Start-up crowdfunding exemption: facilitating start-up financing or risky investments?

Last month, an article on this blog summarized the recent amendments to the accredited investor exemption which came into effect May 5, 2015. Ordinarily a company cannot issue securities unless it has filed a prospectus. In certain circumstances, such as those described in the accredited investor exemption, a company can sidestep this requirement. This exemption assumes that accredited investors have a certain degree of financial literacy in order to assess an investment without a prospectus and that, if the company’s situation takes a turn for the worse, the investor’s future financial prospects will not be devastated.

One of the aforementioned amendments requires a corporation to acquire a Risk Acknowledgment Form from investors before distributing securities. This form states (in bold letters) “WARNING! This investment is risky. Don’t invest unless you can afford to lose all the money you pay for this investment.” With such a conspicuous disclaimer, it seems one purpose of the amendments was to make sure investors appreciated the risk involved.

Recently, the securities regulators of British Columbia, Saskatchewan, Manitoba, Québec, New Brunswick and Nova Scotia announced they had introduced, or intended to introduce, a “start-up crowdfunding exemption”. Like the accredited investor exemption, this relieves the issuer from having to file a prospectus.

The goal of crowdfunding a project is to raise funds to pursue a certain project. This phenomenon has been successful in the past where companies have had people invest in their project in exchange for the pre-sale of the product of their project or for promotional items. Alternatively, equity crowdfunding allows a business to issue securities in exchange for an investor’s monetary contribution to the project.

On the one hand, the start-up crowdfunding exemption provides a corporation with an alternative avenue for raising capital which avoids the potential costs associated with preparing audited financial statements and a prospectus as well as concerns about control of the company that can arise with venture capital. On the other hand, the same concern about an individual’s ability to accurately assess the risk associated with an investment arises as with the accredited investor exemption.

Although the exemption allows the corporation to issue securities, there are safeguards in place to protect investors. Precautions include having the business file a prescribed offering document online outlining its idea, limiting the maximum investment amount to $1,500 per individual and requiring the crowdfunding campaign to be made through a funding portal that meets the required conditions.

Despite these protections, the British Columbia Securities Commission cautions investors that investing in a start-up or small business can be risky and that an investor could lose their entire investment. Additionally, the Commission cautions that investors may have to hold onto their securities indefinitely if they are unable to find a purchaser.

Ultimately, the investor should do some homework before investing. While the start-up crowdfunding exemption may provide investment opportunities not previously available, there are risks associated with exempting crowdfunding projects from the scrutiny of securities regulators.

The author would like to thank Corey McClary, summer student, for his assistance in preparing this legal update.

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Pre-transaction confidentiality agreements: sword or shield?

A recent lawsuit has again highlighted the importance of the terms of confidentiality agreements entered into between potential targets and acquirers in advance of an M&A transaction.


It is usual practice in both the public and private M&A context that bidders who are looking at acquiring either the assets or shares of a target company in a consensual deal will first be expected to negotiate and enter into a form of non-disclosure agreement (NDA) or confidentiality agreement (CA). The CA will often provide standard protections for the non-public or confidential information that the target entity may share with the potential acquirer as part of the due diligence process that may be undertaken in advance of a potential M&A transaction.

Depending on the nature of the transaction and appetite of the parties, these NDAs can either be heavily negotiated, or entered into very quickly without in-depth legal review, often using one of the parties’ standard form of agreement.

The NDA addresses permitted uses of the information that may be shared pursuant to the terms of the agreement for a fixed time period. The agreement may go further to not only restrict the use of such information in the future, but to include standstill provisions for a set period of time restricting the launch of a hostile transaction without the consent of the target.

Recent lawsuit

On July 7, 2015, IOU Financial Inc. announced that it had commenced legal proceedings against Qwave Capital LLC and its manager before the Québec Superior Court in the face of Qwave’s unsolicited partial offer for the shares of IOU Financial commenced in June 2015. IOU alleged that Qwave had misused confidential information and acted in a manner not permitted by the confidentiality agreement entered into by the parties in November 2014, and sought an order suspending Qwave’s hostile offer.

On July 17, 2015, the parties announced that they had settled the matter, with Qwave agreeing not to take up and pay for shares tendered to its offer prior to September 2015 and IOU agreeing to waive the application of its rights plan until such date. Given the settled outcome, IOU terminated its proceedings with the Quebec Superior Court against Qwave. IOU also announced that it is continuing to pursue alternative transactions in the best interests of IOU and its shareholders.

