ASC on the right track for small business money-raisers

The Alberta Securities Commission gave the provincial government an interesting lesson Tuesday in capital formation, job growth and economic stimulus.

The ASC, under the leadership of its new chairman, Stan Magidson, unveiled two new initiatives aimed at helping small and medium-sized businesses raise money.

“These new rules are about facilitating capital formation for startups,” said Magidson.

The changes allow for small companies to raise $1,500 from individual investors to a maximum of $5,000 as long as a registered dealer offers the appropriate advice, with the total amount of the offering set at $250,000. The company can tap the market twice within a year and the maximum the group involved with the company can raise in aggregate under this new rule, ASC 45-417, is $1 million.

This limit is to prevent abuse of ASC 45-417, in the context of multiple companies being set up by the same individuals.

This mechanism will be available only to Alberta investors and requires a scaled-down offering memorandum and an acknowledgment of the associated risk — the investor could lose the entire amount.

The possible downside is that there is no liquidity associated with this funding mechanism, which means the units or shares can’t be traded in what is called a grey market.

The liquidity event comes when the company grows to the point of raising a significant amount of money privately, which creates the grey market, if it goes public or is sold to another entity.

The second capital-raising avenue introduced on Tuesday is one of facilitating corporate crowdfunding in Alberta, which already exists in other provinces, including British Columbia, Ontario, Saskatchewan, Quebec, Manitoba, Nova Scotia and New Brunswick.

The crowdfunding option allows for companies to raise $2,500 from individuals to a maximum of $25,000, if the investor is deemed to be qualified.

The maximum that can be raised in any given year is $1.5 million, there is no aggregate limit for the management group and money can come from outside Alberta.

That said, the raising of the funds under this scenario must come through a funding portal, which is registered with the ASC. Think of it as something along the lines of a virtual investment dealer, with one of the big differences being it does not risk any capital; it’s simply a vehicle for distribution.

While Alberta might be a bit late to the crowdfunding option, which is currently under a 30-day comment period, ASC 45-417 is another illustration of the financial minds in the province thinking about new ways to raise capital for new ventures that has been going on since the 1970s.

Think of the successes of the Junior Capital Pool companies, which arguably formed the backbone of what is today’s TSX Venture Exchange.

Then there was the Special Warrant Structure, which allowed companies to raise money through an underwritten private placement, with the warrants converting to shares as soon as the prospectus was cleared by the ASC.

This option did away with the one-year hold period that was characteristic of private placements at the time and was attractive because it allowed for more institutional investor participation.

At the time there was a limit to the number of private placements that the institutions could invest in because of the hold period.

There was also another structure that was used by companies such as Chauvco and Cypress Energy, whereby units of A shares and B shares were sold in units to the public.

The structure allowed for the founders to limit the issuance of the Class A shares, but there was a time frame for conversion of the B shares, which were often flow-through shares and thus had a tax angle that benefited the investors, into A shares.

At one point, investors could take advantage of the Petroleum Incentive Program, which further enhanced the return.

More recently, it was in Calgary that the royalty trust model was developed. It was hugely beneficial to both companies and investors in the oilpatch, facilitating the raising of capital and development of assets, some of which might not have been considered as Grade A properties.

Given the lack of liquidity in the asset disposition market, it’s hard not wonder if it would be helpful to have a similar structure in place today to facilitate more transactions and alleviate some of the financial pressure that currently exists.

What the ASC announced on Tuesday is a very positive step in helping to address the very real issues facing this province in terms of economic growth — and more worrisome — the fact highlighted in the most recent census, that is seeing young people leave this city.

“It’s going to help young entrepreneurs to get started,” said Magidson, adding that it was an important initiative given the province’s current economic challenges.

The sad fact is the ASC alone isn’t enough to provide the certainty required by individuals looking to start new businesses or companies seeking to establish a presence in this province because there is a profound lack of confidence that exists as a result of actions and statements made by the provincial government.

The latest came in the form of a

ASC 45-417 is another illustration of the financial minds ... thinking about new ways to raise capital for new ventures.

lawsuit launched by the province seeking to repudiate the contracts associated with the power purchase arrangements bought by companies when the electricity market was deregulated.

Adding fuel to the fire were the comments made on Monday by deputy premier Sarah Hoffman, who effectively wagged her finger at the private sector, saying it was tough luck, that markets change, this affects profits, it’s part of being in business and can’t “... be the grounds for abandoning contracts and passing on those costs.”

But the companies signed contracts with the government in power at the time. If they are not honoured, businesses will think twice if they believe successive governments believe it is their right to repudiate previous government legislation.

And that could very well undermine the efforts of the ASC and extend to the young entrepreneurs looking to take advantage of the intellectual and financial capital that exists in Alberta, which this province can’t afford to lose if it is really committed to diversifying the economy.