Cross-Border Investment Webinar: What Angels Need to Know to Invest in Canada

© National Angel Capital Organization

Cross-Border Investment:

A Primer Webinarfor US Angels Interested In

Canadian Opportunities


The National Angel Capital Organization Thanks Its Sponsors


• Housekeeping:– Technical Housekeeping – Bryan Watson– Introduction – Lanis Anthony

• Panel Discussion– Cross-Border Investment Issues– Suggested Structures for Investment in Canada– Case Studies/Examples– Q&A– Conclusion

ACA-NACO Angel Webinar Agenda


Welcome!

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• Al Browne, Partner, Cooley Godward Kronish LLP (Boston office)

– Partner in VC Financings and Emerging Companies practices.– Represents tech companies in all areas.

• Alan James, Partner, Gowling, Lafleur, Henderson LLP (Toronto office)– Focused on VC & PE structuring and technology/infrastructure investments.– Has advised investment funds and corporations in numerous cross-border investment

transactions.• Lanis Anthony, Saskatchewan Angel Investors Network (SAINT)

– Chair of SAINT (Saskatchewan Angel Investors Network), board member of NACO and NRC IRAP National Advisory Board.

– A serial entrepreneur, business lecturer and capital strategist.• David Verrill, Founder, Hub Angels & Chair, ACA Collaboration Committee

– Co-founder of Hub Angels. – Research science background followed by work at MIT's Corporate Relations and Xerox

Adaptive Products.– Helped found two businesses: technology consulting & third party marketing in financial

services. • Matey Nedkov, Director, NACO & Member, ACA Collaboration Committee

– Founded Infonet Media, now owned & operated by Rupert Murdoch’s Newscorp Canada. – Formed Nedcorp Holdings Inc, a Merchant & Investment Banking company specializing in early-

stage cos.

Webinar Panellist Biographies


Cross-Border Investment: A Primer Webinar

With

Al Browne, Partner, Cooley Godward Kronish LLP Alan James, Partner, Gowling, Lafleur, Henderson LLP

Lanis Anthony, Saskatchewan Angel Investors Network (SAINT) David Verrill, Founder, Hub Angels and Chair, ACA Collaboration

Committee Matey Nedkov, Director, NACO and Member, ACA Collaboration

Committee

Legal Issues for US Angel Investors Investing in Canada

Al Browne, Cooley Godward Kronish LLPAlan James, Gowling Lafleur Henderson LLP

June 10, 2009

Who We Are (Gowlings)

• Gowlings is one of the largest law firms in Canada with offices across Canada

• We have extensive experience acting for Canadian resident investors and US resident investors that invest in Canada

• We represent a large number of companies that have received one or more rounds of VC and Angel financing

Who We Are (Cooley)• Cooley is a full-service law firm serving high-growth companies and the

investors and financial institutions that fund them.

• We have 10 offices throughout the U.S., including offices in most major U.S. cities.

• We have over 675 attorneys nationwide with deep substantive expertise across a range of legal specialties.

• We represent over 3,000 emerging companies, and many of the largest and most sophisticated technology and life sciences companies in the world, such as Adobe Systems, Applied Materials, eBay, Gilead Sciences, Gen-Probe, NVIDIA, Qualcomm and Synopsys.

• We are the #1 law firm in the U.S. in the number of private equity funds formed

• We serve as counsel to over 200 investment fund organizations, such as Francisco Partners, Battery Ventures, Mohr Davidow Ventures, Duff Ackerman, Sutter Hill Ventures and Venrock Associates

Why invest in Canada?

• Large, talented technology workforce at 20-30% discount to the US

• Scientific Research and Development tax credits can reduce early stage R&D outlays by 40-50%

• Low tax rates for Canadian Controlled Private Corporations

• Easy access to U.S. markets, partners, and acquirers

• Very similar legal system, culture and language

Possible Ownership Structures

• Direct Investment by US investors into Canadian corporation

• Indirect Investment by US investors through US Corporation

• Indirect investment by US investors through “tax friendly” jurisdiction

The “Ideal Structure” – Direct Investment

All Investors invest directly in Canadian Company

US Investors Cdn Investors

CanCo, Inc.

Advantages of the “Ideal Structure”• May Preserve CCPC Status

• Shareholders of CCPCs may qualify for capital gains exemptions upon the sale of their shares

• CCPC’s may be eligible for preferential tax rates and qualify for enhanced SR&ED credits

• Significantly Cheaper to Implement• Requires only one corporation in the structure• Avoids costly legal fees associated with more complicated structures

• Avoids taxable dispositions by Canadian shareholders

Reasons for not Adopting “Ideal Structure”

• Section 116 Withholding Requirements• Comfort (familiarity with DE law)• Some US investors are only permitted to invest in US

companies• US companies are viewed as superior “exit vehicles”• Passive Foreign Investment Company (“PFIC”)

Issues• Controlled Foreign Corporation (“CFC”) Issues• Foreign Investment Entity Rules

The Preferred US VC Structure

All Investors invest directly in US Company


US HoldCo, Inc.

Your CanCo, Inc.

Issues with Preferred VC Structure

• Advantages include having all investors holding shares in the eventual exit vehicle

• Disadvantages include • Taxable dispositions for Canadian shareholders• Potential loss of CCPC status• Investment Company Act of 1940

Sample Exchangeable Share Structure

The Solution:


US HoldCo, Inc.

CallCo, Inc.

Cdn OpCo, Inc.

Alternative Ways to Implement “Ideal Structure” for U.S. VC’s

• Form an offshore investment vehicle in order to avoid Section 116 problem, but preserve tax efficiency on exit

• Typical offshore structures include• “stack” structure in Luxembourg, Netherlands, Barbados

Sample LuxCo Structure

The Solution:


LLC

LuxCo

Cdn OpCo, Inc.

Thank You

Alan JamesPartner

Gowling Lafleur Henderson LLP

and

Al BrownePartner

Cooley Godward Kronish LLP


Questions?

Contact us at:

National Angel Capital OrganizationPhone: 416-581-0009

E-mail: [email protected] Web: www.angelinvestor.ca


Thank You

Al Browne, Partner, Cooley Godward Kronish LLP ([email protected])

Alan James, Partner, Gowling, Lafleur, Henderson LLP ([email protected])

Lanis Anthony, Saskatchewan Angel Investors Network (SAINT) ([email protected])

David Verrill, Founder, Hub Angels & Chair, ACA Collaboration Committee ([email protected])

Matey Nedkov, Director, NACO & Member, ACA Collaboration Committee ([email protected])


Upcoming events of the National Angel Capital Organization

• Survey of Angels’ Impact and Risk (for Canadian investors)– Across Canada in June 2009– Crucially informative for policy-makers – complete it in 2 minutes at:

• www.angelinvestor.ca/Investees_Survey.asp• 9th Annual National Angel Summit (Canada)

– In Toronto, Canada from October 14th to 15th, 2009– Themed Angel Capital: The Engine of Commercialization– The cornerstone event for Angel investors, the high-net-worth

individuals who capitalize Canada’s prospective global champions. • Cross-Border Co-Investment Summit (United States)

– In Boston, Massachusetts November, 2009– Showing high-potential Canadian companies to US Angels

Business

Cross-Border Investment Webinar: What Angels Need to Know to Invest in Canada