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.
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:
|Item||Cost and Factors|
|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 role of 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 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 6% 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.|
|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.|
- The OM Exemption Lite refers to Multilateral CSA Notice 45-311 Exemptions from Certain Financial Statement-Related Requirements in the Offering Memorandum Exemption to Facilitate Access to Capital by Small Businesses which was published on December 20, 2012 by certain members of the Canadian Securities Administrators (the CSA). Each CSA member, other than British Columbia and Ontario, issued a harmonized interim local order (the Orders: See Alberta Order) that provides an exemption from certain financial requirements set out in the OM Exemption. The Orders remains in force until December 14, 2014. The Orders provide relief from the audited financial statement requirement and the requirement for issuers to prepare financial statements using Canadian GAAP applicable to publicly accountable enterprises provided that: (a) the issuer and related issuers raise no more than $500,000; (b) no investor invests more than $2,000 in any 12-month period; (c) the issuer is not a reporting issuer, investment fund, mortgage investment entity or real estate issuer; (d) the issuer does not distribute complex securities; and (e) the OM contains a bold warning on the front page.↩
- 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.
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:
- Client Issues;
- Client’s Business Objective(s);
- The Preparedness of Client;
- Specific Tasks Involved in Offering;
- What Documents are Necessary and Who is Responsible;
- Closing Matters;
- If There are Necessary Tasks in This Engagement Typically Outside a Law Firm’s Scope of Work;
- Issues Likely to Come-Up in Connection with the Offering;
- Other Constraints;
- Deal Management Issues; and
- 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:
- 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.
- 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.
- 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.
- 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.
Limited Engagement Retainers
Some law firms enter into limited engagement retainers. Limited engagement retainer letters contain a long list of assumptions and tend to push the majority of the risk back on you as the client. If a law firm is conducting no due diligence, it assumes you have conducted all necessary due diligence and all information in the OM is complete and accurate. If a law firm is capping its review hours, its engagement may be little more than determining if you are using the correct form of OM, did not leave out any required statements as set-out in the OM form requirements and that all the headings in the form of OM have been addressed (although not necessarily accurate or complete). It is your decision to make as a client if a limited engagement retainer will work for you. It is our belief that it is in each client’s best interest to go through the scoping process before entering into a limited engagement retainer to ensure they understand the process, what obligations they are assuming and the risks and liabilities they may face if they cut too many corners.
Preparing an OM is part of the cost of capital in raising money under the OM Exemption. It is recommended that clients retain legal counsel to prepare a scoping document, deal memorandum or similar document to understand the nature of the transaction and what is required in relation to preparing an OM and related documents in reliance on the OM Exemption. Being organized is critical and a scoping document provides a client with a road map of documents, process, timing and costs which are important to do before undertaking any securities offering. Lastly, hiring capable securities counsel is important so make sure you have confidence in your selection of legal counsel and their capabilities. You are making an important decision that can cost you a lot more than money if things go offside.
OFFERING MEMORANDUM: SCOPE OF WORK DISCUSSIONS
|(a) Who is the Firm’s Client?||Are we representing the business, selling shareholder, selling agent or other party?||Whom a law firm represents will have a direct impact on the work it will perform.|
|(b) What Type of Entity is Raising Capital?||Reporting issuer or non-reporting issuer? Is it a corporation, limited partnership, partnership, family-owned business, or founder-owned business? Does the entity have a simple or complicated organizational structure with several subsidiaries?||The type of entity raising capital affects the complexity of the transaction, disclosure requirements, extent of due diligence and regulatory agencies involved. For example, an issuer that is a reporting issuer and exchange-listed would be a more complicated deal since you now need to factor in exchange related requirements into any fee quote. The deal may also require a restructuring of the business (i.e., incorporate a sole proprietorship) prior to offering securities or dealing with what are called ‘legacy’ issues (e.g., incomplete or undocumented prior share issuances and/or resolutions)|
|(c) Review of Constating Documents and Related Documents||Are there any shareholder rights issues, such as right of first refusal, board representation, and pre-emptive rights? Are there other issues, such as insufficient authorized capital, shareholders agreement or structure issues that need to be addressed before raising capital?||A law firm may need to amend constating documents or enter into or terminate certain agreements.|
|(d) Entity’s Industry||Real estate
Oil & Gas
|An entity’s industry will dictate: (a) the due diligence review process, necessary ancillary documents (i.e., Form 43-101 technical report for mining issuers, Form 51-101 statement of reserves data for oil and gas issuers or general partnership and limited partnership agreements if a general or limited partnership); (b) industry specific representations; (c) warranties; (d) risk factors; and (e) material agreements.|
|(e) The Geographic Location of Entity and its Proposed Investors||Where is the entity’s business operating? Where does the entity’s proposed investors in the offering reside?||Legal counsel in other jurisdictions may need to be retained and co-ordinated to complete the due diligence process and ensure all applicable legal requirements are identified and addressed.|
