A Montreal-based consumer goods company has launched the first crowdfunded, cross-border capital raise.
WAFU, a maker of Japanese dressings and mayonnaise, is taking the step to extend their reach in the competitive American food products sector.
WAFU seeks $1,000,000 via the issuance of as many as 400 Series A-3 preferred shares, split evenly between new and existing ones. Priced at $2,500 per share with a two-share minimum, the value represents 20.99 percent of the share capital, giving WAFU a $4.26 million valuation.
WAFU states the net proceeds will be directed toward research and development, debt repayment, marketing, listing fees and general capital.
The move is the brainchild of WAFU CEO Gil Michel-Garcia. In nearly two decades in business Mr. Michel-Garcia has overseen cross-border private debt and equity offerings on behalf of foreign companies seeking expansion into the United States. He has also helped more than 70 foreign companies raise beyond $10 billion in private placements from American investors.
To date he has helped attract in excess of $1 million in accredited investments for WAFU from American and Canadian citizens.
In designing the investment package, Mr. Michel-Garcia set out to make the shares as attractive as possible. Series A3 preferred shares are being offered and Mr. Michel-Garcia included additional incentives to appeal to investors.
“Things investors need are minority protection rights and voting rights. We are providing a full, fair package, like what a private equity fund would receive.”
He added the shares would receive liquidation preference over common shares.
The advent of the JOBS Act made these cross-border raises possible, Mr. Michel Garcia said.
“Before the JOBS Act, a company had to go public once they reached 500 shareholders. Now it is 2,000.”
That extra 1,500 shareholder allowance makes creative financing options like WAFU’s a possibility, but it also lessens the headaches for companies which expand at a rapid pace, Mr. Michel-Garcia said.
“Look at Facebook. They had to rush and the whole IPO was a disaster.”
Of course, 2,000 is a whole lot more than 50, which is the limit at which companies have to go public in Canada. This presented challenges and a host of technicalities that took a securities lawyer to navigate. Luckily Mr. Michel-Garcia is one.
“You do not have to register the company once the 50-shareholder limit is reached, but you lose exemptions,” Mr. Michel-Garcia explained. “The effect is, if you cannot find a loophole you lose the M&A preference which invalidates any chance at an M&A exit for investors.”
And with it the biggest attraction for investors to look at your company.
“Prior to Title II, companies couldn’t engage in general solicitation – no press releases, talking to reporters, or social media activity,” Mr. Michel-Garcia explained. “That was Rule 506. Under 506 (b) you could as long as you got a representation from someone confirming they were an accredited investor. Now, with 506 (c) you can engage in general solicitation but have to reasonably verify that all investors are actually accredited.”
They could not advertise in Canada for fear of it bouncing back to the U.S., he added.
Mr. Michel-Garcia envisions crowdfunding filling a crucial gap many companies find themselves in as they begin to grow.
“A normal company life cycle starts with partners accessing retirement savings and taking second mortgages. Once they have some initial success and they require extra capital they go to family and friends.”
This might take them to $1 million in annual sales.
“If they go for a commercial loan, they will get laughed at until they reach $3 million. This is when capital dries up.”
The $1.5 million – $2 million sales range places a company square in the netherworld where they are too small for private equity but too large for angel investors.
“A private equity deal won’t happen for less than $5 million so the company would have to be worth $20 million if they want to offer 25 percent equity,” Mr. Michel-Garcia explained.
Companies pondering traditional raises should be aware of all the costs associated with them, Mr. Michel-Garcia cautioned.
“You are looking at $20,000 for an accountant, minimum of $25,000 for an audit and another $20,000 for legal fees.”
Add in as much as 10 per cent to the placement agent and if you are not raising a high amount, your capital costs eat up a significant portion of your raise.
Can we expect to see a rush of companies conducting cross-border raises in the future? Mr. Michel-Garcia sees limits.
“You have to be careful with your terms,” he said. There are also language and credibility issues with companies from some areas of the world.
People like dealing with familiarity, so the countries most likely to engage in cross-border crowdfunding raises in the United States are ones whose legal systems and corporate environments are most similar to America’s, places like Canada and the United Kingdom, Mr. Michel-Garcia explained.
“Court systems and investor protections are well-developed.”
When the pool of investors is widened to include additional jurisdictions like the U.S., it drastically changes valuations, Mr. Michel-Garcia says.
“If you are pricing a deal Canada-wide you are looking at 1.5 times forward looking gross sales, while a fully-penetrated US company can command two times and if they are fully branded maybe 2.5 to three times,” he said.
The valuations increase because large companies are not necessarily looking solely at revenue streams, but also consider such factors as trademarks, distribution channels, international access, and entry into valuable new product lines. This frequently occurs in Mr. Michel-Garcia’s specialty area.
As an example Mr. Michel-Garcia cited Heinz’s 2008 acquisition of refrigerated salad dressings maker Renee’s.
“Heinz paid $67 million for a company with forward looking gross sales of $19 million, or roughly 3.5 times,” he said. “Heinz paid to get into a low-competition market.”
In days past, the large companies did most of their research and development in-house, but that process was disrupted by private equity. It became more effective for companies to find a company that had the product, technology, or access it needed and buy them.
“A large company spends $5 million to $10 million just to launch a new product,” Mr. Michel-Garcia said. “This makes them risk averse.”
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