Mahi Sall, Advisor, Fintech-Bank Partnerships, Payments and Financial Inclusivity
January 25th, 2023
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.
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.
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:
Legal fees | Legal fees can cost between $10,000 to $150,000 plus taxes and disbursements. This is a wide range and depends on a number of factors including the sophistication and involvement of management of an issuer and professional advisors. |
Accounting fees: | Accounting fees can cost between $5,000 to $200,000 plus taxes and disbursements. Under the OM Exemption, you need IFRS audited financial statements while under the OM Exemption Lite[1] you need unaudited financial statements reviewed under PE-GAAP or IFRS. |
Agent work fees: | Works fees are fees payable to an intermediary, such as an exempt market dealer or investment dealer, and are for the work performed by the intermediary in getting an issuer ready for financing. Works fees can cost between $5,000 to $90,000 plus taxes and disbursements. |
Agent sales commissions and finder’s fees: | Sales commissions are payable to a registered dealer, such as an exempt market dealer and/or investment dealer who are involved in selling securities to investors and/or unregistered finders who are referring (a) issuers to dealers or (b) investors to issuers and/or dealers, in return for a fee. Sales commission are generally 7% to 16% of the total aggregate amount raised by an issuer, depending on a number of factors, and typically would include any finder’s fees. |
Regulatory filing fees: | Regulatory filing fees in each Canadian province or territory where capital is raised ranges from $0 to a percentage of the total aggregate amount raised in a particular jurisdiction.(1) |
Marketing fees: | These include sales and travel costs associated with entertaining or pitching potential dealers and/or investors (fees are indeterminate). |
Other expenses | Other expenses include printing costs associated with printing the OM and any related market materials. |
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.
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.
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:
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.
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:
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