|(f) Has or is a Selling Agent Going to be Engaged?||How is the entity intending to solicit investors? If a selling agent is involved, are they registered in the applicable jurisdictions or is there an available exemption from registration?||The involvement of a selling agent will affect the nature and complexity of the transaction and OM. An agency agreement will need to be negotiated and the selling agent’s legal counsel may be involved in the due diligence and OM preparation process. Closing of the offering will also be more formalized and a legal opinion letter may be necessary.|
|2. Client’s Business Objective|
|(a) Discuss Business Objective||Clients have different reasons for raising capital and wanting to use the OM Exemption.||There may be a better alternative to raising capital than using the OM Exemption that a client has not explored that should be discussed.|
|(b) Level of Interest||Does the client have an immediate interest in going forward with an OM financing or just entertaining the idea?||A client with a low level of interest is unlikely to complete their responsibilities involving a law firm’s engagement on a timely basis. Low client interest generally causes scope creep (yes that means you have to pay more money to your lawyers) or results in the offering not going forward or failing to be completed.|
|3. Preparedness of Client|
|(a) Business Plan, Technical Report, Oil & Gas Report or Similar Document||Is there a current business plan? How comprehensive is the plan?||Very few business plans contain information that can be used in an OM. They tend to be promotional pieces or so generic they could apply to any business. The quality of the business plan will determine how much research and original writing a law firm will need to do to complete an OM. In some instances, preparing an OM is the first time a client will have thought through their business. If the issuer is a mining issuer, instead of a business plan, is there a current Form 43-101 technical report? If the issuer is an oil and gas issuer, is there a current Form 51-101 oil and gas report? A law firm must review these reports for regulatory compliance and if necessary, the report writer must bring them into compliance before a law firm can prepare an OM.|
|(b) Financial Statements||Does the issuer have current audited annual financial statements? What about current unaudited quarterly financial statements? Are these financial statements compliant with the requirements for the OM Exemption being relied upon and for the type of issuer?||Clients may find that they are not able to obtain audited or accurate unaudited financial statements due to bookkeeping issues. A law firm’s engagement may include introducing a client to a third party accounting and audit firm. Scope of work creep is more likely to occur if financial statements are not already prepared; as information may become stale dated or due diligence updates are required as time moves forward. Moreover, a company with various ‘legacy’ issues may take a long time to have their audit completed which may delay the completion of the OM as financial statements must be included in an OM under the OM Exemption.|
|(c) Terms of Offering||Is there a term sheet setting out key terms of the offering? Has the client entered into a letter of intent with a selling agent that includes the terms of the offering and their engagement?||A law firm may need to become involved in structuring the offering, negotiating terms with agent’s counsel and coordinating with other advisors (i.e., tax professionals) in preparing a term sheet.|
|(d) Tax Issues||Has the client obtained tax advice regarding the offering (i.e., flow-through shares; limited partnership units; or applicable tax incentive programs such as the Small Business Venture Capital Act in British Columbia)?||You may be looking to a law firm to introduce you to tax professionals or engage with these professionals on your behalf. The effect of this advice could be that a law firm will be required to create flow-through shares, limited partnership documents or assist you with obtaining tax incentive status such as an eligible business corporation in British Columbia.|
|4. Tasks Involved in Offering|
|(a) Structuring||Discuss the structure of the offering or explain structuring options and complexity. Discuss corporate, securities and tax implications of structure.||Common shares, limited partnership units, preferred shares, debenture, convertible debentures, promissory notes, flow-through shares, and unit offerings all have different levels of complexity. Although a law firm may not be providing any tax advice, it will need to understand any tax implications in order to confirm they have been properly addressed in the OM.|
|(b) Due Diligence||Every section and statement in an OM must be confirmed as being accurate at the date of the offering.||This means someone must conduct a due diligence review to avoid unnecessary liability exposure.What also takes quite a bit of work is reviewing and suggesting revisions to any forward-looking information and future-oriented financial information which requires a careful description of the material factors and assumptions used in relation to such disclosure.|
|(i) Due Diligence Documents||Does the entity have a current due diligence binder or file with all material normally forming part of a due diligence package||A due diligence document list is critical. A client can save money by organizing these documents themselves for review by its legal counsel. Obtaining these documents tends to be a painful process. Clients will often dribble out bits and pieces over weeks if not months resulting in scope creep as the due diligence review process becomes inefficient and the length of a law firm’s engagement drags on. Clients sometimes prefer to skip doing any form of due diligence review or want to undertake the due diligence review process themselves without legal counsel. There is a risk to the client in both circumstances. If a selling agent is involved in the offering, preparing a due diligence package is not optional. A due diligence package must be put together.|
|(ii) Due Diligence Report||A written due diligence report provides clients with a record of the nature and extent of the due diligence conducted in connection with preparing the OM.||A written due diligence report is very helpful if a regulator ever makes an enquiry about the accuracy of the content of an OM. Preparation of a written due diligence report, however, increases the work that must be done by legal counsel.|
|(iii) Due Diligence Searches||A number of searches must be done as part of the due diligence process, including but not limited to, the following:
