Selling Shares In Your
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
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
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