This Guide provides private companies an overview of the process for obtaining a public listing in Canada and highlights key considerations for the company and its principal stakeholders both prior to and throughout the going public process.
Part 1 outlines various matters that a private company should consider before deciding to go public, and provides a summary of the principal methods of completing a public listing in Canada. Part 2 describes the regulatory framework in Canada for public companies and how that framework affects a listing and the post-listing reporting requirements. Part 3 provides an overview of the principal listing methods in Canada, being an initial public offering, a reverse takeover or a qualifying transaction. Part 4 details the listing procedures for the Toronto Stock Exchange (TSX) and the TSX Venture Exchange, the two principal listing markets in Canada. Part 5 outlines what a company is required to include in a prospectus or other listing document and the liability associated with the disclosure provided in such documents. Part 6 provides an overview of a dealer’s (i.e., an underwriter’s) involvement in a public listing and a summary of what a company should expect for an offering of securities completed concurrently with an initial listing. Part 7 outlines certain Canadian tax considerations for a company looking to complete a going public transaction in Canada. Part 8 provides a summary of the Canadian reporting requirements for a company following a public listing on a Canadian exchange.
B. Methods of Going Public Stock Exchanges In Canada, there are presently four main recognized stock exchanges for corporate entities: Exchange Operated by Toronto Stock Exchange (TSX) TMX Group Inc. TSX Venture Exchange (TSXV) TMX Group Inc. Canadian Securities Exchange (CSE) CNSX Markets Inc. Cboe Canada Cboe Global Markets The TSX and TSXV are the two most established exchanges in Canada on which most Canadian public companies are listed. While the TSX and TSXV provide the greatest visibility and liquidity for public companies in Canada, a company may choose to list on the CSE or Cboe Canada 1 for a number of reasons, including listing eligibility, industry-related regulations, cost and timing. Since the TSX and TSXV remain the two principal listing markets in Canada, the focus of this Guide is in respect of a listing on those exchanges. Principal Listing Methods There are three primary methods of going public on the TSX or TSXV — an initial public offering (IPO), a reverse take-over (RTO) of an existing TSX or TSXV listed company, or a qualifying transaction (QT) with a capital pool company (CPC) listed on the TSXV. 2 The table below sets out the main advantages, disadvantages and key considerations to assess when choosing a listing method. We explore each of the listing methods in more detail in Part 3 of this Guide. 1. Cboe Canada is a privately owned exchange formerly known as the NEO Exchange. 2. Note that IPOs relating to SPACs (Special Purpose Acquisition Corporations) are not addressed in this guide. | IPOs and Going Public in Canada 6 Method Regulatory Approvals Advantages Disadvantages Listing Document Initial Public Offering (IPO) Company sells securities through an underwriter pursuant to a prospectus filed in one or more provinces or territories of Canada, and obtains listing on a stock exchange upon closing Canadian securities commissions and Stock exchange • Ability to concurrently raise funds • Potential for broader distribution of company’s securities, which can create more publicity and awareness of a company’s products and services • Prospectus drafting and regulatory clearance process may help to improve company’s strategic focus • Relatively expensive process with a number of fixed costs and expenses • May be more time consuming than other methods of going public - generally takes a minimum of four months • Subject to the whims of the IPO market Long-form prospectus Must contain full, true and plain disclosure of all material facts concerning the company and the securities offered. Reverse Take-Over (RTO) Typically, shareholders of a private company with a strong business sell their shares to a listed shell company with no active business in exchange for new shares of the listed shell company that represent more than 50% control of that shell company Stock exchange • Less dependence on market conditions for timing • Faster process than an IPO • The shell’s filing statement document does not typically receive the heightened level of review that one would see with an IPO prospectus • Shell provides public shareholder base that meets distribution requirements • Private company has less opportunity to publicly tell its story • Requires M&A type negotiations and mutual due diligence Shell’s management information circular, if shareholder approval required or Shell’s filing statement, if shareholder approval not required Each must contain full, true and plain disclosure of all material facts concerning the shell, the private company and the resulting issuer. Qualifying Transaction (QT) Capital pool company (CPC) (i.e., a reporting company listed on TSXV with experienced board of directors but no business or assets except up to C$10,000,000 in cash) acquires all of the outstanding shares of or amalgamates with the private company Stock exchange • CPC may bring experienced board of directors • CPC provides public shareholder base that meets TSXV distribution requirements • CPC provides interim funding and initial cash reserve for resulting issuer • Dilution of private company management and shareholders • Requires M&A type negotiations and mutual due diligence • QT’s are a TSXV only concept (although the resulting issuer could graduate to the TSX or migrate to another Canadian stock exchange upon closing) CPC management information circular, if shareholder approval required or CPC filing statement, if shareholder approval not required Each must contain full, true and plain disclosure of all material facts concerning the CPC, the private company and the resulting issuer. | IPOs and Going Public in Canada 7 C. Critical Path Items The following elements of the going public process give rise to the longest lead times in planning for a successful listing and should be given priority by the company from the very start of the process: Critical Path Item Explanation Considerations Financial Statements and Management’s Discussion and Analysis (MD&A) Generally, a company will need to provide in its listing document three full years of audited annual financial statements, plus unaudited interim financial statements for its most recently completed quarter and the comparative quarter in the immediately preceding year, as well as pro forma financial statements in certain circumstances. • Financial statements must, with some exceptions, be prepared under International Financial Reporting Standards. • MD&A will need to be drafted and reviewed by the company’s commercial, legal and accounting team, and all numbers carefully verified by the auditors. • For “emerging-market” companies,3 Canadian securities commissions have historically demonstrated additional concern over the adequacy of the company’s “internal controls” and “disclosure controls” and its ability to comply with Canadian financial reporting requirements. The company may need to demonstrate that its finance staff will have sufficient training and experience to satisfy such concerns. Board of Directors, Management Team & Compensation