TSX Based Cannabis Company
LOCATION: Toronto
Capitalizing on a unique ability to produce cannabis at an extremely low cost outside of North America, one Toronto-based cannabis company used Greenhill’s services to facilitate their Private Placements, Private Transactions, and Proxies, ultimately helping them to go public on the TSX Venture Exchange.
The Challenges
PRIVATE PLACEMENTS
The traditional method of doing a private placement involves lots of paperwork. There are subscription agreements over 30 pages that must be printed, filled in by hand, signed, scanned and returned. The back office must then transcribe the forms, follow up with the subscriber for any errors, and track the status of each subscription, including any payments. In the case of a US 506(c) private placement, where solicitation of the general public is allowed, the back office must also send out and track accredited investor status verification requests, typically sent to a third party of the subscriber’s choice.
The transcription process is complicated by the facts that a) many people’s handwriting is difficult to decipher at the best of times, and b) in the modern era of smartphones, many people will opt to take a picture of the signed subscription agreement and send it in directly from their phone. Unfortunately, they would usually send the picture as the smallest size, making the document next to impossible to read. This leads to transcription errors.
This cannabis company had to retain a staff member, whose full-time job was to send out documents, update spreadsheets, and track funds. Preparing the closing documents alone for a 200-subscriber private placement took a full business day. These documents then had to be circulated for signature, which may take days to complete. Finally, once everything was complete, all the documentation was sent to the transfer agent, where the information was transcribed again into their systems, often introducing more errors.
By the time that a private placement was complete, there were often 3-5 records with either name or address errors due to the manual transcription process.
PRIVATE TRANSACTIONS
When dealing with a private company, any shares sold from the treasury are sold with restrictions attached. At a minimum, these restrictions typically state a) that subject to certain exemptions, the securities may not be traded after until the company becomes a reporting issuer, and b) (for US purchasers) that the shares have not been registered under the Securities Act of 1933, and cannot be sold without being registered or subject to an appropriate exemption.
As part of their corporate bylaws, many private companies also require board approval for any transaction, and a transfer agent will add their own complications to the process, potentially requiring medallion or signature guarantees, and possibly even legal opinions in order to process the transfer.
The end result is that, when using a transfer agent, it becomes very difficult to transfer shares, either for simple “retitling” transactions, where the beneficial owner remains the same, or for sales privately negotiated between a shareholder and a potential buyer.
This cannabis company did its best to facilitate transactions for shareholders, but due to the complexity of the transfer agent’s processes, some early transactions were not completed at all, and had to be re-done, and certain later transactions were stuck in process for upwards of six months.
MEETINGS AND PROXIES
The largest challenge for any private company when holding an annual or special meeting of shareholders is to get enough shareholders together in order to meet the quorum requirements. For any company with more than a few shareholders, this is typically done by sending out a proxy for the shareholder to complete, sign and return.
The challenge when dealing with a typical proxy, usually processed through a transfer agent, is that the transfer agent only has the names and addresses of shareholders, so the notice of meeting and the proxy package are sent out by mail. The shareholder then must be relied on to take the time and interest to complete and send back the proxy form, or if the transfer agent offers online or telephone voting, to vote through that system.
Annual meetings often become a source of stress for management, as printing and mailing are not only expensive (often averaging a minimum of $5.00 per package), the company receives no feedback as to whether the shareholder has even received the package, and whether or not they will act on it, until a response is received.
For one of their shareholder meetings, this cannabis company took the transfer agent route. Packages were received late or not at all, technical issues at the transfer agent prevented people from voting online, and management was on the phone full time getting out the vote for several weeks in advance of the meeting, and even then, they barely made quorum.
The Solutions
PRIVATE PLACEMENTS
Rather than relying on paper documents, Greenhill’s system provides a secure web portal for subscribers to enter their information. The system collects this information using a question and answer format, so that the subscriber is only asked to fill in information relevant to their individual situation. For example, a Canadian accredited investor is qualified differently from an American one.
