So You Want to Go Public?
Deciding to become a publicly traded company is an extremely important decision that must be carefully considered by management of a company. A company must understand that going public entails complying with the many requirements imposed by securities regulatory authorities both during the process of going public and after it has been publically listed. This bulletin will discuss, at a very high-level some of these requirements and obligations as they pertain to an initial public offering (“IPO”) for listing on the TSX Venture Exchange (“TSXV” or the “Exchange”). Readers should note that an IPO is only one of the several ways in which a company can become publically listed.
A company will generally decide to go public as a way to enhance its public profile, access capital markets, and provide liquidity to shareholders. In addition, going public can have many other advantages, such as:
- Enhancing the ability to borrow funds, as the issuance of equity generally improves debt-to-equity ratios;
- A better offering price arises from public issue, as the issuance of equity through private placements is often at a discount due to equity resale restrictions;
- Providing a means for valuing the company through the market for its listed shares; and
- Facilitating an issuance of stock options, stock appreciation rights, etc. as an incentive for management and employees.
There are also disadvantages to going public. Securities regulatory authorities and stock exchanges impose many obligations on public companies, which will have an impact on the amount of resources that will be dedicated to compliance and governance matters. A public offering will require the retention of lawyers, auditors and investment bankers as well as other technical consultants. In addition, administration costs for printing the prospectus, “road shows” and listing fees can be substantial. Companies looking at going public should weigh whether the costs of going and staying public are justifiable in the context of their specific business. Other disadvantages include the following:
- The potential loss of control for founders of the company;
- Continuous disclosure requirements may result in a loss of privacy;
- Enhanced responsibilities arise for the board of directors, and additional controls are placed on management;
- An increase in shareholder expectations as to profitability and success of the company;
- Possible market indifference, resulting in “thin trading” of the company’s securities; and
- Additional restrictions, such as escrow restrictions, may be placed on share disposal.
The IPO Process — the Securities Regulatory Authorities
An initial public offering is one of a number of ways to obtain a listing on the TSXV, but before endeavouring into the process of an IPO, a company must ensure its own internal governance ise ready for an IPO. This includes a review of the company’s minute books to ensure the validity of such matters as prior issuances of securities and the election of directors, and to determine if the articles and by-laws are suitable for a public company, with respect to such matters as transfer or issuance restrictions, composition of the board and quorum thresholds. Additionally, a company should review its material agreements (including banking or credit facilities) to confirm if there are any prohibitions or consent requirements that result from those agreements.
A company’s business plan will be scrutinized by its underwriters and potential investors and it will become an important component of the company’s marketing efforts. Due attention should be paid to whether the company’s business plan is realistic (will it withstand the scrutiny of outsiders?), understandable, well written and in plain language.
After deciding to pursue an IPO, a company must generally file both a preliminary prospectus and a final prospectus for approval from the securities regulatory authority in each province in which it (or its agent/underwriter) intends to solicit offers to purchase its securities. The prospectuses must contain full, true, and plain disclosure of all information concerning the company and the offered securities that can reasonably be expected to influence a prospective investor’s decision to purchase the company’s securities or the market price of those securities. This information will range in specificity, from general information regarding the company and its business, to specific audited financial statements.
Apart from the prospectuses, additional filings/requirements include (among others) those listed below:
- copies of all material contracts entered into, other than in the ordinary course of business. Material contracts include those contracts which can be reasonably regarded to be material to a prospective investor;
- the directors and officers of a prospective public company must file a prescribed form which authorizes the collection of the directors’ and officers’ personal information, as well as a “personal information form” to permit the relevant stock exchanges to complete background checks;
- certain shareholders, including directors, officers, and significant shareholders may be required to place their shares in escrow for a defined period of time. Securities regulatory authorities and stock exchanges may require other shareholders to also place their shares in escrow. Accordingly, the company may be required to retain an escrow agent. The escrow requirements ensure that these shareholders have a long term interest in the viability of the company; and
- the company will need to retain a transfer agent to act as registrar and transfer agent for the company’s shares.
After a receipt is issued upon filing the preliminary prospectus and other requisite documents, the company, its dealers or underwriters may begin to distribute the preliminary prospectus and solicit interest from potential investors in accordance with applicable securities laws.
The IPO Process — the Stock Exchange
Applications to list on the TSXV are made shortly after or concurrently with the filing of the preliminary prospectus. Approval of the application will be subject to such additional requirements as the TSXV may impose.
