Going Public in Canada
Issues and Considerations Associated
with an Initial Public Offering
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GOING PUBLIC IN CANADA
Issues and Considerations Associated with
an Initial Public Offering
This publication includes a general overview of the advantages of
going public as well as some of the principal structuring issues, the
process of obtaining a stock exchange listing in Canada, the
prospectus process, ongoing compliance requirements and tax issues
associated with an IPO.
© STIKEMAN ELLIOTT LLP
JULY 2014
Going Public in Canada
Introduction ......................................................................................................................... 5
The Going Public Decision .................................................................................................. 9
Stock Exchange Listing Requirements ............................................................................. 18
Timing Considerations ...................................................................................................... 19
Preparing to Go Public ...................................................................................................... 21
The Prospectus Process ................................................................................................... 27
Life After Going Public ...................................................................................................... 41
Certain Tax Consequences of Becoming a Public Corporation ....................................... 55
Schedule “A”: TSX Original Listing Requirements ........................................................... 59
© STIKEMAN ELLIOTT LLP
GOING PUBLIC IN CANADA
Introduction
The Decision to Go Public................................................................................................... 6
Securities Regulation in Canada ......................................................................................... 6
The Prospectus ................................................................................................................... 6
Continuous Disclosure ........................................................................................................ 7
About this Guide .................................................................................................................. 7
© STIKEMAN ELLIOTT LLP
INTRODUCTION
Introduction
THE DECISION TO GO PUBLIC
Deciding to “go public” by offering equity securities to the public is often one of the
key decisions facing a business. The purpose of this publication is to demystify that
process by providing background information and general advice to companies
considering an initial public offering in Canada.
Because an initial public offering (IPO) typically involves obtaining a stock exchange
listing, these materials also summarize the requirements for obtaining a listing.
Canada’s two primary exchanges are The Toronto Stock Exchange (TSX), Canada’s
senior stock exchange, and the TSX Venture Exchange (TSX Venture), which is
geared towards more junior issuers. The MX or Bourse de Montréal acts as the sole
financial derivatives exchange in Canada and offers such products as equity, interest
rate, currency, energy and index derivatives (i.e. options and futures contracts). The
MX has been part of the TMX Group since 2008. Other smaller stock exchanges and
alternative trading systems are also recognized by regulators.
SECURITIES REGULATION IN CANADA
Securities regulation in Canada is a matter of provincial and territorial jurisdiction.
Each Canadian province and territory has its own securities laws, policies and rules
that are administered by a securities regulatory authority or regulator (each, a
“Securities Commission”). In addition, the Securities Commissions have adopted
“National Policies” and “’National Instruments” that are applicable in all Canadian
jurisdictions (as opposed to multilateral or local instruments and policies, which are
applicable in some but not all, or only one, of the Canadian jurisdictions). By and
large, the process for offering securities to the public is uniform and has become
increasingly harmonized across the country through increased mutual reliance and
cooperation among the Securities Commissions. Accordingly, while these materials
concentrate on the process in Ontario, it is fair to say that compliance with the
harmonized national rules will, subject to mandated French translation
requirements for offerings in Quebec, generally result in compliance with the rules
in all provinces and territories.
The Ontario securities regulator is the Ontario Securities Commission (OSC). The
OSC, an independent regulatory agency, like its equivalents in other provinces and
territories, generally reviews public offering documents, licenses and regulates
market participants such as investment dealers, brokers and advisers, enforces
provincial securities laws and monitors the capital markets with a view to ensuring
appropriate behaviour by market participants.
THE PROSPECTUS
Going public generally requires the preparation of a disclosure document called a
prospectus containing all material information concerning the business and
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STIKEMAN ELLIOTT LLP
INTRODUCTION
securities to be offered. A prospectus typically includes audited historical financial
information (usually two years of balance sheets and three years of income
statements, statements of changes in equity and statements of cash flows, plus
interim reports) and related Management Discussion and Analysis (MD&A).
Management, the company’s lawyers, the underwriters and their lawyers will
extensively review the company’s affairs in what is referred to as a due diligence
process in order to ensure that the prospectus contains full, true and plain
disclosure about the company and is not misleading in any respect. The prospectus
is also reviewed and commented on by the Securities Commission of the issuer’s
principal jurisdiction, and if the issuer’s principal jurisdiction is not Ontario,
potentially by the OSC as well.
CONTINUOUS DISCLOSURE
Once a company has completed an IPO, it becomes subject to continuous and timely
disclosure requirements intended to ensure that the market has access on an
ongoing basis to all material information concerning the company, including
prescribed corporate governance matters.
ABOUT THIS GUIDE
This publication includes a general overview of the principal advantages of going
public as well as some of the principal structuring issues, the process of obtaining a
stock exchange listing in Canada, the prospectus process from its preparation
through to its review by the relevant Securities Commission, ongoing compliance
requirements applicable to public companies and tax issues associated with an IPO.
While not intended to be exhaustive, this publication is designed to provide insight
into the issues involved. Further useful information of a general nature is available
on the System for Electronic Document Analysis and Retrieval, or “SEDAR”, at
www.sedar.com (which provides access to information filed by public companies
and investment funds) and on the OSC’s website at www.osc.gov.on.ca. Insider
trading reports can be accessed through the System for Electronic Disclosure by
Insiders, or “SEDI”, at www.sedi.ca.
Stikeman Elliott would also be pleased to provide more specific information upon
request.
