Cassels Brock & Blackwell LLP
Private Capital Markets
Association of Canada
Venture Law Corporation
Securities regulators and those active in the
financial industry seem to have their own secret
language. Sometimes it can be difficult for companies
and investors to understand what it all means. In
this article, we are going to de-mystify various terms
which describe how much money a company can
keep when crowdfunding. In particular, we are going
to discuss what it means when a company says it is
conducting a ‘minimum’, ‘maximum’, ‘keep-it-all’ or
an ‘all-or-nothing’ offering.
The ‘minimum offering or ‘target amount’
means the minimum amount of capital a company
must raise in an offering before it can keep the money
from investors and close the deal. Sometimes it is
also called an ‘all-or-nothing’ campaign. A company
must return any money received from investors if it
does not raise the specified minimum amount. In that
case, it is a failed offering. All-or-nothing offerings will
typically involve an escrow account to hold investor
funds until the end of a pre-defined offering period,
such as 90 days, or the raising of the minimum or
target amount. All-or-nothing campaigns are typically
associated with non-equity crowdfunding but are also
associated with private placement equity financings.
The term ‘maximum offering means the
maximum amount of capital a company can raise
under an offering. A maximum offering amount may
be set by the company raising capital, its dealer,
or by applicable securities law. If a company or a
dealer has set the maximum offering amount, the
parties may increase the maximum offering amount
by consent. It is common in public offerings for a
company to provide an ‘over-allotment option’
to its dealer. An over-allotment option gives the
dealer the option to increase the maximum offering
amount if the increased amount is for market-making and other purposes. Over-allotment options
do not apply to a crowdfunding offerings. Existing
and proposed securities laws in Canada and the
United States set maximum offering amounts for
companies raising capital under applicable equity
A ‘keep-it-all’ or ‘flexible’ offering means
the company receives all of the funds raised in the
offering. There is no minimum offering amount that
must be raised by the company to receive the funds.
A keep-it-all or flexible offering makes sense when
a company can utilize any amount of capital raised
and has other sources of financing to advance its
business. Investors should be cautious about a
keep-it-all offering and should investigate whether a
company really needs a certain amount of capital to
allow a project to be successful or get the company
to its next key milestone. The last thing an investor
wants to do is invest in an underfunded project that
should have a minimum offering amount.
Why have minimum and maximum offerings?
Setting a minimum and maximum offering amount
requires management of a company to analyze what its
financial needs are to reach its next key milestone or
complete its business plan within defined timelines. This
includes assessing what capital is on hand and what
other financing sources are available to the company.
A well thought out minimum offering amount
helps ensure a company will be able to fund its goals.
A well thought out maximum offering amount ensures
founders of the company are not unduly diluted at any
point in the growth cycle of the company or are tempted
to waste money and resources on non-viable activities.
Setting a minimum offering amount protects investors
from investing in companies which do not understand
their capital needs or who are, in the investor’s opinion,
undercapitalized to achieve their stated goals or
business plan. No one wants to waste his or her hard-earned money on a company that has little to no chance
of success. Similarly, setting a maximum offering amount
protects investors from unnecessary dilution and from
management who may misuse funds if not properly ear
marked for a specific purpose.
Setting a minimum and maximum offering
amount makes it easier for a company to share with
investors its intended use of proceeds in the offering.
The more details a company provides on how it will
use the money it raises, the better idea an investor has
on what a company proposes to do with the money.
When offering documents state a company will use
the money raised for ‘general corporate purposes’, it
does not really provide an investor with any insight
into how the money will be spent. Although companies
may prefer this flexibility, it provides little comfort to
investors who, as a result, may choose not to invest in
Setting out a use of proceeds in offering
documents should done with care. Investors expect
companies to spend their money as set out in the
How Much Money Can a Company Keep When Crowdfunding?
De-Mystifying Minimum, Maximum, ‘Keep-it-All’ and ‘All-or-Nothing’ Offerings
By Brian Koscak and Alixe Cormick