A board of directors with the optimal combination of financial and operational expertise, public company experience and Canadian capital market recognition will need to be assembled, and the full management team engaged. • Background security checks of the proposed directors and officers by the listing exchange (and separately by the underwriters) can take several months and the required personal information forms for all candidates should be submitted as soon as possible. • Corporate governance structures such as board committees, mandates, policies and stock option and similar compensation plans will need to be put into place. • Compensation schemes for directors and senior management (e.g., salary, options, change of control payments, etc.) and employment agreements will need to be settled. Due Diligence The company’s directors and underwriters will have liability for any material misstatements or omissions in the listing document unless they can rely on a “due diligence” defence. In establishing this defence, counsel and other advisers to the company and the underwriters will conduct due diligence to ensure the accuracy and detail of the information in the listing document. • The company will need to make a comprehensive electronic data room available, where all key documents relevant to the company’s business and legal affairs will be included and accessible by the working group. Being prepared for the kind of due diligence investigation a public listing entails will help prevent the company from wasting valuable time and resources responding to documentary requests and searching for documents rather than moving the transaction forward. • The company will need to be organized and respond to additional requests from the underwriters promptly. A slow or disorganized process can send negative signals to underwriters and investors, while a smooth, well-run process can create momentum for a successful listing. 3. The TSX assesses the jurisdiction of an issuer on a country-by-country basis, but generally will not consider issuers of Canada, the U.S., the UK, Western Europe, Australia or New Zealand to be emerging market issuers. Review of the following criteria may result in an issuer being designated an emerging market issuer: (i) residency of “mind and management”; (ii) jurisdiction of principal business operations and assets; (iii) jurisdiction of incorporation; (iv) nature of the business; and (v) corporate structure. | IPOs and Going Public in Canada 8 Critical Path Item Explanation Considerations Third Party Consents A company should take care in reviewing its material contracts to determine what consents, if any, will be required to complete a public listing, including any relevant shareholder or investor rights agreements. • Consents may also be triggered if a company intends to complete a reorganization prior to going public. • In addition, a company should review confidentiality obligations in its material contracts and seek waivers in advance, as appropriate. Resource Information and Reports If the company has mineral projects, disclosure in the listing document must comply with National Instrument 43-101 (NI 43-101), the mining disclosure rule of the Canadian securities commissions, including the requirement that all scientific and technical disclosure be based on a technical report or other information prepared by or under the supervision of a qualified person. If the company has oil and gas activities, disclosure in the listing document must comply with National Instrument 51-101 (NI 51-101), the oil and gas disclosure rule of the Canadian securities commissions. • May require the company to engage a qualified third party to prepare the necessary report(s). Accordingly, preparation of this disclosure and associated reports will be timeconsuming and should commence as soon as possible. | IPOs and Going Public in Canada 9 D. Other Strategic and Practical Considerations Completing a public listing will often result in significant changes to a company’s management and capital structure. In addition to the critical path items identified above, a number of other important check list items need to be understood and made part of the overall going public planning process, including the following: ☑ Engage the Right Advisers → The importance of selecting the right members of the working group cannot be underestimated. The company’s agents, counsel, auditors, technical consultants and other advisers will need to form a cohesive team to achieve success, and this will require not only strong expertise, but also good communication and coordination of efforts. Care must be taken in engaging experienced, practical advisers with strong communication and teamwork skills. ☑ Agree on Company Valuation → Prior to starting a listing process, the company should assess and agree on its expected valuation with its advisors and key stakeholders. ☑ Conduct Business as Usual → The listing process will be an intensive and time-consuming one for the commercial team, but it should be sufficiently separate from the ongoing operations of the company so as to be minimally disruptive to those operations up to the point of completion. ☑ Complete Tax Planning → Canadian and international tax considerations will need to be assessed in making corporate structure decisions. These discussions should be held early in the listing process. ☑ Determine Need for Dual Class Structure → In some cases, the founders may want to reserve control of the company post-listing. To do this, the company may need to establish a dual class share structure. The TSX and TSXV rules require “coattail” provisions for listed companies with dual class voting share structures.4 ☑ Consider Reorganization Issues → To the extent that a corporate reorganization of the company will be required in preparation for the public listing, the scope of this reorganization should be determined. Assets may need to be transferred, employee benefit plans reviewed or amended, and commitments to third parties assigned from other entities in the broader company group. There may also be a need to reorganize the capital structure of the company so that it aligns with what is traditionally expected of a public company in Canada. ☑ Consider Multiple Stock Exchange Listings → In addition to a listing in Canada, the company may wish to consider (and may already have considered and rejected) the possibility of concurrent listings on other global exchanges. ☑ Determine Stock Exchange & Underwriters’ Escrow Requirements → Certain major shareholders as well as senior officers and directors of the company will be subject to typical escrow requirements imposed by the listing exchange and/or Canadian securities laws. It is also typical for underwriters to require a lock-up period for major shareholders and management for a period after closing, to run cumulatively with any regulatory escrow period. ☑ Evaluate Post-Closing Public Company Readiness → Upon completion of the public listing, the company needs to be prepared to address continuous and timely disclosure requirements, and related internal approvals and processes (e.g., any required internal culture adjustments to reflect being a public company, formally instituting investor relations functions, key policies, etc.). Being ready to be a public company requires a significant time investment by management in financial reporting and regulatory compliance processes and systems to ensure satisfactory risk management. See Part 8 of this Gui