Venture Law Corporation | Alixe Cormick | April 22, 2014

Asking what the “all-in-costs” are for preparing an offering memorandum (an OM) is like asking how much it costs to build a house. A new 4,000 square foot custom-built house in West Vancouver, BC will cost more than a 1,200 square foot kit house in Abbotsford, BC.  Both homes may be lovely, but they are not the same in terms of construction, features, or cost.  A “one size fits all” price does not work in estimating the cost of a new house or the cost to prepare an OM.  To get an accurate estimate for either more information in needed from you as the client.

A law firm who gives you a quote for an OM without knowing more about your business and circumstances places you at risk of unforeseen fees and charges multiplying well beyond that original quote if that quote is unrealistically low. Alternatively, if the law firm assumes preparing your OM is unduly complicated, the quote may be so high that you may decide going forward is not for you. Neither situation is in your best interest.

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This article discusses the costs of preparing an OM under the OM exemption set out in section 2.9 of National Instrument 45-106 Prospectus and Registration Exemptions (the OM Exemption) which requires a prescribed form of offering document. There are separate forms for reporting and non-reporting issuers (e.g., private companies). These companies may be brand new start-ups or well established companies with complicated business structures operating around the world.

Summary of Offering Memorandum Costs

OM costs vary and depend on several factors. Costs related, directly and indirectly, to preparing an OM and related documents in Canada can be broken down as follows:

Note: (1) PEI & NS: $0; NWT, YK & NU: $100; NB: $350; ON: $500; SK: $750; BC: the greater of $100 or 0.01% of capital raised in BC; and AB: the greater of $100 or 0.025% of capital raised in AB.

Most of these expenses are upfront fixed costs, which issuers must pay even if an offering is not completed for failure to raise the minimum offering. However, if the offering is completed, typically these offering costs are deducted from the gross aggregate proceeds raised with the net amount being paid to the issuer at closing. So how does a reputable law firm provide a fee quote or enter into a fixed fee arrangement? This is discussed below.

Determining Associated Legal Fees for Preparing an Offering Memorandum

Typically, engagements with a law firm start with an hourly retainer letter or a scoping fixed fee retainer. Law firms will either enter into a fixed fee retainer or provide an estimate of legal fees after the terms of its engagement has been determined. The reason firms start with an hourly fee or scoping retainer is the need to get more information, review existing documents, and flesh out what your goals and needs are as a client. A law firm also needs to make sure you fully understand key issues, risks, and what the law firm will do (and not do) for you in its engagement. These scoping conversations and the resulting scope of work document are often the most critical step in a deal. It sets the stage for the entire transaction and ensures that everyone has a complete understanding of the transaction and his or her role. Without a scoping document, which some refer to as a Deal Memorandum, it is difficult for you as a client to understand what legal documents and/or advice you need and the associated costs.

Calling different lawyers and law firms and asking for a quote for an OM will likely result in a wide range of costs and fees, which may not necessarily be comparing “apples-to-apples”. Going with the lowest quote without first understanding the scope of work appropriate for your deal is the last thing you want to do. Yes, you have a price or quote but it is likely a never-ending escalating number as you move forward and new items are constantly being added to the list of what must be completed. The law firm will then typically charge you for this “extra work” which you did not anticipate nor budget. Not a situation you want to be in. So how does legal counsel determine the scope of its engagement with you? Simple, you need to engage counsel to prepare a scoping document, deal memorandum or other document that sets out the scope of work you require for your deal. Topics discussed during various meetings, telephone calls and exchange of documents are discussed below.

Scoping Engagement

The scoping process discussed above involves a thorough review of a client’s key documents. It also requires a law firm to spend a considerable amount of time with a client discussing various issues and working out a definitive approach and a structure for an offering under the OM Exemption. The scoping engagement process includes determining:

1. Client Issues;
2. Client’s Business Objective(s);
3. The Preparedness of Client;
4. Specific Tasks Involved in Offering;
5. What Documents are Necessary and Who is Responsible;
6. Closing Matters;
7. If There are Necessary Tasks in This Engagement Typically Outside a Law Firm’s Scope of Work;
8. Issues Likely to Come-Up in Connection with the Offering;
9. Other Constraints;
10. Deal Management Issues; and
11. The Engagement Letter

Appendix A contains a chart outlining and discussing each of these items in more detail. The scoping process provides transparency and certainty to all the parties involved in the transaction. It eliminates 90% of the surprises when going forward and ensures everyone knows their role and the expectations of other participants.

How to Keep Legal Fees to a Minimum

You are not alone if you would like to minimize your legal fees in preparing an OM and related documents in connection with raising capital under the OM Exemption or any other legal transaction. Here are a few simple actions you can take to reduce your legal fees:

1. Organize your due diligence documents. The number one way you, as a client, can control legal fees is by taking responsibility in gathering and organizing all the due diligence documents and other information pertaining to your business. Consider hiring someone for this purpose. Once you have created a due diligence binder or file, you will find it is rather easy to keep it updated. This is particularly true if you create an electronic file of all these items. Many clients find that gathering all this information in one place and in an orderly manner also reduces the cost of their audit review each year. You should ask your lawyer for a due diligence checklist to assist you with identifying all relevant documents and information.
2. Keep your place in the cue. Lawyers typically have many clients and it is important to keep your place in cue so your deal is completed in accordance with your reasonable expectations. A law firm typically provides its client with a list of steps, documents and a timeline evidencing a process for completing a transaction in a timely manner. A lawyer allocates time to do your work in his or her schedule. If a lawyer does not receive key documents back from you or from third parties involved with a transaction, the lawyer cannot move forward with your file. Your lawyer, having many clients, will move forward with other client’s work until he or she receives the document or information the lawyer requested from you to complete the next step of your file. This means your lawyer may have to complete that other client’s work before he or she can start again on your file. It also means your lawyer must reacquaint himself or herself with your file and determine if you need to update or change anything the lawyer completed earlier because of this delay. Time and costs add up if your lawyer must chase you or a third party for information or a document to move forward with your file. This will obviously result in scope creep.
3. Avoid scope creep. A law firm’s engagement letter contains a lot of detail in terms of what work you want it to do for you. Essentially, anything you ask a law firm to do outside of what is set out in the engagement letter is scope creep and is an additional billing item. Generally, a law firm will try to alert a client that something a client has asked it to do is outside its original retainer. Law firms will bill any new items requested on an hourly or fixed amount basis as an extra cost. Scope creep can also occur when the terms of a transaction keep changing so it is important to get it right at the beginning. This is why preparing term sheets are important.
4. Get your key third party documents in hand. Financial statements are key elements to preparing an OM. OMs require IFRS GAAP audited financial statements and current quarterly unaudited financial statements. The only exception is if you are making the offering in one of the jurisdictions that has adopted the OM Exemption Lite and the issuer is seeking to raise less than $500,000. If so, you can include unaudited financial statements and satisfy other requirements under the OM Exemption Lite. Obtaining audited financial statements takes a lot of time. If you are mining company, you must obtain a Form 43-101 technical report from an independent qualified person. This too, takes time. You are wasting your money in hiring a lawyer to prepare an OM if you do not have these documents or do not have them on their way to being completed.

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