Shareholder Participation in Private Placements

People purchasing public companies’ shares in private placements typically receive discounts and often get warrant “sweeteners” thrown in. Unfortunately for average investors, participation in private placements is usually restricted to institutions, wealthy individuals and insiders. Retail investors are left to purchase shares in the secondary market even though securities legislation now allows existing shareholders to participate in private placements by Canadian public companies.

In Canada, unless an exemption is available, a company offering shares from treasury must do so under a prospectus describing the issuer and the offering in detail. Exemptions from the prospectus requirement are available where a prospectus is considered unnecessary because of the investor’s knowledge, sophistication, ability to withstand loss, relationship with the issuer or where alternative disclosure or other protections exist. The accredited investor exemption and the family, friends and business associates exemption are two common prospectus exemptions. Offering shares pursuant to one or more exemptions from the prospectus requirement is typically referred to as a private placement. Most companies opt to complete their financings as private placements instead of prospectus offerings as private placements tend to be simpler and significantly less expensive.

Shares issued in private placements are usually discounted and are often coupled with a warrant as a “unit”. A warrant is the right to buy additional shares at a fixed price, on or before a fixed date. Although any investor may purchase securities without limit through a stock exchange, historically, retail investors have been excluded from participating in private placements. Three years ago, the securities regulators in all jurisdictions of Canada adopted the existing securityholder exemption. The existing securityholder exemption allows Canadian stock exchange-listed companies to issue shares (and warrants) to existing shareholders if the offer is made available to all shareholders who reside in jurisdictions where the exemption is available and certain other conditions are met. One of the key conditions is that each existing shareholder is limited to acquiring $15,000 of the company’s shares under the exemption in a 12-month period unless that shareholder has obtained advice about the suitability of the investment from an investment dealer (in which case there is no limit).

Unfortunately, the additional time, cost and complexity of setting up an private placement to include existing shareholders has dissuaded companies from making use of the existing securityholder exemption. Capiche is a web-based platform that has streamlined the private placement process and makes it cost-effective to include existing shareholders. Using Capiche, Canadian public companies can use any or all of the usual private placement exemptions. As the process is automated and online, companies are able to take subscriptions for smaller dollar amounts and reach a significant untapped pool of investors. While Canadian public companies appreciate the funds invested by existing shareholders, allowing retail investors to participate in private placements has other benefits as well, including providing much-needed liquidity in the secondary market and maintaining the goodwill of supportive small shareholders.

Interested in seeing how Capiche can simplify your private placement? Contact Capiche to arrange a demo at capiche.io or info@capiche.io or 1 (888) 560–6077.