This post highlights and explains ways in which you can take your company public that is an alternative to the traditional IPO process.
The decision to go public is a significant milestone for a company. Although an IPO is a common means in which companies go public, it may not always be the most effective and efficient way for certain companies.
There are a couple of key advantages that emerge from taking a company public through the IPO process such as:
Providing a company with the opportunity to directly conduct a financing, where the funds can be used to transform the growth trajectory of a company.
Allowing for a wider distribution of securities, which can create more publicity especially for a company not well known in Canada. If a company hopes to continue to grow, it will need increased exposure to potential customers who know about and trust its products; an IPO can provide this exposure as it pushes a company into the public spotlight.
If it is not anticipated that there will be a significant craving for your company’s securities in the public markets, an IPO may not be as suitable as the alternatives when it comes to listing.
Alternatives to the Traditional IPO
Aside from an IPO, direct listing an RTO (Reverse Takeover) transaction and a qualifying acquisition with a SPAC (Special Purpose Acquisition Corporation) are other ways to take your company public in Canada. Additionally, your company could also go public in Canada through a transaction known as a “qualifying transaction” with a Capital Pool Company listed on the TSX-V, although the rules are substantially different for that process. All the alternatives to the traditional IPO process previously mentioned will be explained in further detail below.
Another option for going public in Canada is an RTO (Reverse Take-Over). In an RTO, a private company is acquired by a listed company, typically with very few assets, otherwise known as a shell company. This can happen in a number of ways, including a share exchange, amalgamation, or plan of arrangement. Generally, the shareholders of the private company receive shares that make them the controlling shareholders of the resulting listed shell company. The listed company resulting from the RTO must still meet the original listing requirements of the TSX or TSX-V.
The RTO is subject to the approval of the shareholders of the shell company. In order to obtain shareholder approval, the shell company must send to its shareholders a management information circular containing prospectus-level disclosure of the shell company, the private company and the listed company resulting from the RTO. The management information circular is not reviewed by Canadian securities regulators, but an RTO is subject to the review and approval of the TSX or TSX-V. The TSX or TSX-V typically treats an RTO as a new listing of the acquired business and may also impose escrow restrictions on certain shareholders, such as officers, directors, and insiders. The escrow restrictions generally impact the liquidity of their holdings for an initial period for the purpose of reducing the potential for volatility of the security to be listed.
A SPAC is a shell holding company or shell with no current operations or business that completes an IPO to raise a minimum of $30 million. With a SPAC, there’s a view to using the capital raised to acquire one or more operating businesses through a qualifying acquisition within 3 years from the date of the IPO. Until such qualifying acquisition is completed, the SPAC is largely precluded from spending the capital raised through the IPO. SPACs are an alternative to both the restrictive rules and low maximum capital limits of the TSX-V’s Capital Pool Company regime and the more formal, high minimum capital threshold of the traditional public offering route for entities looking to raise capital in the Canadian capital markets.
A SPAC is founded by a sponsor, along with the SPAC’s management, which is responsible for identifying an acquisition target, negotiating, and executing the qualifying acquisition, and ultimately supporting the operations of the resulting issuer. The SPAC regime is controlled by the TSX itself rather than a provincial securities regulator and is subject to many stringent restrictions. It may be necessary for a SPAC to obtain exemptive relief from the TSX and applicable Canadian securities regulatory rules in order to achieve the SPAC’s objectives.
An accurate way to view a CPC (Capital Pool Company) is essentially like a mini SPAC. A CPC is a shell company that has completed an IPO, raised an admirable amount of capital (minimum amount required to be raised under the rules of the TSX-V is $200,000 and the maximum permitted together with any prior seed funding is $5 million) and obtained a listing on the TSX-V, with the main goal of completing a qualifying transaction. The qualifying transaction must be completed within 24 months of the IPO or else the company becomes inactive. Due diligence of the public shell company is often more straightforward for a qualifying transaction with a CPC than a regular RTO in that it will not have carried on any previous or active business preceding to the completion of a qualifying transaction. The financial statements of the private company required to be included in the filing statement or proxy circular for a qualifying transaction are similar to financial statements required for an issuer completing an IPO.
Direct Listing Alternative
A company that is already listed on another exchange may list directly on the TSX or TSX-V if they are able to meet the proper listing requirements. Additionally, these issuers may be qualified for certain exemptions from the regulatory and reporting requirements if they are listed on an exchange recognized by the TSX and with similar listing requirements. A direct listing is an efficient apparatus to access a larger pool of investors and to leverage the listing in another market.
If you are still confused about your options in regard to taking your company public, we would be more than happy to hear from you. With years of market experience on our dedicated team, we are confident that we can help you identify the best path for taking your company public.