To gain a listing, a company must generally meet the initial listing requirements of the Exchange. The Exchange divides issuers into Tier 1 or Tier 2 categories according to the requirements, with the latter Tier being subject to more restrictive requirements. The TSXV also divides issuers into five subcategories according to industry:
technology/industrial, mining, oil and gas, real estate, and research and development. Each tier and subcategory will have different initial listing requirements based on a variety of criteria, some of which include the following:
- The amount of net tangible assets;
- Past and projected revenues;
- Past and projected expenditures on research and development spending;
- Amount of working capital; and
- Amount of proven reserves or properties.
Depending on the amount of working capital it has, a technology/industrial company may be required to file a management plan detailing the company’s business development for the next 24 months, including evidence that the company’s product, service or technology is sufficiently developed and that there is reasonable expectation that there will be earnings from the product, service or technology within the next 24 months.
Additionally, a company must have issued a minimum number of securities of a minimum market value for public distribution. These threshold numbers are imposed by the Exchange to ensure market liquidity.
The Exchange also imposes requirements on the company’s management and control group. A listed company must have at least three directors, one of which must have expertise in the area of the company’s actual or proposed business, and another of which must have had favourable experience in operating and managing a public company. At least two directors must not be employees, senior officers, control persons, or management consultants. All members of management should be free of any history of past criminal behaviour, fraud, breach of trust, or securities violations. Except in limited circumstances, a listed company must have a chief executive officer (“CEO”) and a chief financial officer (“CFO”); the CEO and the CFO cannot be the same person.
Further, a company must establish an audit committee composed of at least three directors. After the IPO, audit committee members cannot be employees, control persons, or officers of the company, or have immediate family members that are employees, control persons, or officers of the company. The audit committee must review the financial statements, management discussion and analysis of the financial statements, and any press releases concerning earnings of the issuer before they are approved by the board of directors and disseminated to the public.
A company may also need to have sponsorship of their listing application. The sponsor will be a member of the Exchange, and will assist the Exchange in evaluating the financial strength of the company, its business plan, and the suitability of its management and control group. The sponsor is typically the company’s lead underwriter in its IPO.
After the IPO — Ongoing Obligations
A company must meet ongoing disclosure requirements after they become reporting issuers. The securities regulatory authorities and the TSXV impose continuous disclosure requirements that generally require annual filings of a variety of forms and documents.
Forms and documents required by securities regulatory authorities must be filed where the company has filed a prospectus. Some of the required forms and documents include as follows:
- Audited annual financial statements;
- CEO and CFO certification of the financial statements, and a statement certifying that they have reviewed the company’s internal financial disclosure procedures, ensured that said disclosure procedures have been implemented, and reviewed the company’s financial disclosure;
- Management Discussion and Analysis accompanying the annual and interim financial statements, consisting of management’s narrative explanation of company performance, financial condition, and future prospects;
- In certain instances, Annual Information Forms detailing material information about the company and its business at a point in time, including discussion of historical and future development of the company, its operations and prospects, its risks and other external factors that impact the company specifically;
- Annual meetings of security holders, including the distribution to such holders of an information circular regarding the election of directors, the appointment of auditors and any other “special” business, and detailed disclosure of all executives’ individual compensation amounts and the company’s corporate governance practices;
- Material change reports in the form prescribed by securities laws. A “material change” occurs when a change in the business, operations, or capital of the company is reasonably expected to have a significant effect on the market price of any of the securities of the company, or when a decision to implement such a change is made by the management of the company;
- Periodic press releases informing the public of business developments of the company, including changes in the company’s corporate structure, changes of its auditor, and other material changes;
- Insider trading reports by directors, officers and significant security holders; and
- All material documents affecting the rights and obligations of security holders, including material contracts.
The decision to take a company public is often one of the key decisions management will need to make in the lifecycle of a company. Companies considering a going public transaction are advised to retain a team of knowledgeable accountants, lawyers and investment bankers early on in the process. Pushor Mitchell has the necessary experience to guide companies through this process and we would encourage you to contact us if your business is considering going public.
Keith Inman is a securities and M&A lawyer with broad experience in the capital markets. Keith regularly advises individuals and companies with respect to securities reporting and compliance matters, purchases and sales of businesses and other corporate/commercial matters. You can reach Keith at 250-869-1195 or by email at email@example.com