STIKEMAN ELLIOTT LLP
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GOING PUBLIC IN CANADA
A
The Going Public Decision
Advantages and Disadvantages of Being a Public Company........................................... 10
Initial Public Offering (IPO) ............................................................................................... 11
Treasury Versus Secondary Offering................................................................................ 11
Escrow Issues for Initial Public Offerings .......................................................................... 12
Who must escrow shares? .......................................................................................... 12
Escrow release timetable ............................................................................................. 13
Secondary offerings under the prospectus .................................................................. 13
Transfers in escrow...................................................................................................... 14
Other resale restrictions ............................................................................................... 14
© STIKEMAN ELLIOTT LLP
THE GOING PUBLIC DECISION
The Going Public Decision
ADVANTAGES AND DISADVANTAGES OF BEING A PUBLIC COMPANY
Potential advantages resulting from going public include:
■ immediate equity capital (the immediate equity infusion can be used for
expansion or to reduce indebtedness), likely at more attractive multiples than
private equity financing, thus reducing dilution to existing shareholders and
avoiding the interest costs of debt financing;
■ liquidity for existing shareholders (subject to any escrow requirements
imposed by the TSX or the OSC, which are discussed below, agreements with
underwriters and statutory restrictions on resale), which may assist them with
estate planning and portfolio diversification;
■ improved opportunities for future financing (an IPO usually provides increased
access to a broader range of financial markets and vehicles, including additional
common equity, convertible debt, convertible preferred shares and rights
offerings to existing shareholders and others, as well as making debt and
preferred share markets easier to tap by increasing the company’s exposure,
improving debt/equity ratios and making it easier to attract financing on more
attractive terms);
■ increased ability to complete mergers and acquisitions both by using the
issuer’s publicly traded shares as “acquisition currency” and by raising cash
through the sale of additional equity, thus increasing flexibility;
■ increased ability to attract and retain personnel and improved opportunities
for management and employee compensation (e.g. through stock options or
similar compensation arrangements and/or stock purchase plans);
■ increased prestige and a higher profile generally, with resulting potential for
improving corporate image and relationships with the community, customers
and suppliers;
■ the facilitation of valuations, better enabling creditors, suppliers and others to
place more accurate values on the company; and
■ the ability to conserve cash and declare stock dividends.
In determining whether a public offering is appropriate, a number of other factors
should also be considered, including:
■ the potential loss of control for the founder(s) of the company;
■ sharing of success with new shareholders;
■ the loss of confidentiality due to initial prospectus and periodic financial
reporting and other ongoing public disclosure requirements (with the
obligation to disclose both good and bad news, including disclosure of material
contracts that are entered into outside the ordinary course of business);
■ the commitment of time and resources and incurring of expenses in the IPO
process and subsequently to address such matters as board meetings (including
audit and other committees and independent directors), shareholders’ meetings,
compliance with the requirements of securities laws and stock exchange rules,
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STIKEMAN ELLIOTT LLP
■
■
■
THE GOING PUBLIC DECISION
■
discussions with analysts and reporters, more detailed and complex financial
information requirements, accounting and auditing matters, disclosure and
internal control systems and procedures, as well as certifications;
the potential loss of certain tax benefits that may have been available to both
the company and its shareholders;
the potential loss of flexibility as a result of regulatory requirements, including
in respect of related party or conflict of interest transactions;
the accountability, duties and potential liabilities to public shareholders, which
may require conducting the business in a more formal manner and imposing
greater short-term performance pressures; and
a higher profile generally could lead to unwanted publicity and damage the
corporate image and relationships with the community, customers and
suppliers, including in such areas as regulatory relationships, the environment,
lawsuits and similar disputes and contingent liabilities.
INITIAL PUBLIC OFFERING (IPO)
An initial public offering is one of a number of ways to obtain a listing on the TSX.
This is usually completed by way of formal prospectus filed with the OSC and/or
other Securities Commissions. Alternatives to IPOs are discussed later in this
chapter.
TREASURY VERSUS SECONDARY OFFERING
If you have not already done so, you will undoubtedly be engaging in discussions
regarding the possibility of an IPO with investment dealers in order to obtain an
assessment of the likely market reception for an IPO and advice as to the structure
of the offering. It is possible to do a treasury (or “primary”) issue, in which new
shares are issued for cash to the public, or a “secondary” issue, in which a portion of
the shares held by existing shareholders are offered for sale and the proceeds
accrue to such shareholders either immediately or on an installment basis. On
occasion, an IPO ends up being a mixed primary and secondary offering to address
both company financing and shareholder liquidity needs. As new investors often
prefer to fund an issuer rather than provide liquidity to controlling shareholders,
secondary participation is usually limited to some extent. As discussed in more
detail later in this section, escrow requirements may also impact the participation of
shareholders in respect of a secondary offering.
Where a secondary offering is being made pursuant to the same prospectus as a
primary distribution, the selling shareholders often bear a proportionate share of the
expenses of the offering, although this is not a legal requirement. In any event, under
the prospectus form requirements, appropriate disclosure must be made of the share
of the expenses borne by the selling shareholders, and if none of the expenses of the
distribution are being borne by the selling securityholders, this must be disclosed in a
statement along with the rationale.
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THE GOING PUBLIC DECISION
IPOs have traditionally involved common shares. Not infrequently, units consisting
of a common share and a warrant representing a right to buy additional shares at a
predetermined price are offered to the public in a treasury offering, thus providing
the possibility of future additional financing as well as additional “upside
participation” to initial investors.
ESCROW ISSUES FOR INITIAL PUBLIC OFFERINGS
National Policy 46-201 Escrow for Initial Public Offerings imposes uniform terms of
escrow under which, if applicable, management and key insiders of a newly listed
public company must retain an equity interest for a period of time following the IPO.
