The BC Securities Commission (BCSC) has recently sought public comment on a matter of great importance to entrepreneurs raising capital for early stage companies in B.C. It has been seeking to revoke the “Northwest Exemption” (B.C. Instrument 32-513) to the capital raising rules.
The exemption allows persons or companies who are not registered as brokers with the securities commission to be capital “finders” for companies when using one of four categories of prospectus-exempt trades: accredited investor; minimum amount; friends, family and close business associates; or the offering memorandum exemption.
The BCSC’s position stems from its view that only 1% of financing in B.C. (by private issuers) has relied on this exemption, and it should be revoked because:
- it would have a negligible impact on raising capital;
- those relying on the exemption are not complying with investor protection conditions: and
- investors would be better protected if they bought such investments from brokers registered with the commission instead.
Response to this proposal from the securities commission has been vocal from two major early stage financing constituencies in B.C.: the junior resource sector universe, which is primarily centred around the TSX Venture Exchange, and the technology startup sector in B.C., which has been the stomping grounds of the private angel and venture capital community.
On the resource side, an interested group has put up the venturecrisis.org website to highlight the difficulty that junior resource companies are having raising venture capital, and how much harder it would be without having these “finders” available to raise the money.
A perspective on the importance of the Northwest Exemption to publicly listed junior companies is provided in a letter to the commission from TSX Venture Exchange president John McCoach.
“We found that of the estimated $6 billion raised by TSX-V issuers in 2012, approximately $4 billion was raised on a prospection-exempt/private placement basis. Of the 1,844 non-IPO financings … 1,719 (93%) of these were completed on a prospectus-exempt/private placement basis. Our review of a sample of the associated exchange filings indicated that 30% to 35% of these financings involved non-registrants acting as finders for a least a portion of the financing.”
The BC Technology Industries Association has recently published “Growing BC’s Technology Industry: A 4-Point Plan for Growth.” The report notes that while B.C. has 8,555 startup companies (between one and 49 employees and $0 to $10 million in revenue), it has only 333 emerging medium-size companies (50 to 499 employees; $10 million to $100 million in revenue) and only 15 mature, large companies (more than 500 employees; more than $100 million in revenue).
The BCTIA is most concerned that only 3.5% of B.C.’s tech companies have thus far leaped over the growth gap to become mid-sized enterprises, and a significant reason for that failure is lack of growth capital.
In 2010, only 43 of B.C.’s private tech companies raised capital from venture funds ($220 million), and 202 raised capital from angels ($72 million) under B.C.’s Investment Tax Credit program for angels. These sad stats show that less than 3% of B.C.’s tech companies successfully raised capital from angels or venture funds.
What do we think that the other 97% did for capital? Members of the BCTIA’s Policy Advisory Council on Access to Capital were convened to discuss the Northwest Exemption matter, and it was generally agreed that the use of finders by tech companies was widespread and of vital importance to entrepreneurs – many of whom have little talent for or experience with raising capital themselves.
Many council members also felt that the registrant community preferred by the securities commission for raising capital had little interest in financing risky private tech companies, particularly the 8,500-plus at the startup stage.
Given their lack of appeal to brokers, and facing death if they didn’t raise money, it’s not hard to imagine that without the Northwest Exemption, startups in B.C. might attempt to hire finders under the table, temporarily appoint them to their boards, label them consultants or find some other opaque way to engage them anyway.
Regarding the Northwest Exemption, finder Doug Cruikshank wrote to me: “I am not sure that if these [proposed] changes were in place five years ago that my firm, Cruikshank Advisory Group Ltd., would have become involved in the financing of Avigilon Corp. …. one of the most successful technology companies in B.C. history.”
It’s not in anyone’s interest to encourage an underground financing system for B.C.’s burgeoning tech startup community. A fully disclosed, Northwest Exemption-based environment, with perhaps better attention to compliance and protection aspects, might be the best solution.
