Cross-Border Investment: A Primer Webinar for US Angels Interested In Canadian Opportunities

The National Angel Capital Organization Thanks Its Sponsors

Housekeeping: Technical Housekeeping – Bryan Watson Introduction – Lanis Anthony Panel Discussion Cross-Border Investment Issues Suggested Structures for Investment in Canada Case Studies/Examples Q&A Conclusion ACA-NACO Angel Webinar Agenda

Housekeeping:

Technical Housekeeping – Bryan Watson

Introduction – Lanis Anthony

Panel Discussion

Cross-Border Investment Issues

Suggested Structures for Investment in Canada

Case Studies/Examples

Q&A

Conclusion

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Al Browne, Partner, Cooley Godward Kronish LLP (Boston office) Partner in VC Financings and Emerging Companies practices. Represents tech companies in all areas. Alan James, Partner, Gowling, Lafleur, Henderson LLP (Toronto office) Focused on VC & PE structuring and technology/infrastructure investments. Has advised investment funds and corporations in numerous cross-border investment transactions. Lanis Anthony, Saskatchewan Angel Investors Network (SAINT) Chair of SAINT (Saskatchewan Angel Investors Network), board member of NACO and NRC IRAP National Advisory Board. A serial entrepreneur, business lecturer and capital strategist. David Verrill, Founder, Hub Angels & Chair, ACA Collaboration Committee Co-founder of Hub Angels. Research science background followed by work at MIT's Corporate Relations and Xerox Adaptive Products. Helped found two businesses: technology consulting & third party marketing in financial services. Matey Nedkov, Director, NACO & Member, ACA Collaboration Committee Founded Infonet Media, now owned & operated by Rupert Murdoch’s Newscorp Canada. Formed Nedcorp Holdings Inc, a Merchant & Investment Banking company specializing in early-stage cos. Webinar Panellist Biographies

Al Browne, Partner, Cooley Godward Kronish LLP (Boston office)

Partner in VC Financings and Emerging Companies practices.

Represents tech companies in all areas.

Alan James, Partner, Gowling, Lafleur, Henderson LLP (Toronto office)

Focused on VC & PE structuring and technology/infrastructure investments.

Has advised investment funds and corporations in numerous cross-border investment transactions.

Lanis Anthony, Saskatchewan Angel Investors Network (SAINT)

Chair of SAINT (Saskatchewan Angel Investors Network), board member of NACO and NRC IRAP National Advisory Board.

A serial entrepreneur, business lecturer and capital strategist.

David Verrill, Founder, Hub Angels & Chair, ACA Collaboration Committee

Co-founder of Hub Angels.

Research science background followed by work at MIT's Corporate Relations and Xerox Adaptive Products.

Helped found two businesses: technology consulting & third party marketing in financial services.

Matey Nedkov, Director, NACO & Member, ACA Collaboration Committee

Founded Infonet Media, now owned & operated by Rupert Murdoch’s Newscorp Canada.

Formed Nedcorp Holdings Inc, a Merchant & Investment Banking company specializing in early-stage cos.

Cross-Border Investment: A Primer Webinar With Al Browne, Partner, Cooley Godward Kronish LLP Alan James, Partner, Gowling , Lafleur , Henderson LLP Lanis Anthony, Saskatchewan Angel Investors Network (SAINT) David Verrill , Founder, Hub Angels and Chair, ACA Collaboration Committee Matey Nedkov, Director, NACO and Member, ACA Collaboration Committee

Legal Issues for US Angel Investors Investing in Canada Al Browne, Cooley Godward Kronish LLP Alan James, Gowling Lafleur Henderson LLP June 10, 2009

Who We Are (Gowlings) Gowlings is one of the largest law firms in Canada with offices across Canada We have extensive experience acting for Canadian resident investors and US resident investors that invest in Canada We represent a large number of companies that have received one or more rounds of VC and Angel financing

Gowlings is one of the largest law firms in Canada with offices across Canada

We have extensive experience acting for Canadian resident investors and US resident investors that invest in Canada

We represent a large number of companies that have received one or more rounds of VC and Angel financing

Who We Are (Cooley) Cooley is a full-service law firm serving high-growth companies and the investors and financial institutions that fund them. We have 10 offices throughout the U.S., including offices in most major U.S. cities. We have over 675 attorneys nationwide with deep substantive expertise across a range of legal specialties. We represent over 3,000 emerging companies, and many of the largest and most sophisticated technology and life sciences companies in the world, such as Adobe Systems, Applied Materials, eBay, Gilead Sciences, Gen-Probe, NVIDIA, Qualcomm and Synopsys. We are the #1 law firm in the U.S. in the number of private equity funds formed We serve as counsel to over 200 investment fund organizations, such as Francisco Partners, Battery Ventures, Mohr Davidow Ventures, Duff Ackerman, Sutter Hill Ventures and Venrock Associates

Cooley is a full-service law firm serving high-growth companies and the investors and financial institutions that fund them.

We have 10 offices throughout the U.S., including offices in most major U.S. cities.

We have over 675 attorneys nationwide with deep substantive expertise across a range of legal specialties.

We represent over 3,000 emerging companies, and many of the largest and most sophisticated technology and life sciences companies in the world, such as Adobe Systems, Applied Materials, eBay, Gilead Sciences, Gen-Probe, NVIDIA, Qualcomm and Synopsys.