The policy rationale underlying these types of escrow requirements has historically
been to bolster investor confidence by aligning the interests of management, key
insiders and securityholders with the issuer by requiring them to hold on to their
interests for a specified period.
Who must escrow shares?
The escrow rules, which restrict “principals” of a non-exempt issuer (discussed in
detailed below under “Escrow Release Timetable”) from selling their interest for a
specified period, apply to IPOs and secondary offerings that are essentially IPOs (e.g.
corporate spin-offs). “Principals” include individuals falling into one of these
categories on the completion of the IPO:
■ Directors and senior officers of the issuer or a material operating subsidiary of
the issuer;
■ Promoters of the issuer during the two years preceding the IPO;
■ Persons who own and/or control more than 20% of the issuer’s voting
securities immediately before and immediately after completion of the IPO; and
■ Persons who own and/or control more than 10% of the issuer’s voting
securities immediately before and immediately after completion of the IPO, and
have elected or appointed, or have the right to appoint a director or senior
officer of the issuer or of a material operating subsidiary of the issuer.
A company, trust, partnership or other entity more than 50% held by one or more
principals will be treated as a principal. A principal’s spouse and relatives that live
at the same address as the principal will also be treated as principals and any
securities of the of the issuer they hold will be subject to escrow requirements.
A principal that holds less than 1% of the votes immediately after the IPO is not
subject to the escrow requirements.
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No escrow is imposed in the case of exempt issuers. For established and emerging
issuers, escrowed securities are generally released as set out in the following table.
Established Issuers
% Released
Cumulative
% Released
THE GOING PUBLIC DECISION
Escrow release timetable
The length of the escrow period (if any) depends on the category the issuer is in
upon completion of the IPO. Under NP 46-201, an issuer is placed into one of three
categories:
■ Exempt Issuers – (A) Issuers listed on the TSX in its exempt category (nonjunior issuers), or (B) issuers that have a market capitalization of at least $100
million;
■ Established Issuers – Issuers that, after an IPO, have securities listed on the TSX
and are not classified as an exempt issuer or have securities listed on the TSX
Venture and are TSX Venture Tier 1 issuers; or Emerging Issuers – Issuers that,
after the IPO, are not exempt issuers or established issuers.
Emerging Issuers
% Released
Cumulative
% Released
Date of the
IPO
25% exempt
from escrow
25%
10% exempt
from escrow
10%
6 months
25% released
50%
15% released
25%
12 months
25% released
75%
15% released
40%
18 months
25% released
100%
15% released
55%
24 months
–
–
15% released
70%
30 months
–
–
15% released
85%
36 months
–
–
15% released
100%
Secondary offerings under the prospectus
A principal is permitted to sell all or any portion of its securities of the issuer to the
public in the issuer’s IPO free of escrow provided that the secondary distribution is
disclosed in the issuer’s IPO prospectus, and the issuer’s IPO is firmly underwritten.
Further, a principal (other than a director, senior officer or promoter) may sell
securities as a best efforts secondary offering in the IPO free of escrow, subject again
to disclosure in the issuer’s IPO prospectus, and provided that all securities offered
STIKEMAN ELLIOTT LLP
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THE GOING PUBLIC DECISION
in the IPO by the issuer are sold before any sale is completed under the secondary
offering.
Transfers in escrow
Transfers of securities subject to escrow are generally not permitted, other than
transfers to:
■ existing or incoming directors or senior officers of the issuer or of a material
operating subsidiary, subject to board approval;
■ a person or company that was already a 20% voting holder before the transfer;
■ a person or company that becomes a 10% voting holder after the transfer and
has the right to elect or appoint one or more directors or senior officers of the
issuer or any of its material operating subsidiaries;
■ an RRSP or similar tax deferred plan (of the transferee);
■ a trustee in bankruptcy; and
■ a financial institution upon realization of escrow securities pledged, mortgaged
or charged as collateral for a loan (although the escrowed securities must
remain escrowed in the hands of the financial institution for the remainder of
the applicable escrow period).
In addition, the TSX may also impose escrow requirements on issuers not otherwise
subject to NP 46-201 that have listed on the TSX through reverse takeovers or by
completing a qualifying acquisition with a special purpose acquisition corporation
(SPAC). The TSX may also impose escrow requirements on principals of a spin-off
entity listing on the TSX where those principals acquired their securities under a net
asset value private placement (or where the market price was unknown). The TSX
has indicated that if such placements are not accompanied by a satisfactory
contractual escrow, TSX may use its discretion to impose escrow terms to facilitate
the retention of insiders and other service providers.
Other resale restrictions
In addition to regulatory escrow requirements, companies contemplating an IPO
should be aware that underwriters in an IPO generally place time-based (e.g. 180 –
365 days) contractual limitations on the ability of certain insiders to sell their
securities of the issuer without underwriter consent. Companies may also be
restricted by underwriters in further issuances for a limited period of time. Issuers
should also note that under National Instrument 45-102 Resale of Securities, pre-IPO
stock may not be freely tradable until the expiry of any applicable seasoning period
(which is generally four months from the date of distribution or the date the issuer
becomes a reporting issuer, but is accelerated upon going public by filing a
prospectus). Sales by a so-called “control block” holder of securities (generally,
holdings by a person of more than 20% of the outstanding voting securities) also
trigger prospectus requirements unless made pursuant to a prospectus exemption,
including an exemption that allows control block holders to sell securities provided
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ALTERNATIVES TO IPO
Reverse Take-overs (Backdoor Listings)
Alternatively, it is possible to obtain a listing by means other than an IPO. While not
technically an original listing, certain transactions (generally referred to as
“backdoor” listings or “reverse take-overs”) are treated in effect as if they were an
original listing by the TSX. Under TSX rules, a backdoor listing occurs when an
issuance of securities of a listed company results, directly or indirectly, in the
shareholders of a listed company owning less than 50% of the shares or voting
power of the resulting company, with an accompanying change of effective control
of the listed company. The transaction giving rise to a backdoor listing may take one
of a number of forms, including an issuance of shares for assets or an amalgamation
or a merger. A backdoor listing by itself does not raise any new funds from public
investors, but rather represents a method of, in effect, buying the existing public
company’s listing and public distribution. Additional financing is often raised by
completing a contemporaneous private placement or, on occasion, a subsequent
public offering. Of note, the TSX is considering amendments to the TSX rules
intended to better define backdoor listings and clarify the discretion of the TSX to
exempt a transaction from the requirement to meet original listing requirements or
consider a transaction a backdoor listing even where it would not otherwise qualify
as such.