Bottom line

The provisions of a CA are meant to safeguard the confidential information of the party providing such information, but their use may also be extended by a target to attempt to thwart future non-friendly overtures by a bidder. The case law regarding the ability of a bidder to initiate a hostile transaction after having entered into a CA with the potential target is mixed and highly fact-specific. In this case, the settlement with Qwave has provided IOU’s board with a longer time frame to complete its strategic review process.

This again reiterates that parties to an NDA or CA should think carefully about their current and future intentions with respect to the relationship when entering into such an agreement. It is prudent for all parties to exercise caution and carefully review the wording of CAs at the time they are being entered into in order to mitigate the risk of litigation based on future actions.

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M&A and online corporate matchmaking

As previously discussed on this blog, the first half of 2015 has seen significant mergers and acquisitions activity. According to data from PricewaterhouseCoopers, the $875 billion in M&A deal value thus far in 2015 marks a 9% increase over M&A deal value this time last year. For this reason, among others, there is optimism that 2015 will be the best merger market since the financial crisis. And growth is expected to continue.

Conveniently, as the market is heating up, a new trend has been sparked in the M&A world: corporate matchmaking. In practice, this movement is exactly what it sounds like: it’s basically a form of online dating… but for companies.

There are now a variety of platforms that allow CEOs to offer global business opportunities, such as a potential M&A deals, to possible corporate suitors online. Banks, financial companies, and other M&A advisors pay a fee to access the platforms and then offer the opportunities to their client members.

One such company is The Opportunity Network. The Opportunity Network is a digital platform which allows users to publish strategic business opportunities (provided each opportunity is worth over $1 million) on an anonymous basis. The posts can be accessed by reputable financial institutions or service providers who communicate those opportunities to prospective buyers. Interested buyers may then take the next steps to connect with sellers via email.

The MergersClub offers a similar corporate matchmaking service to its members. The MergersClub is a free service available to M&A professionals, and offers a private and secure online space within which members may connect, build their respective networks, share mandates, and accelerate their deal making processes. The platform enables members to quickly and effectively explore thousands of mandates (including on an international scale) with a view to uncovering potential counterparties for a transaction and uploading, reviewing, and even buying or selling mandates.

Finally, DealNexus is yet another example of corporate matching at work. The DealNexus platform facilitates corporate document sharing and allows transactions to pass through a secure cloud. Large-scale mergers and acquisitions are just one of the endeavors it facilitates, providing members immediate access to an extensive network comprised of thousands of strategic and financial acquirers and capital partners.

So will these new online corporate matchmaking platforms lead to increased M&A dealmaking? As with most things, only time will tell, but in the meantime we recommend that both potential suitors and their targets do their due diligence.

The author would like to thank Gillian Moore, summer student, for her assistance in preparing this legal update.

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Global M&A driven by record valuations

Global M&A continues to rise with over $2.19 trillion recorded in the first half of 2015, according to Dealogic data. This is an increase of 31% from $1.67 trillion announced in the first half of 2014, and the second highest half year volume on record, following $2.59 trillion recorded in 2007. In addition, US targeted M&A reached a half year record high of $1.03 trillion this year, the first time on record any nation has broken the $1 trillion mark in a half year period.

These gains have been driven by an increase in “jumbo” deals, which are mergers that are greater than $5 billion in value, and account for 43% of all activity. Companies may find, however, that these rising valuations result in a difficulty to strike new deals.

When a company has already cut costs and is struggling to find growth, M&A is a way to increase revenues. These high valuations pose the risk that a company will borrow too much money or overstate the savings it can achieve from the new deal.

Bankers, lawyers and academics interviewed by the Financial Times raise concerns about the sustainability of the current boom. While some analysts claim the current cycle is very different from the one that preceded the financial crisis, it is possible that the high valuations coupled with a growing number of hostile deals indicate that we are headed towards a 2007 bubble. At this point in time, it is probably too early to tell.

The author would like to thank Simone Nash, summer student, for her assistance in preparing this legal update.

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Canadian midyear M&A check-in

Now that we have entered the second half of 2015, it’s helpful to take a look at M&A numbers from the first half of the year and predictions for what lies ahead. A report recently published by MergerMarket provides a number of key data points and dealmaker survey results that may be a barometer for the direction of Canadian M&A.

In Q1-2015, the aggregate value of Canadian M&A deals was US $8.6 billion, spread over a total of 112 deals. This is the lowest quarterly aggregate deal value since Q4-2008, when a total of only 78 deals worth US $7.4 billion were recorded. Inbound M&A activity into Canada was also slow, with only 55 deals worth an aggregate of US $4.2 billion during Q1-2015, being the lowest quarterly aggregate inbound deal value since Q1-2009. Overall, in the first five months of 2015, there was an 18% decline in year-on-year M&A volume (for a total of 215 deals) and a 35% decline in year-on-year M&A value (for a total of US $23 billion).

