners often use this model. As with a partnership, when forming a limited partnership, it is wise to have a partnership agreement in writing.

Corporation

A corporation is a separate legal entity set up for the purpose of carrying on business. Most corporations are share corporations where the company is owned by its shareholders. Non-share corporations have members instead of shareholders and are often used for co-ops, not-for-profit organizations and charities.

A share corporation is ideal for companies that wish to protect owners from business liabilities, that intend to raise funds via an offering and/or that are expected to make money and wish to reduce their tax exposure.

Stay tuned for the next blog 'How to Incorporate in Ontario'. Feel free to get in touch at 'info AT nickwright.ca' if you are structuring your business and require assistance.

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.

Welcome...

2010-02-06T15:00:00.000-08:00

Welcome to the blog of Nicholas dePencier Wright, Barrister and Solicitor.

I am a corporate lawyer practising in Toronto, Ontario, Canada. My practice is focused on helping start-up and growth-stage companies structure, negotiate and finance their business strategies.

Put simply, I will take care of all of your company's legal needs from incorporation to public offering and beyond. I also provide strategic business consulting as is appropriate.

For more information about my background and the services that I provide see my website at: http://www.nickwright.ca

Stayed tuned for future posts about issues and events relevant to growth-stage business and the entrepreneurs that run them.

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.