THE GOING PUBLIC DECISION
that the prescribed notices are filed. Appropriate pre-IPO structuring may be
completed to avoid the limitations on resale in certain cases.
These types of transactions must be effected in accordance with stock exchange
rules, which include the satisfaction of original listing requirements, an exchange
review process and obtaining of shareholder approval. Special approval levels or
voting requirements may be imposed by the TSX, and valuations or independent
assessments may be required, particularly in the case of a non-arm’s length
transaction. The TSX may also require that the securities issued pursuant to a
backdoor listing be fully or partially escrowed in accordance with the TSX’s Escrow
Policy. In deciding whether an escrow is appropriate in such circumstances, the TSX
will generally seek to apply the same principles set out in National Policy 46-201
Escrow for Initial Public Offerings, discussed in detail above.
Capital Pool Company (CPC)
Similar to the SPAC program for the TSX described below, the Capital Pool Company
Program provides an option for issuers wanting to list on the TSX-V.
A CPC is a shell company that is formed by a group of experienced public company
managers who capitalize the CPC with an initial injection of seed financing. Once
formed, the CPC raises a modest amount (e.g. $200,000) of additional capital
through a prospectus IPO and is temporarily listed for trading on the TSX-V as a
CPC. Once the CPC is capitalized and trading has commenced, the CPC has 24 months
to complete a qualifying transaction, generally by acquiring a business that meets
STIKEMAN ELLIOTT LLP
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THE GOING PUBLIC DECISION
certain listing requirements of the TSX-V. Once the qualifying transaction has closed,
the CPC becomes an operational public company traded on the TSX-V and its CPC
designation is removed. The private company or business acquired benefits from
the experience of the CPC management team and the capital situate in the CPC.
Simultaneously, the CPC and its management benefit by acquiring a ready-made and
growing business and bringing it to the capital markets.
Special Purpose Acquisition Corporation (SPAC)
Similar to CPCs, SPACs are investment vehicles that allow the public to invest in
businesses or assets usually sought by private equity firms. A SPAC is initially a shell
company with no previous operational history that goes public through an IPO
raising at least $30 million, with the intention of using the proceeds to acquire a
business by acquiring either shares or assets. Once the SPAC’s IPO distribution has
closed and its securities are listed, the SPAC has 36 months to complete a qualifying
acquisition. At least 90% of the proceeds raised from the IPO (and the deferred
underwriting commissions) must be placed in escrow to be applied towards the
funding of the qualifying acquisition. The qualifying acquisition is not restricted
geographically or on any target sector, other than as may be disclosed in the SPAC’s
IPO prospectus. If the qualifying acquisition is not completed within the prescribed
time period, the escrowed funds raised on the IPO will be distributed pro rata to
securityholders and the SPAC de-listed. Following its IPO, the SPAC must prepare
and file another prospectus containing disclosure regarding the SPAC assuming
completion of the proposed qualifying acquisition. Once this final prospectus is
receipted by applicable securities regulators, the SPAC must obtain the approval of
its securityholders to proceed with the qualifying acquisition by a majority of votes
cast by non-founding securityholders and a majority of directors unrelated to the
acquisition. Once the qualifying acquisition has closed, the issuer resulting from the
qualifying acquisition must meet the TSX’s original listing requirements.
CONSIDERATIONS FOR INTERNATIONAL COMPANIES
Going public in Canada is, in a broad sense, not dissimilar to going public in the
United States. There are, however, some important differences. For one thing, the
U.S. has a much more developed over-the-counter market, and some Canadian
companies bypass stock exchanges in favour of these systems, which tend to be
somewhat less regulated.
In addition to the more rigorous Sarbanes-Oxley disclosure requirements, the U.S.
environment has historically also been much more litigious, with the result that a
company may be opening itself up to greater securities litigation risk in the United
States. Further, the costs involved in a U.S. public offering may well exceed the
equivalent Canadian costs due to higher legal, audit, printing, D&O liability
insurance and other costs.
Due to its size and diversity, the U.S. market may be able to complete transactions
that could not be completed in Canada alone. On the other hand, companies that
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STIKEMAN ELLIOTT LLP
The Multijurisdictional Disclosure System (MJDS) provides a mechanism for
established Canadian companies meeting specified size requirements and with
specified reporting histories to access the U.S. market on a streamlined basis. In a
similar vein, Canadian companies doing offerings in Canada that complete a parallel
private placement to sophisticated investors in the U.S. can tap into U.S. investor
demand without becoming subject to either initial or extensive ongoing compliance
requirements under U.S. securities laws. Accordingly, a Canadian company looking
at eventually establishing a U.S. shareholder base may be able to accomplish this
objective without going to the expense of completing an IPO in the United States.