Although these figures are sobering, the survey results show that dealmakers are predicting that Canadian M&A activity will increase in the coming months. 76% of survey respondents expect that M&A will increase “significantly” or “somewhat” in the next year. Only 16% of respondents predict stagnant M&A levels, with a slim 8% expecting that M&A will decrease.

Perhaps not surprisingly, the majority of respondents (80%) expect that the Energy, Mining and Utilities sectors will continue to be the busiest areas of M&A activity in the next year, as prospective acquirers take advantage of undervalued Canadian assets. A depressed economy and a low Canadian dollar may create M&A opportunities, as Canadian businesses with strong fundamentals lose value and become attractive acquisition targets.

In terms of deal size, 76% of respondents predict that lower and middle market (i.e., between US $26 to $100 million) deals will continue to dominate M&A, in part because smaller deals are more affordable and there is still room for local industry consolidation. However, the remaining 24% of respondents expect that deals in the higher end of the market (i.e. between US $101 to $500 million) will prevail, based on the expectation that foreign acquirers with strong balance sheets will take advantage of undervalued Canadian targets.

While none of these predictions are certain, such optimism signals that dealmakers may be preparing for increased M&A activity in the months ahead.

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China’s outward foreign direct investment could soon surpass the United States

Recently, Spencer Lake, the Global Head of Capital Financing at HSBC, reported that China is positioned to overtake the United States in outward foreign direct investment (FDI) in the coming few years. The most widely-used rule of thumb for FDI is a 10% (or greater) investment in voting shares in a foreign-owned company, and thus, it includes foreign mergers and acquisitions. The significance of this statistic is that it can be used as an indicator of economic development. It comes as no surprise that the United States has been a leader in outward FDI over the past few decades – ranking first in this statistic in almost every year over this span. Currently, at approximately $337 billion, US outward FDI comprises nearly a quarter of the entire world’s outward FDI; by comparison, China’s 2014 outward FDI is only $116 billion. With respect to outward FDI, a key difference between the two nations, however, can be seen in their recent growth rates. Over the past five years, China’s outward FDI has been booming at an average annual rate of 15% (Spencer Lake cites a growth rate of 19%, which appears to be an over-estimate). Compared to the US’s growth rate over the same period (approximately 3%), China is quickly making up ground. If their respective growth rates are maintained, China would surpass the US as the world leader in outward FDI by 2024.

The first response to this proposition is that a 15% growth rate is unsustainable over a 10 year period. The explanation that Lake provides for this prediction, however, is persuasive. He argues that this trend has been the result of a deliberate, targeted effort on the part of the Chinese government: Firstly, China is currently sitting on approximately USD $3.7 trillion in foreign exchange reserves. Secondly, other foreign currencies are undergoing comparative depreciation. As a consequence, China is economically well-positioned to implement an outward FDI strategy. Through some recent deregulation in foreign investment, privately-owned enterprises (POEs) are further incentivized to ramp up investments abroad.

One of the observations that might support this hypothesis is the increase in both the number and total value of foreign M&A deals by POEs. From 2013 to 2014, the number increased 23% to 145 whereas the total value of the deals increased 29% to $14.7 billion. Indeed, Lake projects a continued strong foreign M&A presence from China for the foreseeable future. On the other hand, from 2012 to 2013, the number of Chinese foreign M&A deals by POEs decreased by 6% and total value decreased by 43%. As a result, it may be premature to conclude that the recent increases are a result of the Chinese government’s strategy and that the outward FDI projections will ultimately be realized so quickly.

The author would like to thank Peter Georgas, summer student, for his assistance in preparing this legal update.

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Intellectual property considerations in M&A

The acquisition of a business, whether via the purchase of either its shares or its assets, often involves the transfer of intellectual property. Generally, in the former scenario, the transfer of IP is by operation of law, whereas in the latter case, the specific intellectual property rights subject to the transfer are specifically detailed, usually in a schedule to the purchase agreement governing the deal. In either case, careful attention must be paid to the IP during the diligence phase in order to effectively capitalize on the full value of the IP’s intangible rights.

