You Don’t Need a US Company to Raise from the US
We’ve attended a number of presentations lately where Canadian founders are told that they MUST be a US company to raise money from US investors. This advice is patently false; Canadian startups raise from US investors all the time and investors generally don’t care that a prospective portfolio company is Canadian.
1. Where does this Falsehood Originate?
10 years ago, US investors were less receptive to investing in Canadian companies. Many funds had a domestic focus due to a wealth of US investment opportunities but as the venture environment became more competitive, and funds ever larger, investors began to look abroad. The historic US focus of funds was often reinforced by restrictions in their LP (limited partnership) agreements that prohibited investments outside the US, with similar restrictions exhibited by incubators such as Tech Stars and Y-Combinator.
2. The Truth: US Investors don’t care that you’re a Canadian Company
Today, US investors in our clients rarely care that they are Canadian companies while most incubators have dropped the requirement that portfolio companies be US incorporated.
Of the 1,400+ companies we represent, we have only encountered 1 US investment that required the company to reincorporate in the US, in all other cases US investors took no issue with a Canadian company or could be made comfortable quickly (often any friction is due to US legal counsel’s lack of familiarity with Canada).
3. US incorporation and Canadian tax Results
Should you still wish to incorporate in Delaware, it’s important to understand that a cross-border, Delaware-Canada, structure may lead to negative tax results for both the company and its founders unless a proper legal and tax plan is created (and followed).
Potential negative tax results include: (a) personally missing out on the capital gains exemption and the roughly ~$1.25 million of tax free gains it offers; (b) the company missing out on certain R&D tax credits (see: Revisiting – Should I Incorporate my Canadian Startup in Delaware); and (c) the company being exposed to costly cross-border legal and tax issues due to bring a US company but operating in Canada.
4. Investors don’t lead with “where are you incorporated?
Investors don’t lead with “where are you incorporated?”; incorporation jurisdiction is an afterthought. If an investor wants to invest and demands a US company, your lawyers can quickly restructure the Canadian company into a Delaware company. An investor that passes, rather than allowing you to restructure, was never going to invest in the first place.
For more information, please see our posts: Should I Incorporate my Canadian Startup in Delaware and Revisiting – Should I Incorporate my Canadian Startup in Delaware.
Raising Capital from U.S. Investors
Many Canadian companies raise funds in cross-border financings, with most rounds including at least 1 U.S. resident investor (if not a U.S. lead investor). If your Canadian startup is raising funds from U.S. investors, you will need to keep the following in mind:
1. Value Your Startup in USD
All Canadian startups should value themselves in USD. While early investors may be Canadian, U.S. startup to benefit from the USD-CAD exchange rate, further extending runway to the extent expenses (see: payroll) are in CAD.
In our experience: (a) Canadian investors expect a USD valuation; (b) US investors don’t consider forex; and (c) your company is not more appealing because CAD is cheaper – investors are looking for quality companies not forex discounts.
2. US vs Canadian Templates
Most startup financings use template documents, either YC’s SAFE or the National Venture Capital Association priced-round documents (CVCA for Canadians). It’s important to use the correct, Canadian, version of these templates as the Canadian version contains key clauses designed to achieve Canadian legal compliance. The Canadian versions are very similar to the US versions, which similarity will create comfort for your U.S. investors and their legal counsel.
3. Canadian and US Securities Laws Apply
As a Canadian startup, raising company from U.S. investors will implicate cross-border securities laws. First, since your startup is incorporated in Canada, Canadian securities laws apply. Second, since the investor is resident in the U.S., U.S. securities laws apply. It is critical that compliance with these securities laws be addressed before closing a financing. Luckily, cross-border legal counsel should be able to address compliance quickly.
4. You Don’t Need to incorporate in the US
You don’t need to be a U.S. company to raise money from U.S. investors and many U.S. investors won’t force you to be a US company. Of the 1,400+ companies we represent, we’ve only had to incorporate a U.S. company to appease U.S. investors twice in the last 12 years. Read our blog posts on the subject here: Should I Incorporate my Canadian Startup in Delaware and Revisiting – Should I Incorporate my Canadian Startup in Delaware.