STIKEMAN ELLIOTT LLP
THE GOING PUBLIC DECISION
may be small or mid-cap by U.S. standards will often be mid-cap to large-cap by
Canadian standards, thereby attracting greater profile and enhanced analyst
coverage, trading and liquidity.
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GOING PUBLIC IN CANADA
B
Stock Exchange Listing Requirements
As a practical matter, in an IPO, a stock exchange listing for the securities qualified
by the prospectus must generally be obtained, which means that the issuer will have
to meet the minimum original listing requirements of the relevant stock exchange.
An issuer wishing to list its securities for trading on the TSX must demonstrate that
it meets certain minimum listing requirements and comply with the rules of the TSX.
While there are several different categories, and the minimum listing requirements
for these vary to some extent, all listed companies must meet certain standard
financial and minimum public distribution requirements and satisfy the TSX as to
the quality of its management.
In determining eligibility, the TSX, for example, categorizes an issuer as being one of
an industrial company (the general category), a mining issuer, or an oil and gas issuer.
The industrial issuer category is itself subdivided into further categories including
technology companies and research and development companies. Typically, issuers
such as business income funds and those offering structured products are listed under
the industrial (general) category.
The TSX has established certain basic requirements for TSX listings, such as a minimum
public float, quality of management and sponsorship from a member firm of the TSX, as
well as specific financial and other significant requirements depending on the applicable
category of issuers. The minimum original listing requirements of the TSX are set out in
Schedule “A” (and are available on the TSX’s website at www.tmx.com).
Minimum listing requirements for TSX Venture listings are also based on financial
performance, resources and stages of development. The TSX Venture listing
requirements are specifically designed for emerging companies and recognize that
they have different financial needs from more established businesses. Requirements
vary for listing on the other recognized exchanges. For example, on the Canadian
Securities Exchange, minimum listing standards include having a minimum public
float, adequate working capital and an acceptable capital structure.
© STIKEMAN ELLIOTT LLP
GOING PUBLIC IN CANADA
C
Timing Considerations
An indicative timetable for an IPO of securities by a Canadian corporation is
illustrated on the following pages. This timetable should be used as a guide only as
the actual timing will vary from transaction to transaction, being affected by a
number of internal and external factors. Depending on the circumstances (for
example, in the case of mining companies, which are required to produce technical
reports, a Canadian IPO process generally takes in the range of three to six months,
absent any intervening factors.
Indicative Timetable for an IPO of Securities by a Canadian Corporation
WEEK
1
2
3-4
TASK
−
−
−
−
Organize working group
Distribute draft timetable
Engage underwriters
Meet with auditors and other advisers to discuss financials and any
technical (mining) reports or oil and gas reports for applicable issuers
−
−
−
Underwriters begin due diligence
Prospectus drafting to commence
Commence preparation of financial statements and any technical (mining)
reports or oil and gas reports for applicable issuers
−
−
−
−
Review and revision of prospectus, financial statements and any technical
(mining) reports or oil and gas reports for applicable issuers
Preparation of TSX listing application
Attend to TSX listing requirements (i.e. application for CUSIP number,
distribution of TSX personal information forms to directors and officers,
etc.)
Legal and business due diligence continues
Marketing materials prepared
Arrange financial printers
−
Oral due diligence session with company’s management, auditors and
−
−
5
© STIKEMAN ELLIOTT LLP
TIMING CONSIDERATIONS
WEEK
TASK
−
−
legal counsel
Finalize preliminary prospectus (French translation will be necessary if
offering into Quebec)
Hold board meeting to approve preliminary prospectus (including financial
statements and any technical reports)
File preliminary prospectus with relevant Securities Commission(s)
Issue press release
−
−
−
−
−
−
Begin preparation of closing documentation
Confirm settlement and trading mechanics
Settle underwriting agreement
Respond to comments on preliminary prospectus
Underwriters begin marketing efforts
File TSX listing application
−
−
−
−
−
−
−
−
Marketing complete and expressions of interest solicited
Hold bring-down due diligence session with company’s management,
auditors and legal counsel
Resolve any outstanding comments from the Securities Commissions on
the preliminary prospectus
Finalize terms of offering (i.e. price, size, etc.)
Finalize prospectus
Board approval of final prospectus and any other ancillary matters
File final prospectus with relevant Securities Commission(s)
Issue press release
Print commercial copies of final prospectus for distribution to subscribers
−
−
−
−
−
Expiry of statutory withdrawal rights in Canada
Pre-closing meeting to settle and sign all closing documentation
Closing occurs
Issue press release
Securities begin trading on the TSX
−
−
6-9
10-11
−
12-13
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STIKEMAN ELLIOTT LLP
GOING PUBLIC IN CANADA
D
Preparing to Go Public
Prepare a Business Plan................................................................................................... 22
Prepare Audited Financial Statements ............................................................................. 22
Auditor oversight .......................................................................................................... 22
Develop Appropriate Reporting and Control Systems ...................................................... 22
Select Advisers ................................................................................................................. 23
Creating a Corporate Image ............................................................................................. 23
Selecting an Underwriter ................................................................................................... 23
Modifications to Corporate Structure ................................................................................ 24
Appointment of Independent Directors ............................................................................. 25
Preparation of New Contracts ........................................................................................... 25
Establishment of Share Incentive Plans ........................................................................... 26
© STIKEMAN ELLIOTT LLP
PREPARING TO GO PUBLIC
Preparing to Go Public
The going public process can be complex and time-consuming, with numerous
issues to address within tight time frames. By addressing the matters listed below in
advance while the company is still private, considerable effort, expense and time can
be saved in the long run.