|(4) Specialized Due Diligence Issues||Determine if involvement in various speciality areas will affect need for additional searches (i.e., mineral exploration offices, mining tax, logging tax, motor fuel tax, environmental ministries, government permits, and contaminated site databases).||If involved in a speciality area or an issuer has intellectual property issues or pending litigation, the due diligence process will be more complicated and will require more time to complete.|
|(a) Principal Drafting, Reviewing and Negotiating Responsibility||Typically, in preparing an OM, a law firm will be drafting, negotiating and reviewing all principal documents, such as the:
||Legal counsel’s role in drafting, negotiating and reviewing the offering documents affects the level of work required. If a law firm is only reviewing documents, what type of review is to be conducted? Is a law firm to assume the accuracy of all statements in these documents and that the issuer has properly disclosed all material information?|
|(b) Regulatory Issues||Special considerations for exchange-listed issuers and foreign issuers.||If an issuer is a reporting issuer and has its securities listed on an exchange, it will need to meet the private placement requirements of that exchange before proceeding with the offering. Notices and other stock exchange filings need to be prepared and delivered.If the issuer is a foreign issuer, it may need to obtain an exemption order for certain disclosure or non-conformity with the form requirements of the OM Exemption.|
|(c) Third Party Consents or Waivers||Third party consents or waivers may be necessary if there are shareholder rights issues, such as right of first refusal, board representation, or pre-emptive rights; or contractual rights limiting sales of securities or dilution.||These consents and waivers can involve protracted negotiations and take time which may be an issue in a financing that needs to be completed in a timely manner.|
|6. Closing Matters|
|(a) Mechanics of Closing||How a closing takes places directly impacts time, money and effort and the scope of the retainer.||Matters that need to be considered by a law firm include whether:
|(b) Regulatory Filings|
|7. Tasks Typically Outside a Law Firm’s Scope of Work|
|(a) Tax Advice||This is typically provided by a full-service law firm or can be provided by an accounting firm or other financial and/or tax advisor outside of a law firm.||This needs to be explicitly discussed between a client and lawyer and has a direct impact on any retainer since taxation advice is generally expensive.|
|(b) Non-Canadian Law||Generally, a Canadian law firm’s scope of work does not include advising or ignoring the laws in jurisdictions outside of Canada that are applicable to you and your proposed offering.||You will need to discuss who is going to be engaged in all applicable jurisdictions outside of Canada with your Canadian legal counsel in order to coordinate the offering in multiple jurisdictions.|
|(c) Due Diligence Outside of Canada||Generally, a Canadian law firm’s scope of work does not include conducting due diligence searches outside of Canada where the issuer may have operations.||Same response as immediately above.|
|(d) Other Matters||Discuss other matters outside law firm’s scope of work.|
|8. Issues Likely to Come-Up in Connection with Offering||These issues will affect the drafting of the OM even if your law firm is not engaged in these matters. Generally, each of the matters below is outside the scope of work involved in preparing an OM unless specifically included in a law firm’s engagement letter or a new engagement letter:
|9. Timing Considerations|
|(a) Need or Preference||Timing may impact cost.||A law firm needs to consider whether there are any tax-driven, regulatory or business-driven timing considerations? Do you want to close by a certain month, quarter, or year-end?Tighter schedules may demand that a law firm work evenings and weekends beyond its normal business hours or require the firm to put more personnel on a file. This will increase costs.|
|(b) Gating Events||Certain events might have to occur in a certain order for various legal or other reasons. This may impact time, money and effort in preparing any scope retainer.||A law firm must consider whether certain work needs to be completed before going forward with the offering, such as a shareholders’ meeting to change the articles of a company, obtaining any regulatory approval, lender or shareholders’ waivers or bridge financing. A client needs to discuss whether its law firm will be involved in this gating event and included in any scope of work document.|
|10. Other Constraints|
|(a) Client Availability||There is a direct correlation to price and client involvement and timeliness of response to questions and requests by legal counsel.||If you are unavailable or have limited availability, the timing of completing the OM can be adversely impacted and the scope of work required of a law firm can be expanded. A lawyer needs to work with its client to get the deal done as a team since both have certain responsibilities.|
|(b) Budget||Are there any budget constraints? Must the client raise bridge financing in order to proceed with an OM? Does the client understand all expenses and professional fees they will undertake in connection with an offering under the OM Exemption?|
|11. Deal Management|
|(a) Contacts||Identify all parties working on offering. Are there any other advisors we should be aware of related to the client?|
|(b) Communication||What is the client’s communication preference or expectation? Will we be required to prepare weekly written progress reports? Will daily or weekly phone calls and emails suffice in providing progress updates? Whom can we share what information with at the client’s office? Are there any confidentiality concerns?|
|(c) List of Steps and Documents||Prepare and discuss list of steps of documents. Confirm all parties agree to the assignments in the list of steps and documents and who is responsible for what in moving the transaction forward.|
|(d) Engagement Letter||Prepare and discuss law firm’s engagement letter and agreed scope of work.|
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DisclaimerThe articles on this blog are not intended to create and do not create, an attorney-client relationship. You should not act or rely on information on this website without first seeking the advice of a lawyer. This material is intended for general information purposes only and does not constitute legal advice. You are advised to contact legal counsel prior to undertaking any securities transaction. Laws change and there are subtle nuances to the rules that may apply in your particular circumstance.