After the subscriber enters their information, it is validated by Greenhill for consistency. This information is then used to populate all the documents necessary to complete the subscription. Using a single source of truth that the subscriber is responsible for, rather than relying on information that may have been transcribed multiple times, leads to significant time savings and significantly improves the accuracy of the information.
We then generate a pre-populated subscription agreement that is then sent to the subscriber for review and electronic signature. Our electronic signature system also enables trackability, and regularly reminds the user to review and sign the document. We can review the status of any subscription agreement, whether it has been received by the subscriber; when, if, and how many times the document has been viewed; and when it has been signed, with the signing event automatically kicking off the next step in the process: the payment request.
Greenhill maintains a trust account with BMO, which allows us to hold funds in escrow and clear to the company at placement closing. We have also developed technology which allows payments to automatically post to our system as soon as they hit the trust account. This enables us to do real-time reporting on the status of a placement, the number and values of subscription agreements, their status, and the payments received. By tracking individual access codes, we are also able to report on the status of subscribers brought in by any person in the company, to give management an additional level of insight.
The final portion of automating a private placement is generating the closing documents required by the company’s lawyer and by the transfer agent. Greenhill’s system turns a process that would take an entire day of transcribing information from spreadsheets into a button-click and a process that takes a matter of seconds. The documents are then sent to the appropriate parties within the company for electronic signature and can be forwarded on to the lawyer and transfer agent when complete. We have also worked with several transfer agents to output the information stored in our system into a format that can be directly imported into theirs, reducing time spent dealing with data on both sides, as well as eliminating any transcription errors from the transfer agent.
Greenhill’s system allowed this cannabis company to successfully raise nearly $50 million, while significantly reducing errors and staff time required to process their private placements. We estimate that we saved several hundred person-hours and enabled the company to complete the private placements without taking on additional staff. Working with the company’s brokerage partners, we were also instrumental in facilitating the qualifying transaction required for the company to go public on the TSX Venture Exchange by handling the non-brokered portion of the transaction.
PRIVATE TRANSACTIONS
The cannabis company’s transfer agent maintains a very bureaucratic process for handling transfers, so Greenhill worked with the transfer agent to determine exactly what forms and documents were required to process a transfer. Once both sides had agreed on a process, we worked to automate it, and were reliably able to deliver a transfer documentation package to the transfer agent that they were willing to approve and process.
Greenhill also developed a process where the cannabis company was able to support “anonymous” transfers, where the buyer and seller were not known to each other. This allowed the cannabis company to help existing investors who needed to exit the deal, while bringing in new shareholders during times that the company was not raising funds.
In total, Greenhill was able to facilitate approximately $7.6 Million in private transfers and bring the average transfer time down from several months to about 14 days.
MEETINGS AND PROXIES
An early success for Greenhill’s electronic proxy system was processing proxies for one of the cannabis company’s AGMs. Due to scheduling concerns from the cannabis company’s legal counsel, the proxy had to be sent out on December 23rd, with the over 450 proxies needing to be returned by January 24th. This posed a challenge, as things largely shut down during the week between Christmas and New Year’s Day.
Since we kept records of the emails of all of the cannabis company’s shareholders, we were able to send out all of the proxies electronically via the Greenhill system, and have the system automatically nudge shareholders to complete their proxies while the business world shut down for a week.
By the time that things started opening back up on January 4, we had 53.8% of shares reporting in, and by the end of the proxy period, we had 82.5% of shares voted. Thanks to the system, the cannabis company was able to complete a proxy, over Christmas, with no human intervention. No one had to pick up the phone, send an email, or contact a shareholder in any other way.
A later meeting to approve the “going public” transaction saw a final result of 92.5% of shares voted, and over 800 proxies sent out. These sorts of responses are unprecedented in this industry and take much of the stress out of shareholder meeting planning.
Conclusion
In addition to the private placement, private transaction, and proxy services outlined above, Greenhill offers a complete equity management suite, also handling any options and warrants issued by a company, tracking their issuance, exercise and expiry. We also offer shareholder management services, where a company can engage us on an ongoing basis to handle all of their equity, and communicate with shareholders to process routine transactions, so that you can focus on running your business.