PREPARE A BUSINESS PLAN
A business plan prepared well in advance of going public can be useful for
approaching potential underwriters and obtaining financing. In including a
description of the business, an analysis of the company’s market, a description of the
products, corporate strategy, the management structure, financial information, and
a description of the company’s financial needs, a business plan can serve as a
management tool, as well as constitute the forerunner of parts of the prospectus.
PREPARE AUDITED FINANCIAL STATEMENTS
A prospectus is generally required to include income statements, statements of
changes in equity and cash flow for three years and balance sheets for the previous
two years. For financial periods beginning prior to January 1, 2011, these
statements may be prepared in accordance with Canadian generally accepted
accounting principles. For periods after that, the statements must generally be
prepared in accordance with International Financial Reporting Standards. However,
exceptions apply in both cases to permit preparation and audit in accordance with
standards adopted by certain designated foreign jurisdictions and United States
generally accepted accounting principles.
Although there are some limited exceptions from the requirement to provide a full
three years of audited historical financial statements, by preparing financial
statements that satisfy these requirements in the years preceding a decision to go
public, the burden of redoing and obtaining audits at a later date can be avoided.
Auditor oversight
The auditors should preferably be the ones that are used once the company goes
public. Under National Instrument 52-108 Auditor Oversight, financial statements of
public companies can be audited only by a firm that is a participating audit firm and
in compliance with any restrictions or sanctions imposed by the Canadian Public
Accountability Board (CPAB). A participating firm is a public accounting firm that
has entered into a “participation agreement” with the CPAB, under which the audit
firm agrees to submit to CPAB oversight, including ongoing inspections.
DEVELOP APPROPRIATE REPORTING AND CONTROL SYSTEMS
The more informal management reporting systems typically used by private
companies will generally not be suitable for a public company. Appropriate
reporting and control systems and procedures to support the financial and other
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STIKEMAN ELLIOTT LLP
SELECT ADVISERS
Use of an accounting firm (and an audit partner) experienced in securities offerings
facilitates the offering process and may reduce the time spent by lawyers on
accounting matters relating to the prospectus. Early involvement of auditors can
assist in planning a public offering, including assessment of the advantages and
disadvantages of going public and consideration of other sources of financing. The
auditors can also assist in developing reporting systems.
PREPARING TO GO PUBLIC
reporting requirements for a public company should be developed and put into
place before the company has gone public. As a public company, the chief executive
officer and chief financial officer will be required to sign certificates attesting to the
company’s annual filings and its reporting and control systems and procedures (as
discussed in detail under “Corporate Governance” in Section F).
The law firm retained will play a major role in the preparation of the prospectus and
other aspects of the going public process. Due to the extent of its involvement, a law
firm with experience in public offerings and with broad experience in securities
practice should be used.
For a private company not known to financial analysts, use of a financial public
relations firm may be advantageous in order to establish a corporate image and to
assist in preparing for a road show.
CREATING A CORPORATE IMAGE
Consideration should be given to creating a corporate image suitable for a public
company that will accurately depict the state of the company’s business. This should
be done with caution and generally well in advance of going public due to
limitations on priming the market in anticipation of a public offering.
Consideration should also be given to possible industry classifications of the
company (e.g., according to the dominant types of customers, the technology used,
the nature of the products) and the manner in which investors value different
industries. Consideration should also be given to preparing a corporate brochure
and to including securities analysts and the business press on mailing lists for
newsletters. While a private company is generally allowed to keep its affairs
confidential, there is no requirement that it do so.
SELECTING AN UNDERWRITER
The appropriateness and interest of prospective underwriters could be affected by
the size of the offering and the national/international/regional scope of the offering,
and it may be useful to develop a relationship with one or more investment dealers
well before going public, including for consideration of alternative methods of
financing.
STIKEMAN ELLIOTT LLP
23
PREPARING TO GO PUBLIC
The following factors should be considered in evaluating the suitability of an
underwriter, particularly a lead underwriter, for a particular offering:
■ The reputation of the underwriter, particularly where the issuer is unknown,
may be significant to potential investors as well as to other investment dealers
that might be invited to join an underwriting syndicate or banking group to sell
the securities;
■ The underwriter must have, or be able to arrange for, adequate distributional
capability, both for selling the requisite number of shares and for selling them
to a sufficiently broad investor base. The retail or institutional focus of the
underwriter should be considered in respect of the company’s desired
shareholder base;
■ The specialization and reputation of the underwriter in a particular industry
should be considered;
■ The underwriter should have a research department with the capability and
likely desire to follow the company after it goes public;
■ It may be useful to establish a relationship with an underwriter that would be
able to provide the company with further financial advisory services in the
future; and
■ Contacting other customers of a prospective underwriter might assist in
evaluating these factors.
MODIFICATIONS TO CORPORATE STRUCTURE
Rather than taking the whole corporate group public, it may be desirable to take
public only certain operating units in the group. This may depend in part on the
historical financial performance and growth prospects of the various units, and the
view taken by the financial markets of the different industries in which they operate.
For this purpose, it may be necessary to reorganize the corporate structure or
transfer assets among entities in the corporate group, bearing in mind that the
public company should be capable of being a viable entity on its own, without
needing to rely extensively on private companies in the corporate group for its
operation.
Consideration should be given to the tax and accounting consequences of taking
public either a holding company or other unit. If the existing corporate structure of
the private company has been developed with a view to minimizing corporate taxes,
a corporate restructuring may be necessary. The transfer of assets could potentially
require valuations by independent third parties.
