Return to Entrepreneurship: Why More Dealing Representatives Are Considering Small and Related Offerings
By William McNarland, CFA & Qian Zhang
Starting last year, we have noted a shift in Dealing Representatives considering smaller offerings that they have a disclosed related interest in. The purpose of this article is to discuss some of the reasons for this shift, and the important aspects to consider in this decision.
First, let’s define small and related offering to establish a base for our discussion. Typically, a small offering means that its capital requirement is between $500,000 and $5,000,000. Related means that the Dealing Representative has spearheaded the project and is considered the ‘mind and management’ of the offering.
As an example, David is a Canadian Dealing Representative. He is passionate about multi-family buildings in Ottawa. He understands the market well, and has identified a building that is listed at $3,000,000 CAD. He feels confident that the listing is at a great price, and he already has a plan in place on how to increase its rental revenue. In this scenario, it would require him to match the bank debt he is able to borrow with $800,000 CAD of equity. It may be beneficial for David to consider structuring a ‘small and related offering’ through an Exempt Market Dealer (EMD).
A small and related offering structure could be beneficial to a Dealing Representative for a number of reasons:
1. Additional Exemptions: Small and related offerings are potentially eligible for additional exemptions that normally would not apply to large projects offered via an offering memorandum (OM). As a principal of the offering, the Dealing Representative may be able to rely on the close friends, family, close business associates, and accredited investor exemptions. These exemptions potentially have more flexibility than other traditional exemptions that can be used.
2. More Cost-Effective: Unlike the traditional large OM offerings, small and related offerings can be a lot more cost-effective. Often, offerings can be put together for less than $40,000 CAD. This includes RRSP eligibility, opening of corporations, and professionally prepared confidential information memorandum with extensive financial modeling, subscription agreements, and all other needed components to make the offering turn-key-ready for the Dealing Representative. Ongoing costs may also be more manageable as there is no requirement for audited financial statements or filing requirements of the raised capital. Like the traditional large OM offerings, the cost for putting the offering together can often be structured to be refunded by the offering.
3. Better Compensation Flexibility: Private offerings with related interests allow for custom compensation. Instead of only earning a commission, the dealing representative can earn equity, base salaries, bonuses, or any other form of desired compensation that is agreeable to investors.
4. A Sense of Control: Reputation and clients’ trust take years to build. Many successful Dealing Representatives would prefer to have a say in the offerings they put in front of their investors. They are not satisfied with only receiving updates. In the case of a small and related offering, Dealing Representatives have an interest position in the project, which allows them to have a voice, and depending on the level of involvement, they could also have additional managerial control of the project.
5. A Boost in Confidence and Enthusiasm: Generally speaking, when people own a part of an offering, it means that they really love it and they really believe in it. Even when two offerings are of equal quality, it is much easier and more motivating to share with investors the one we feel passionate about. This passion is often one of the key reasons an investor will choose to work with one Dealing Representative than another.
While recognizing the benefits of a small and related offering, Dealing Representatives often express a number of concerns. Often, with the right knowledge and structure in place, these concerns can be managed. The top three most common questions we have been asked are as follows:
1. What about back office functions?
The back office functions can often be outsourced for a small monthly fee. This usually includes functions such as bookkeeping, account receivable and payable functions, and investor distribution. Legal and tax resources can be also outsourced to professionals when needed.
2. What about credibility?
Credibility can be strengthened through strong corporate governance structure. This can be accomplished by adding creditable board members, and having safeguards in place such as double signatures on bank transfers and other functions. For turn-key offerings, having directors who have strong resumes adds substantial credibility. However, convincing individuals to willingly risk their reputation for the offering of a Dealing Representative often takes terms negotiation.
3. Can this work with my dealer?
Most entrepreneurial-focused dealers are excited to have these types of offerings for clients. All this typically requires besides a ‘Know Your Client Analysis’ of each trade, is a ‘Know Your Product’ file, an updated ‘Relationship Conflict Disclosure,’ and an ‘Outside Business Activity Update.’
To conclude, it is feasible for a Dealing Representative to put together a private small and related offering. Let’s go back to our example earlier; through putting together a small and related offering, David would be able to raise the capital necessary to support the mortgage on the multi-family building he wished to have an equity in. This would allow him to execute his own vision driven by his own passion. The Canadian Exempt Market is originally founded based on the principles of entrepreneurship. It is exciting that the industry is returning to its roots.
William McNarland, CFA is a corporate finance expert specializing in the structuring, analysis, and capital raising of private debt and equity. Bringing over 20 years of industry experience, William was the founder of ExemptAnalyst and formerly was Managing Director of Pinnacle Wealth Brokers. Currently William is the co-founder and Managing Director of Eiffel Peak Capital, and a director of Rethink and Diversify Securities.
Qian Zhang’s career began in the field of international media and later ventured into the private capital market in 2010. Qian is a co-founder and President of Eiffel Peak Capital and a shareholder of Rethink and Diversify Securities.