How to Apply for an EIN as a Canadian or Foreign Company
An EIN is a unique nine-digit number assigned to your company by the IRS and used for bank account opening, tax filing, hiring and reporting purposes. There are four main methods to obtain an EIN, each one posing its own complications for Canadian and foreign companies.
1. Online
The easiest approach, online, is unfortunately not available to most Canadian and foreign companies as it requires a personal US taxpayer ID number and a US-based address. If you use this method, we suggest you screenshot or print out the confirmation page as you will not receive any additional confirmation from the IRS of your EIN until they mail the EIN confirmation letter 3-6 weeks later.
2. Fax
This is sometimes the best method to use for Canadian and foreign based EIN filers. Simply fill out the SS-4 form and fax it to the correct number (depends on the state of incorporation). The processing time for fax applications can be anywhere from 4 business days to 3 weeks and sometimes requires a follow-up phone call in order to receive confirmation of the EIN. This is typically the preferred method as it does not require a US taxpayer ID number or US address for the filer.
3. Mail
This method is the simplest method, if you have the time. Simply fill out the SS-4 form and mail it in, taking 4-6 weeks before receiving the EIN in the mail. The biggest problem we see with our clients using this method is that, if there is a mistake in the filing, this method takes the longest to receive notice of the mistake and to subsequently correct.
4. Telephone
The IRS currently has a special EIN phone number for international businesses. While this method often results in the shortest processing time (sometimes the EIN is provided on the call), it usually doesn’t work for US-domiciled companies as this number is not meant for US-domiciled companies. US-domiciled companies are meant to call the US-domiciled business number, but this number doesn’t work outside the US.
There are ways to speed this process up, in addition to the above. If you need help applying for an EIN, please feel free to reach out to Voyer Law and we would be glad to assist with the speedy issuance of an EIN for your company.
US Beneficial Ownership Information Registry
On January 1, 2024, the US Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) launched the online BOI E-Filing System and began accepting Beneficial Owner Information Reports pursuant to a new compliance regime under the Corporate Transparency Act.
1. Who needs to file?
Starting January 1, 2024, all non-exempt entities formed or registered to do business in the United States are required report Beneficial Owner Information (“BOI”) to FinCEN by January 1, 2025. This includes all corporations, LLCs, limited partnerships or similar entities created by filing a document with any US state, territory or Indian tribe as well as foreign non-US entities that are registered to do business with any US state, territory or Indian tribe.
2. Who is a beneficial owner?
A beneficial owner is any individual who, directly or indirectly:
- exercises “substantial control” over a reporting entity; or
- owns or controls 25% or more of the ownership interests (equity, stock, voting rights, convertible instruments or any other instrument, contract or other mechanism used to establish ownership) of a reporting entity.
An individual exercises “substantial control” of a reporting entity if such individual:
- serves as a senior officer (for example, president, CEO, COO, CFO, general counsel and any other key officer position of a reporting entity);
- has authority over the appointment or removal of any senior officer or a majority of the board of directors; or
- directs, determines or has substantial influence over important decisions made by a reporting entity.
3. What information needs to be provided?
A reporting entity is required to provide the following information about Beneficial Owners:
- full legal name;
- date of birth;
- current address; and
- unique identifying number and an image of government-issued identification (US passport, state-issued driver’s license, or a foreign passport).
4. Who is exempt from the Beneficial Ownership Information filings?
There are 23 exemptions, which are listed in greater detail in the Small Entity Compliance Guide by FinCen.
One of the key exemptions is for “large operating companies” that: (1) employ 20 full time employees in the US; (2) has a physical presence in the US; and (3) filed federal income tax for the previous year demonstrating more than $5,000,000 in gross receipts or sales.
Other key exemptions are for inactive entities that are not engaged in active business and for subsidiaries of any other exempt entities.
5. What does this mean for you?
If you are a beneficial owner of a US entity and not exempt from the filing requirements, failure to maintain and file a BOI Report by January 1, 2025 may result in fines up to $500 per day per violation and potential imprisonment.
Please reach out to the Voyer Law team to discuss your Beneficial Ownership Information filing requirements and whether your entity qualifies as an exempt entity.