Similarly, for tax related reasons, the share capital structure of a private company
will often involve complexities unsuitable for a public company. Simplification of the
share capital structure to create a single class of common equity is often a
requirement of the underwriters. It may be desirable for additional classes of shares
to be authorized (e.g., preferred shares), even if there is no intention to issue other
classes of shares in the near future.
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STIKEMAN ELLIOTT LLP
The articles and by-laws of the company should also be reviewed with a view to
their suitability for a public company. At a minimum, “private company” restrictions
will need to be removed.
APPOINTMENT OF INDEPENDENT DIRECTORS
A certain number of directors who are independent, namely persons who have no
direct or indirect material relationship with the company, will need to be appointed
to the board once the company has gone public. Directors’ and officers’ liability
insurance will generally also be required.
PREPARING TO GO PUBLIC
If the shareholders of the private company historically have taken little or no profits
from the company, it could be appropriate for the company to pay them a significant
dividend before it goes public, which might be done by incurring a reasonable
amount of debt. Further, it will typically be necessary and desirable to eliminate
loans between shareholders and the company before a company goes public.
A uniform corporate governance disclosure rule, National Instrument 58-101
Disclosure of Corporate Governance Practices and the associated National Policy 58201 Corporate Governance Guidelines provide guidance on what the securities
regulators consider to be optimal standards of corporate governance for publicly
listed companies. This National Instrument and National Policy are also discussed in
more detail in Section F - Life After Going Public. It is generally regarded as good
corporate governance to have a majority of directors on the board comprised of
independent directors. Audit committees are required, subject to certain exceptions,
and nominating and compensation committees are also recommended, to be set up
with specified terms of reference and be composed entirely of independent
directors. It may also be desirable for a company to adopt a code of business
conduct and ethics for its directors, officers and employees.
PREPARATION OF NEW CONTRACTS
Certain types of contracts may need to be entered into, while other types of
contracts may need to be revised, upon going public:
■ A company that relies on technological expertise or innovation may require
confidentiality and other agreements with certain employees;
■ Consideration should be given to entering into employment agreements with
particular employees regarding their compensation and related arrangements.
Appropriate compensation levels will need to be established for shareholder
managers that previously may have set salary and bonus levels primarily with a
view to minimizing the overall tax burden rather than with a view to paying
competitive
remuneration.
Conversely,
various
“income-splitting”
arrangements established by an owner-manager with family members may no
longer be appropriate in a public company and may need to be wound up;
■ If there will be an ongoing business relationship between the new public
company and its related companies, these entities should enter into written
contracts. By doing so before the company goes public, the company will have
documented its relationship with related parties and thereafter be in a better
STIKEMAN ELLIOTT LLP
25
PREPARING TO GO PUBLIC
■
position to avoid subjecting itself to the valuation and minority approval
requirements for material related party transactions that may be applicable to
it as a public company under Multilateral Instrument 61-101 Protection of
Minority Security Holders in Special Transactions (which apply to Ontario and
Quebec); and
Consideration might also be given to revising certain supply, sales or lease
agreements, loan agreements, and agreements with or among shareholders to
ensure that they are appropriate and workable for a public company. For
example, buy-sell arrangements between major shareholders may need to be
revised or terminated in order to avoid the possibility of inadvertently triggering
the requirement to make a take-over bid to all shareholders. Removal of change
of control, termination or approval rights may also be desirable, as well as the
insertion of confidentiality provisions or other mechanisms to address material
contract disclosure requirements after the IPO.
ESTABLISHMENT OF SHARE INCENTIVE PLANS
One of the advantages of going public is the ability to establish stock option and
other types of share incentive plans for directors, officers, employees and
consultants. These plans may include an option component, a purchase component
or a bonus component. Administrative requirements regarding share incentive
plans may be facilitated by setting up the plan before a company goes public, being
mindful of equity compensation arrangement requirements that may be imposed by
the relevant exchange.
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STIKEMAN ELLIOTT LLP
GOING PUBLIC IN CANADA
E
The Prospectus Process
Prospectus Requirement................................................................................................... 28
Prospectus Preparation..................................................................................................... 28
Prospectus disclosure .................................................................................................. 29
Historical Financial Information Requirements ................................................................. 30
Financial statement requirements................................................................................ 30
Other required financial information............................................................................. 30
Forward-looking Information (FLI) - Future Oriented Financial Information (FOFI) and
Financial Forecasts ........................................................................................................... 31
Significant Acquisitions - Financial Information ................................................................ 32
Clearing the Prospectus with the Securities Commission ................................................ 32
Preliminary prospectus ................................................................................................ 32
Comment letters and responses .................................................................................. 33
Conditional listing ......................................................................................................... 34
Prospectus Liability ........................................................................................................... 34
Civil liability for misrepresentation ............................................................................... 34
Defences for misrepresentation ................................................................................... 35
Due Diligence .................................................................................................................... 35
The Underwriting Agreement ............................................................................................ 36
French Language .............................................................................................................. 38
© STIKEMAN ELLIOTT LLP
THE PROSPECTUS PROCESS
The Prospectus Process
PROSPECTUS REQUIREMENT
An initial public offering of securities of an issuer is the conventional way of “going
public” in Canada. Securities laws generally require the filing of a prospectus to qualify
for any non-exempt “distribution” of securities. In the absence of an exemption (see
the section on exemption from prospectus requirements below), no person or
company may “trade” in a security where such trade constitutes a “distribution”
unless a prospectus has been filed. Securities originally distributed under a
prospectus exemption are generally subject to resale restrictions that include the
securities being held for a specified period of time and the issuer having been a
reporting issuer for a specified period of time. Treasury offerings of securities not
previously issued are generally distributions.