Below is a non-exhaustive list of  issues that ought to be considered in the context of the purchase or sale of IP:

  • Determine whether proper vesting of title has occurred in the case of intellectual property created by employees or independent contractors of the business.
  • Delineate the scope of intellectual property licenses that the target business has rights under.
  • Understand the scope of the risk of acquisition of the intellectual property in light of any sources of potential intellectual property infringement.
  • Understand the royalty obligations of the target business.
  • Understand the tax implications that arise from obtaining title to the intellectual property as opposed to licensing such rights from a third party.
  • Understand the tax implications that arise from any involvement in the rights acquired of jurisdictions where tax treaties have been concluded.
  • Understand when the acquisition of intellectual property assets constitutes prohibited anti-competitive acts under sections 78 and 79 of the Competition Act. These sections aim to prevent acts that have or is likely to have the effect of preventing or lessening competition substantially in a market by a person with substantial or complete control of a class or species of business.
  • Determine whether the acquisition of the intellectual property falls within the requirement for merger reporting of asset acquisitions under Part IX of the Competition Act. This Part provides for the reporting of asset acquisitions where amounts relating to the parties’ assets and revenues exceed specified thresholds.
  • Identify the jurisdictions that the intellectual property rights pertain to and determine whether each jurisdiction requires a separate assignment of rights.
  • Note the implications of the timely recording of the transfer of intellectual property rights in each jurisdiction, for example, implications on the continued ownership of the rights (for example, in the case of trademarks), the availability of infringement actions, and the receipt of other benefits that flow from the rights (for example, royalties).

The author would like to thank Larissa Leong, summer student, for her assistance in preparing this legal update.

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Tips for early stage companies and thinking ahead to an exit

It is trite to point out that an early stage company faces a difficult balancing act in weighing the costs of “overhead” against its operational capital needs. At the very beginning, there is often very little cash on hand, and its allocation is not up to much debate, as the saying “keeping the lights on” can prove to be quite literal in the circumstances. As the company moves along its life cycle, it may gain some attention from angel investors, and spending questions will become a bit more difficult. Legal costs are often a painful experience for a start-up that needs cash to pay for basic necessities. However, while good legal advice and housekeeping will not produce cash flow, they can save a lot of money down the line. This post discusses issues that may cause headaches and create significant costs for start-ups in the context of an exit.


The integrity of its intellectual property portfolio is absolutely key to a promising start-up. As such, a start-up would be well-advised to invest in intellectual property protection measures. Unlike the other issues discussed in this post that can create significant costs down the road, material issues in the intellectual property portfolio—especially difficulties in ascertaining ownership or the patentability of technology—can be fatal to a successful exit, or substantially affect valuation. Difficulties are exacerbated here, as intellectual property is not a straightforward area of the law and can surprise unseasoned innovators with unexpected pitfalls. One such pitfall that has the potential to sink the value of a technology in a remarkable number of start-ups is premature disclosure of otherwise patentable technology, which can result in losing the ability to patent the invention in the future. Good legal counsel in the intellectual property area is an absolute must. Fortunately, most founders are aware of the importance of quality advice in this area.

Raising capital

Once a start-up has advanced far enough in its life cycle to attract venture capital funding, which comes with such venture capitalists’ lawyers’ scrutiny, capital raising efforts will usually be decently organized and should not prove to be a mine field in the due diligence phase of an exit. Problems usually stem from early stage capital raising from angel investors and “friends”. Securities laws are complex. These are not waters that a start-up can safely navigate without at least basic legal advice. Mistakes are often made, and non-compliance will require rectification after the fact that can prove to be much more costly than initially investing proactively on necessary advice. In the context of an exit transaction, especially a share purchase, irregularities in issued capital can create significant obstacles.

Other “housework”

Two additional items that can often create difficulty for start-ups are employment and consulting agreements and option plans. With respect to the former, it is important to involve an intellectual property practitioner to create platform legal agreements that the start-up can use with its employees and consultants going forward. Once created, the start-up should be wary of departing from these templates without further legal advice. The latter item—an option plan—will often present a problem following its adoption. While the vast majority of start-ups obtain good legal advice for the creation of the plan, its administration is usually where issues arise. It is important to remember that organization and record keeping are crucial for the administration of an option plan, and that an option plan is not a carte blanche credit line to pay for everything a company requires. If options are granted to ineligible participants, securities laws violations will often come hand in hand, with resulting costs of fixing the issues after the fact.

Generally, a modest amount spent on the creation of a good legal groundwork for all of the above items, when combined with a significant amount of time spent on good organizational practices and record keeping, can—in the long run—result in significant savings in the context of an exit. Otherwise, a start-up can quickly face spending a very large amount on a lot of advice, or be forced to opt for “exotic” exit structures.

