Fundraising: Finding and Managing “Retail” and “Accredited” Investors

I performed some searches yesterday to identify recent publicly-listed technology companies via TMX Money and I found that technology companies and biotechnology companies are starting to take a major share of new listings on the venture exchange. For a growing company in this space, this is good news. The types of companies that are publicly listing provides a barometer of investor sentiment around what’s hot for retail investors. In the digital technology space the types of companies that are listing include advertising technology companies, 3D printing companies, customer engagement companies (via online chat), gaming companies, online meetings companies, and search fund companies (among others) that are looking to invest in one or more technology businesses.

Public company information provides access to strategic and financial information that can help to guide non-public growth companies. Companies in fast growing industry sectors as those noted above are often struggling to find competitive industry information, and public disclosure materials provide reference cases, industry valuation comparables, and access to company strategic plans and financial information, for those that are willing to search through the public disclosure databases. (Companies to search for include Keek Inc., 3TL Technologies Corp, Frankly Inc., NYX Gaming Group Ltd., EQ Inc., to name a few recent examples).

Publicly listing a company may come with many rewards and issues. Publicly listing is an expensive, time consuming process, and accessing the public markets requires the proper preparation and securities commission approval of a prospectus or other comprehensive disclosure document (depending on the method of listing). Companies that have recently listed are for the most part priced at less than $1 per share and are therefore in the category termed as “penny stocks” according to public sentiment. Although this could lead to a fairly large return on investment since a minor increase in price per share can lead to double digit increases in share value, the opposite is also true in terms of potential losses that can be incurred, and ultimately, thin capitalization and trading might make it difficult to find a buyer when stock speculators are looking to sell. The real payoff for companies in this category is finding real economic growth coupled with coverage by institutional research analysts with the result of active trading and liquidity.

Investors who are “accredited” can also invest in high growth companies without the need for a public listing or a prospectus. These investors are often high net-worth individuals, but may also be individuals who satisfy other criteria necessary to qualify them as “accredited investors”. .

Accredited investors can be accessed via Exempt Market Dealers (EMDs) or Investment Dealers (IDs). As an investor seeking access to companies that are looking for capital, it is advisable to make sure that the EMD or ID is properly registered as such and/or properly regulated by a governing body such as the Investment Industry Regulatory Organization of Canada (IIROC. Of course, it’s always better to seek a warm introduction (so contact your current investors and advisors to see if there is a warm or trusted referral that can be made into this group of investment professionals). A careful EMD/ID will usually spend some time performing due diligence on a company seeking capital in order to determine if that company is suitable for their portfolio of potential investors. Factors such as a strong management team and good software product are among a long list of qualities that may be considered before an EMD/ID will represent a company. If an EMD/ID is willing to represent a company, it is not without cost – there will be a commission payable usually in both cash and company shares, there is typically a monthly fee plus expenses for acting as an agent for the company. I will discuss structuring this agency agreement in a future article.

In light of investor sentiment in favour of technology company investors, access to such capital is becoming more readily available than in recent years, the result of which is that companies have access to much-needed working capital. The downside for companies is the need for securities lawyers to navigate the reporting and disclosure requirements, transactional lawyers to negotiate the corporate financing transaction or series of transactions, and corporate lawyers to ensure proper governance and to make sure that books and records are in proper order, along with accountants, auditors, filing deadlines and other administrative requirements that need to be fulfilled, all of which can be quite expensive and time-consuming.

The company will likely need to appoint a dedicated investor relations officer (which could be the CEO) since managing the investor expectations in order to raise future rounds of financing is a time-consuming process as well. The types of investors that discover a company via EMD/ID are often speculative investors, and a common concern in these scenarios is that there is a misalignment between the goals of such investors to obtain fast returns and the goals of the company board and founders seeking incremental, manageable growth. A company can quickly lose control of their project mandates without good advice as the bargaining power shifts and pressure builds to perform and satisfy the demands of the investors and agent.

Investor sentiment towards technology companies has been hot at all levels, which is encouraging for companies that are at a fundraising stage.

A word of warning: a lot of hard work can go up in smoke due to the pressures of satisfying investors, and, to this end, I have three (3) recommendations: try to build a company with good fundamentals that can survive on cash flows and where fundraising can enhance already existing growth, surround yourself with good advisors who want to succeed on the fundamentals, and do not charge into an investment scenario where the new investor goals are potentially misaligned with the founding principals.


Written by Rajah. Rajah Lehal is Founder and CEO of Clausehound.com. Rajah is a legal technologist and technology lawyer who is, together with the Clausehound team, capturing and sharing lawyer expertise, building deal negotiation libraries, teaching negotiation in classrooms, and automating negotiation with software.