We are the #1 law firm in the U.S. in the number of private equity funds formed

We serve as counsel to over 200 investment fund organizations, such as Francisco Partners, Battery Ventures, Mohr Davidow Ventures, Duff Ackerman, Sutter Hill Ventures and Venrock Associates

Why invest in Canada? Large, talented technology workforce at 20-30% discount to the US Scientific Research and Development tax credits can reduce early stage R&D outlays by 40-50% Low tax rates for Canadian Controlled Private Corporations Easy access to U.S. markets, partners, and acquirers Very similar legal system, culture and language

Large, talented technology workforce at 20-30% discount to the US

Scientific Research and Development tax credits can reduce early stage R&D outlays by 40-50%

Low tax rates for Canadian Controlled Private Corporations

Easy access to U.S. markets, partners, and acquirers

Very similar legal system, culture and language

Possible Ownership Structures Direct Investment by US investors into Canadian corporation Indirect Investment by US investors through US Corporation Indirect investment by US investors through “tax friendly” jurisdiction

Direct Investment by US investors into Canadian corporation

Indirect Investment by US investors through US Corporation

Indirect investment by US investors through “tax friendly” jurisdiction

The “Ideal Structure” – Direct Investment All Investors invest directly in Canadian Company US Investors Cdn Investors CanCo, Inc.

All Investors invest directly in Canadian Company

Advantages of the “Ideal Structure” May Preserve CCPC Status Shareholders of CCPCs may qualify for capital gains exemptions upon the sale of their shares CCPC’s may be eligible for preferential tax rates and qualify for enhanced SR&ED credits Significantly Cheaper to Implement Requires only one corporation in the structure Avoids costly legal fees associated with more complicated structures Avoids taxable dispositions by Canadian shareholders

May Preserve CCPC Status

Shareholders of CCPCs may qualify for capital gains exemptions upon the sale of their shares

CCPC’s may be eligible for preferential tax rates and qualify for enhanced SR&ED credits

Significantly Cheaper to Implement

Requires only one corporation in the structure

Avoids costly legal fees associated with more complicated structures

Avoids taxable dispositions by Canadian shareholders

Reasons for not Adopting “Ideal Structure” Section 116 Withholding Requirements Comfort (familiarity with DE law) Some US investors are only permitted to invest in US companies US companies are viewed as superior “exit vehicles” Passive Foreign Investment Company (“PFIC”) Issues Controlled Foreign Corporation (“CFC”) Issues Foreign Investment Entity Rules

Section 116 Withholding Requirements

Comfort (familiarity with DE law)

Some US investors are only permitted to invest in US companies

US companies are viewed as superior “exit vehicles”

Passive Foreign Investment Company (“PFIC”) Issues

Controlled Foreign Corporation (“CFC”) Issues

Foreign Investment Entity Rules

The Preferred US VC Structure All Investors invest directly in US Company US Investors Cdn Investors US HoldCo, Inc. Your CanCo, Inc.

All Investors invest directly in US Company

Issues with Preferred VC Structure Advantages include having all investors holding shares in the eventual exit vehicle Disadvantages include Taxable dispositions for Canadian shareholders Potential loss of CCPC status Investment Company Act of 1940

Advantages include having all investors holding shares in the eventual exit vehicle

Disadvantages include

Taxable dispositions for Canadian shareholders

Potential loss of CCPC status

Investment Company Act of 1940

Sample Exchangeable Share Structure The Solution: US Investors Cdn Investors US HoldCo, Inc. CallCo, Inc. Cdn OpCo, Inc.

The Solution:

Alternative Ways to Implement “Ideal Structure” for U.S. VC’s Form an offshore investment vehicle in order to avoid Section 116 problem, but preserve tax efficiency on exit Typical offshore structures include “ stack” structure in Luxembourg, Netherlands, Barbados

Form an offshore investment vehicle in order to avoid Section 116 problem, but preserve tax efficiency on exit

Typical offshore structures include

“ stack” structure in Luxembourg, Netherlands, Barbados

Sample LuxCo Structure The Solution: US Investors Cdn Investors LLC LuxCo Cdn OpCo, Inc.

The Solution:

Thank You Alan James Partner Gowling Lafleur Henderson LLP and Al Browne Partner Cooley Godward Kronish LLP

Questions? Contact us at: National Angel Capital Organization Phone: 416-581-0009 E-mail: [email_address] Web: www.angelinvestor.ca

Thank You Al Browne, Partner, Cooley Godward Kronish LLP (abrowne@cooley.com) Alan James, Partner, Gowling, Lafleur, Henderson LLP (alan.james@gowlings.com) Lanis Anthony, Saskatchewan Angel Investors Network (SAINT) (lanis@ccteam.ca) David Verrill, Founder, Hub Angels & Chair, ACA Collaboration Committee (Dverrill@aol.com) Matey Nedkov, Director, NACO & Member, ACA Collaboration Committee (matey@nedcorpinc.com)

Upcoming events of the National Angel Capital Organization Survey of Angels’ Impact and Risk (for Canadian investors) Across Canada in June 2009 Crucially informative for policy-makers – complete it in 2 minutes at: www.angelinvestor.ca/Investees_Survey.asp 9 th Annual National Angel Summit (Canada) In Toronto, Canada from October 14 th to 15 th , 2009 Themed Angel Capital: The Engine of Commercialization The cornerstone event for Angel investors, the high-net-worth individuals who capitalize Canada’s prospective global champions. Cross-Border Co-Investment Summit (United States) In Boston, Massachusetts November, 2009 Showing high-potential Canadian companies to US Angels

Survey of Angels’ Impact and Risk (for Canadian investors)

Across Canada in June 2009

Crucially informative for policy-makers – complete it in 2 minutes at:

www.angelinvestor.ca/Investees_Survey.asp

9 th Annual National Angel Summit (Canada)

In Toronto, Canada from October 14 th to 15 th , 2009

Themed Angel Capital: The Engine of Commercialization

The cornerstone event for Angel investors, the high-net-worth individuals who capitalize Canada’s prospective global champions.

Cross-Border Co-Investment Summit (United States)

In Boston, Massachusetts November, 2009

Showing high-potential Canadian companies to US Angels