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M&A in Canada: industry revenue and profits

Expanding growth in nearly all sectors

Norton Rose Fulbright focuses its services on 6 key industry sectors and, according to a study released recently by the Globe and Mail on Canadian corporations, almost all of these sectors have seen an expansion in revenue and most have seen growth in profits during the period from 2011 to 2015. While such expansion does not on its own drive M&A activity, it is important factor for identifying trends. Industries with the greatest growth may see increased M&A activity in the future; likewise industries with prolonged under-performance may be primed for consolidation.



The Canadian banking industry has witnessed increased revenue and profits over the past five years. The industry is dominated by the Big Five banks which suggests limited M&A transactions in the near future.

That said, Canada has seen recent M&A in banking alternatives, for example in 2012 Scotia Bank acquired a division of ING Group to form Tangerine. Likewise, Norton Rose Fulbright recently advised Richardson GMP Limited in its high profile 2013 acquisition of Macquarie Private Wealth Inc.  Expanded M&A activity in wealth management companies and banking alternatives is likely to continue.  

An additional area which could be subject to deal-making is smaller technology players who specialize in mobile payments, digital security and app development. Banks and their service providers will look to these companies for sources of growth in this mature industry.

Oil & Gas


The downturn in oil prices has impacted the profitability of Canadian oil and gas companies while overall revenue has increased over the past five years. The volatility with the price of oil has caused M&A transactions to slow, especially in Q1 of 2015.

Price stability or price increases will likely lead to increased transaction volumes as purchasers will see greater certainty in the risks and rewards of potential acquisitions. Others have seen the downturn as a buyer’s market and predict a ‘take-over blitz’ as the next phase in the Canadian oil patch.

Metals & Mining


Revenue has stayed essentially flat but profits have dropped considerably over the past five years for the metals and mining industry. Prospects do not appear to be improving in the near future as Q1 2015 saw the lowest number of M&A transactions in many years. However, a positive sign is the fact that Canadian mining companies have increased both the rate of domestic spending in the past two years and the amount of capital invested in domestic projects. As suggested by E&Y’s Q1 2015 Canadian Mining Eye report, big players have recently been divesting non-core assets (for example, Newmont Mining, Cliff Natural Resources Inc., etc.), and if the Canadian economy continues to slow, this trend could continue. Alternatively, with any pick up in the Canadian economy, consolidation may follow as a player may choose to acquire undervalued assets.



The Canadian transportation industry has seen steady increases in both revenue and profits over the past five years. Since this is a relatively mature industry, growth is not likely to exceed broader economic growth by a wide margin. However, there are several factors which will positively affect profitability such as low oil prices and increased exports to the US.

One potential area which may see increased M&A activity is companies which specialize in retail e-commerce and other technology-based solutions.

Biotech & Pharmaceuticals


The biotech and pharmaceuticals industry has seen revenue growth almost triple over the past five years along with a shift from net losses to profitability for Canadian corporations. However, the overall growth of the industry in Canada has been slow.

The pressure facing large multi-national pharmaceutical companies to replace their drug pipelines as patents expire will be a key driver of M&A activity in this sector. This, coupled with the fact that Canada is the 8th largest pharmaceutical market in the world, should also drive investment and M&A activity.

The author would like to thank Mark Bissegger, summer student, for his assistance in preparing this legal update.

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Purchase agreements: goodwill as a distinct asset

Goodwill is generally considered to be the amount paid for a business over its fair market value or its identified assets.  Examples of goodwill include the right to use the name of a purchased business and the right to represent that the buyer in a transaction is carrying on the purchased business as carried on by the seller.

Beyond the necessity of including goodwill as an asset category for tax and accounting purposes, however, is recognizing goodwill as representing the synergy among assets used by a business to produce income.  In other words, goodwill demonstrates that the whole is greater than the sum of its parts.

Examples of this synergy value include business longevity, exclusive market access, competitive advantages, market share and industry connections.  Synergy value is expressed as goodwill in transactions and is assigned a dollar value accordingly.

In the world of accounting, goodwill is considered a type of intangible asset.  Intangible assets are those other than financial assets (such as accounts receivable or cash) that lack physical substance.  The existence of intangible assets can be demonstrated and their effect is to increase overall business value.

Examples of intangible assets include marketing related assets such as trademarks and domain names, customer-related assets such as customer contracts and databases, as well as technology-related assets such as third party software licenses.

It is important to note that goodwill is listed separately from other intangible assets on a balance sheet because it is treated differently from an accounting perspective.  Most intangible assets can be amortized because their useful life is determinable.  In contrast, goodwill has an indefinite useful life and is reassessed each year for impairment.

The legal purpose of goodwill, as such, is to allocate value to the synergy value of a businesses and is often identified as a distinct asset category in asset purchase transactions.

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