Selling shares of your company is significantly different from walking into a bank for a loan for several reasons.

The first difference is that selling shares is subject to Provincial Securities Legislation, which fixes by law how one can go about it.

Now before going on with the complexities, it is easy to organize a small business with a few close shareholders who together want to operate a company. Its basically considered a private transaction. The legislative intent is to protect against widely soliciting prospective purchasers of shares in your company.

In Ontario, a prospectus, which must be approved by the Ontario Securities Commission, is required unless an exemption is available. For example, you can sell shares to a "sophisticated investor", or for a total amount below a certain threshold, or by soliciting less than a certain number of individuals, all without issuing a prospectus.

A second major difference from taking on debt, which is repaid and goes away, is that shareholders actually own part of the business and have certain rights attached to their shares. These rights can vary among classes of shares and the rights continue for as long as these shares are issued and outstanding or changed according to a legal process. Shareholders can take legal action under incorporation legislation and common law if it can be proven these rights are being violated.

A third major difference is the structure of the equity market.

Private placements, where the entire share issue is purchased by only one or a few individuals or institutions, are generally taken up by merchant banks, investment banks, pension funds, venture capital companies, investment funds and wealthy individuals.

Because you do not know the market, it is likely you'd use an intermediary of sorts. These types of deals can be syndicated by selling agents who work on a combination fee and commission basis. The commission is generally based on the "Lehman Scale" which is a percentage fee based on the amount financed. The percentage varies with the amount of the financing.

Going public, where shares are offered to a large number of investors, are handled through investment dealers who either purchase the entire issue for resale or act as agents on the sale of the issue. Going public brings many obligations and is beyond the scope of this article, but it is worth mentioning that the costs of obtaining and maintaining a stock market listing are significant, so you want to make sure that these costs are relatively insignificant to you.

A fourth difference, and this is where you have to love the one page loan proposal, is the prospectus documentation required.

Even if a prospectus is not issued, you must still disclose similar information in an offering document. Among other items, you must fully describe the securities offered, the history and business of the corporation, what you intend to do with the proceeds, what the risk factors are, officers and directors of the corporation, who the promoters are, what interest they hold and what rights or advantages they have, and financial projections and assumptions.

This offering document, and a formal business plan, becomes the primary selling tool. Typically, the businessman or their agent will make many presentations to those institutions described above as well as to accounting and legal professionals, financial intermediaries and other matchmaking services.

Once a serious investor is found, confidentiality agreements are signed and the investor will investigate until they are satisfied either a good opportunity exists or that they are not interested in the deal. This process may have to be repeated several times before the right investor is found. If the investor is still interested after this investigation, negotiations are entered into to determine the final structure of the deal.

Be prepared by knowing exactly what you are prepared to give up to obtain the funds and with a "walk-away price" where you cancel the deal if you are not prepared to meet the investor's conditions.

This is extremely important because equity investors are partners in your business. You want them in on your terms, and you want a relationship you can live with.


© 2015 John B Voorpostel CPA, CA, CMB
iaccountant.ca