Funding Cash Flow – Public Versus
Private Company & SR&ED
From an SR&ED viewpoint, raising capital publicly is likely
to change the company’s claimant basis from Canadian-Controlled
Private Corporation (CCPC) to non-CCPC. This entails a fundamental
difference in the SR&ED tax credit earned: only 20% of
SRED costs are offset against income taxes otherwise owing
(“non-refundable”) as compared to 35% of SR&ED project
costs paid in cash (“refundable”). As a start-up or early-stage
technology company with little or no current taxes, the non-refundable
SR&ED tax credit is of little current value and unknown
future value to either itself or to another company that may
acquire it in the future. The company’s status therefore will
have a significant effect on funding cash flow with SR&ED.
However, a rapidly-growing technology company may require
deep pockets since SR&ED funding is received on an annual
basis, after the company has financed the development for
the previous year. Finding an or carefully-structured funding that preserves CCPC status may be preferable
to raising capital publicly.
Raising Capital Publicly – Timing
and Other Considerations
With the above comments in mind, it may be that large capital
requirements are paramount to the company’s future growth.
Raising capital by “going public” can be beneficial for a
high-tech company when credible projections can be made based
on key company individuals and/or proprietary technology that
is at least partially developed When faced with substantial
capital requirements to move the technology and the company
forward, yet partial or full cash flow funding from revenue
has not been achieved, and/or assets have insufficient value
independent of the company’s fate to allow traditional bank
or debt financing, raising capital publicly on equity markets
can be advisable. However, among the myriad of factors to
consider is the fundamental balancing of how the market is
likely to value the new share offering(s) versus the dilution
of existing shares, together with the long-term impact of
the new capital on the company’s value. Recognizing the time
when these factors combine to the best advantage of the company’s
existing shareholders is the key. “Going public” involves
listing the existing shares on a public exchange and is generally
accompanied by making an Initial Public Offering (IPO) of
additional shares, as well as rights to offer additional shares
in the future under certain conditions. The funds raised by
the IPO are established through a range of mechanisms and
generally carried out through an underwriter. The mechanisms
can range from a set (agreed) price and volume (usually with
modest variation allowed in volume) where the underwriter
assumes all the risk of selling into the market, to a best-efforts
basis where the majority of the risk is borne by the issuing
company. There is usually a risk/reward balance to the company
in choosing between those mechanisms. In addition, the compliance
cost to meet the requirements for an IPO and maintain the
listing on public exchanges is generally quite onerous for
small companies, and only justified when a significant amount
of capital is expected to be raised.
Funding Cash Flow – Public Versus
Private Company & IRAP
From an IRAP viewpoint, being a public or private company
has no direct effect on funding availability from IRAP, but
would be just one of the considerations that would be taken
into account in assessing management capability and corporate
viability. The public presence of the company would serve
as an additional window through which the NRC could view the
company.
Raising Capital on Public Stock
Exchanges
Companies can choose to list on one or more public exchanges
with somewhat varying requirements, exposure, and costs. For
example, the CNQ and the TSX Venture Exchange are alternatives
to traditional exchanges such as the Toronto Stock Market
and the New York Stock Exchange.
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