December 5, 2006

Seminar FourCross Border Financing: Private Placements

Cross Border Seminar Series

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WelcomeWhy a cross-border seminar series?

• Acceleration in cross-border business activity• Driven by strong domestic economic growth• Continuing trend of globalization and opening up of new markets• Canadian companies seeking growth opportunities abroad

• “Going global” introduces new business and legal issues

• Today’s seminar: cross-border financing – private placements

• Summary of topics• Recent domestic and cross-border financing trends• Private placements by private companies• Private placements by public companies

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Key VC Investment Trends in Canada

• Total VC financing in emerging Canadian companies declining in 2006• down 8% from 2005• total invested funds in 2006 (YTD) = $1.2 billion

• VC focus shifting to later-stage companies• 85% of new funding = follow-on investments

• Contrast to explosive growth in private equity fundraising• up 51% from 2005, led by buyout sector• total invested funds in 2006 (YTD) = $7.9 billion

• Increasing reliance on foreign capital

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VC Investment Trends in the U.S.

• U.S. $6.4 billion invested in the U.S. venture capital market during Q3 2006

• $19.1 billion year-to-date• 13% increase from last year• On track for best year since 2001

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Canadian VCs: Domestic Orientation

• Less likely to make foreign investments• 58% of Canadian VCs have no plans to

expand investments outside of Canada over the next five years

• Contrast to 44% of VCs globally• Top 3 destinations for Canadian VCs

• U.S. – 27%• China – 23%• U.K. – 20%

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Current:• Information technology (59%)

• Software• Communications and networking• Internet-based

• Life Sciences (18%)Future:• Energy/environment clean technology• Health services• Consumer business

Canadian VCs: Favoured Sectors

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VC Investments in Technology Sector

$0

$100

$200

$300

$400

$500

2006 Q2 2006 Q3

$ million

VC Dollars Invested in Technology Sector

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VC Investments in Canada

VC Dollars Invested in Canada

$1.12$1.14$1.16$1.18$1.20$1.22$1.24$1.26$1.28$1.30

2005 YTD 2006 YTD

$ billion

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VC Investments in Canada

020406080

100120140160180

2005 Q3 2006 Q3

Number of Companies Receiving VC Investments

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VC Investments - Regional View

• Ontario – $153 million in 39 companies• Quebec - $105 million in 52 companies• British Columbia - $46 million in 11

companies

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Growing Reliance on Foreign Capital

$0$10$20$30$40$50$60$70$80$90

2005 Q3 2006 Q3

$ million

Non-Canadian VC Investments in Canada

• $54M in Q3 2005 $90M in Q3 2006• 33% of all VC activity in Canada, compared to 25%

during 2001-2005

12Private Company Private Placements -Regulatory Considerations• Regulatory environment in Canada and the

United States is very similar

Canada• “accredited investor” and “private issuer”

exemptions

United States – Regulation D • permits sales to “accredited investors” and

non-accredited investors who are sufficiently sophisticated to make an informed investment decision

13Private Company Private Placements -Regulatory Considerations• Reps and Warranties

• establish a factual basis for relying on the exemption

• Integration• ensure that separate offerings are not “integrated”

• Resale Restrictions

• “Blue Sky” Rules• each state has different filing and disclosure requirements

• consider engaging local counsel

14Private Company Private Placements -Barriers to Investment by U.S. Investors• U.S. VCs and Private Equity Funds frequently

express concerns about investing in private Canadian companies

• Three Typical Concerns• Non-U.S. company may have trouble doing an IPO• Non-U.S. company may have trouble finding a buyer• Tax issues

15Private Company Private Placements -Solutions for U.S. Investors• Proper Structuring can Address U.S. Investors’ Concerns

• Solutions are largely tax driven • Must get it right at time of investment• Balance needs of U.S. investors vs. Canadian investors vs.

Company

• Certain Solutions• Corporate reorganization of company• Continue company from Canada to U.S.• Use of special purpose vehicles by investor

• Seminar 6 will address Cross Border Tax and Structuring

16Private Company Private Placements –U.S. Investors’ Terms and Conditions • Although U.S. and Canadian VC funds have similar

requirements, U.S. funds can be more aggressive in certain respects:

• Stock Restriction Agreements – company option to redeem founder’s shares under certain conditions (e.g. termination of employment or failure to meet financial targets)

• Registration Rights - contractual rights that entitle the investor to force the company to register securities

• Pre-Emptive Rights – U.S. venture capital funds more likely to restrict the right of founders to participate in subsequent financings

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Public Company Private Placements

• Cross-Border Private Placements –Regulatory considerations

• Cross-Border PIPEs:• What are they?• Regulatory implications• Differences from Canadian-only PIPEs• Versus public offerings

• Cross-Border PIPE Investors –Canadian differences

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Private Placements – Regulatory Considerations

• Outbound Canadian prospectus and registration exemption

• In-bound U.S. registration exemption• TSX / TSX-V Listings• U.S. Exchange Listings• Hold periods – Canada vs U.S.

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Cross-Border PIPEs – What are they?

• PIPE – Private Investment in Public Equity• Usual structures / terms:

• Convertible debt or convertible pref• Anti-dilution• Registration rights• “Death spiral” or “Toxic” PIPEs

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Cross-Border PIPEs – Regulatory Implications

• Registration rights – costs, compliance

• TSX Anti-dilution rules

• TSX approved discount rules

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Cross-Border PIPEs – Canadian Differences

• Little “toxic” PIPE experience

• Significantly lower costs

• No registration required – 4 month hold

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Cross-Border PIPEs – Versus Public Offering

• Costs

• Time to market

• Type of investor

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PIPE Investors - Canadian Differences

• Activists• “Toxic” PIPE Investors• Canadian funds / institutions• Due Diligence:

• Agents• Investors• Lawyers / Law firms

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Stay Tuned…

• Upcoming Cross-Border Seminars

• financing – public companies• tax

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Who You Gonna Call?

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– Chambers Global

McCarthys has more "Leading 100 Canada-US Cross-Border Corporate Lawyers" than any other firm- Lexpert/Thomson