EQUIVESTO COMPANY BOOTCAMP

Equity Crowdfunding Paperwork

When issuing shares to the general public through equity crowdfunding, there are several additional steps beyond simply launching a campaign and collecting the funds raised. Let’s take a look at the corporate governance and legal steps that should be taken as part of an Equity Crowdfunding round.

Working with the Equivesto Portal

Equivesto is licenced as an Exempt Market Dealer (check our licence here), which allows us to legally assist with a sale (distribution) of shares from a company to investors. Since this is a legal transaction that changes the ownership of a company, a bit of extra paperwork is required. To get started, the company’s Board of Directors need to sign and issue a corporate resolution allowing the company to work with Equivesto to raise the money and find investors (free template available here). This allows the company and its representative (the founder/CEO or whomever) to work with Equivesto. While the corporate resolution is technically an internal, private document for your company, seeing proof of it helps us know that you (as the representative of the business) can work with us.

The next step is to sign the Issuer Agreement, which is the legal agreement between the business and Equivesto. This includes details about how we handle your confidential documents, that you give us permission to run background checks and due diligence on you, and that you agree to our fees. We will send this to you for digital signature once your application is submitted.

Creating a New Share Class

With both of those signed, we can move forward to the actual preparation for the campaign. Often, during an equity crowdfunding campaign a company will be issuing shares from a new share class that did not exist before. This helps keep corporate management and the capitalization table simple in the future, but it does result in a little more work at the beginning. Companies will need to work with their lawyers to amend the Articles of Incorporation of the business to create this new share class and have their Board of Directors/shareholders approve this change. This amendment will essentially create this new share class and outline all the rights specific to just this share class, which could include non-voting rights (not having the right to vote or control the company).

While this sounds complicated, it is as simple as reviewing and signing two forms prepared by your lawyer. It is important to have this new share class created prior to your round, so that when you offer these shares for investment, it is clear exactly what is being offered to the new investors. There is no need to actually issue any shares from this new share class yet. It is best to wait until after the campaign ends when you know exactly how many shares need to be issued before you officially issue the shares.

Adjusting the Shareholders’ Agreement

At the same time as creating the new share class, Equivesto will work with you to review and potentially adjust your shareholders’ agreement. The company’s shareholders’ agreement governs all aspects of the management of the corporation, including (potentially) how many shares of each share class can be issued each year, and by whom. Equivesto will review your shareholders’ agreement and help confirm that it will allow the company to do everything it wants regarding issuing these new shares, as well as protecting the rights of these new shareholders. Since the company will soon have many new small investors without much (or any) ability to control the business, Equivesto is required to help protect their rights.

Any company raising on Equivesto is required to have ‘Tag Along’ and ‘Drag Along’ Rights in their shareholders’ agreement. These rights protect small shareholders in the event of a potential sale of the company. They stop majority shareholders from simply selling just their shares and leaving the minority shareholders in the company. These rights also allow the majority shareholders to force the sale of the minority shareholders’ shares if the entire company is being bought.

Equivesto also works to help founders as well. Often, the terms of a shareholders’ agreement when initially incorporated are organized in a way that gives all shareholders a clear view to all decisions being made about the company. However, with hundreds or thousands of new shareholders, this can add considerable complexity and bureaucracy to the management of your business. We will provide direct feedback regarding any clauses in your agreement that could negatively impact your ability to manage the business and quickly make important decisions.

Preparing the Offering Document

As outlined above, companies raising capital through equity crowdfunding need to prepare a 45-110 Crowdfunding Offering Document. All provinces require you to prepare this document, and if you look to raise from investors living in Quebec, you will also need to have this document translated into French. These documents are required before the campaign starts, and outline, in 10-20 pages, everything an investor might need to know about your offer.

They cover:

· Basics on the business location and contact information

· A summary of the business plan

· Details on the team and their backgrounds

· Details of any previous crowdfunding rounds

· A full explanation of the shares being offered and their terms

· The proposed use of the funds post campaign

· The name and contact details of the crowdfunding portal (Equivesto)

· Details of the fees paid to the crowdfunding portal (Equivesto)

As well as a few other items.

To help make the process easier, Equivesto will help prepare the first draft of the offering document, leaving several key sections related to the business plan blank. We will then work closely with you and your lawyers to complete the rest of the document.

You will need to work with a Securities Lawyer for this. Don’t know one? We can make an introduction.

Want to raise from investors in Quebec? You will need to have this translated into French.

Even though we help with the initial draft, the document is the responsibility of the company, and you must understand and sign off on every line of the offering document. This document is submitted to the regulators once the campaign is closed, so its important there is no confusion. The document must be finished and signed off on before the campaign starts, as it is attached to the campaign page, along with all of your other documentation. If anything in the document changes during the campaign, you are required to notify us immediately so we can amend the document and notify the investors. If you have accountant prepared financial statements, they will be attached to the offering document.

Closing the Round and Issuing Shares

After a successful campaign has closed, there is still some additional work to do before all the capital is released to you. Equivesto will provide you and your lawyer with several additional documents noting the new shareholders and the number of shares needing to be issued. Now it is finally time to issue the new shares. Equivesto’s platform also stores digital copies of the signed share purchase agreements, investor risk disclosure forms, and joinder agreements which you can download at any time. The company should now amend the Articles of Incorporation again to issue exactly the number of new shares needed from the right share class. Once those shares are issued, the Board of Directors can now issue a Corporate Resolution authorizing the sale of the shares for cash to the new investors. While this sounds complicated, Equivesto has templates of some of these documents, and it is as simple as signing two forms once your lawyer has prepared them. With everything confirmed and signed off, the funds (minus Equivesto’s 7% success fee) can now be transferred into your company’s bank account.

Within 30 days after closing, its also critical to prepare the Report of Exempt Distribution (which Equivesto will again assist with) and file that alongside the Crowdfunding Offering Document with each provincial securities regulator. You will need to work with a securities lawyer to file this document.

The first two weeks after the closing of your campaign may feel a bit hectic, but with you, your lawyers, and Equivesto all working together, all the documents will be prepared and filed in no time.