The objective of the prospectus requirement is to provide investors with complete
and accurate information about the affairs of an issuer, thereby enabling them to
make informed investment decisions about the securities being offered. Thus, the
contents of a prospectus will vary depending on the nature of the security to be
issued, the businesses in which the issuer and its subsidiaries are engaged and the
particular requirements of the jurisdictions in which the offering will be made (for
example, a prospectus filed in Quebec is subject to a French translation
requirement). The prospectus must be comprehensible to readers and presented in
an “easy-to-read” format.
PROSPECTUS PREPARATION
Securities laws contain a number of specific requirements with respect to the required
or permitted contents of a prospectus, which have generally been harmonized under
National Instrument 41-101 General Prospectus Requirements (NI 41-101). Form 41101F1 Information Required in a Prospectus requires an issuer to disclose extensive
information about numerous matters concerning the company in the prospectus,
including:
■ its corporate structure;
■ its use of proceeds;
■ its financial statements (as well as those of relevant predecessor entities);
■ the businesses carried on by it and its subsidiaries;
■ risk factors relating to an investment in securities of the issuer;
■ significant acquisitions (this includes recently completed acquisitions as well as
proposed/probable acquisitions);
■ legal proceedings affecting the issuer;
■ its directors and officers and the compensation of its executives;
■ outstanding options to purchase securities;
■ the principal holders of its securities;
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STIKEMAN ELLIOTT LLP
■
■
■
prior issuances of securities;
relationships between the issuer and an underwriter;
its auditors; and
any other material facts relating to the securities proposed to be issued and not
otherwise disclosed.
Prospectus disclosure
The prospectus must contain “full, true and plain disclosure of all material facts
relating to the securities issued or proposed to be distributed”. The significance of
this standard is reinforced by the certificates, which the issuer, the underwriters
and others must sign at the end of the prospectus. In the event that the prospectus
contains a misrepresentation, the issuer and each underwriter that signs it (among
others) may be found liable. An issuer is not liable if it can prove that the purchaser
purchased the securities with knowledge of the misrepresentation. Directors and
underwriters can rely on a due diligence defence in cases where, after conducting a
reasonable investigation, they reasonably believed there was no misrepresentation
in the prospectus.
THE PROSPECTUS PROCESS
■
Once an issuer has decided to proceed with a public offering and an informal
underwriting relationship has been established, the issuer will normally establish a
“working group”, consisting of one or more senior officers of the issuer and
representatives of the underwriters, the issuer’s auditors and legal counsel for the
issuer and the underwriters. Although responsibility for preparation of a draft
preliminary prospectus rests with the issuer and its counsel, members of the
working group will typically be assigned responsibility to prepare initial drafts of
particular sections of the draft preliminary prospectus. This drafting exercise can
last weeks or months depending on the complexity of the business and affairs of the
issuer, the need to reorganize prior to going public and the level of intensity
displayed by the working group. Once the decision to “go public” has been made,
filing of a preliminary prospectus typically becomes an urgent matter because the
issuer wishes to receive the proceeds of the offering as soon as possible, as the
underwriters will have determined that the market is appropriately receptive to the
offering, subject to potential adverse market changes occurring prior to closing. The
issuer will also need to appoint a registrar and transfer agent in respect of its
publicly traded securities and the identity of the registrar and transfer agent must
be disclosed in the prospectus.
Upon filing the final prospectus, the issuer will become a “reporting issuer” in each
jurisdiction in which a receipt is issued (or is deemed to be issued under the Passport
System). As such, the issuer will be subject to continuous disclosure rules and ongoing
reporting requirements (discussed in Section F). These rules and requirements
concern such things as the timely disclosure of material changes, the preparation and
filing of quarterly and annual financial information, the solicitation of proxies and the
preparation of annual information forms and information circulars.
STIKEMAN ELLIOTT LLP
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THE PROSPECTUS PROCESS
HISTORICAL FINANCIAL INFORMATION REQUIREMENTS
Financial statement requirements
Inclusion of the following financial statements in a prospectus satisfies the basic
prospectus requirements (note that there have been some changes in terminology
post-IFRS):
■ Audited balance sheets as at the two most recently completed year-ends;
■ Audited income statements, statements of changes in equity and cash flow
statements for the three most recently completed financial years; An unaudited
interim or “stub period” balance sheet for the most recently completed interim
period ended more than 45 days before the date of the prospectus; and
■ Unaudited income statements, statements of changes in equity and cash flow
statements for the interim or “stub period” in the current financial year that
ended more than 45 days before the date of the prospectus and for the
comparable period in the prior financial year.
For audited statements, the auditor’s report must, absent regulatory relief, express
an unmodified opinion. The interim or stub period financial statements may be
required to be updated in the final prospectus, depending upon the timing and
length of the prospectus clearance process, and additional financial statements may
be required for significant acquisitions (see also “Significant Acquisitions - Financial
Information” later in this section).
Other required financial information
In addition to the historical financial statements outlined above, other historical
financial information required in a prospectus includes:
■ annual MD&A, which must include a discussion of liquidity and capital
resources of the issuer (the contents of the MD&A are discussed in further
detail under “Continuous Disclosure Obligations” in Section F). If relevant, a
discussion of the nature and magnitude of financial instruments (e.g. options,
swaps, asset-backed securities) and their effect on liquidity and capital
resources and on operations may be required;
■ interim MD&A on interim financial statements included in the prospectus,
which is similar to annual MD&A, but is focused on the most recent interim
period and on discussing changes in the issuer’s financial condition since the
annual MD&A; and
■ a description of any material changes in and to the company’s share and loan
capital since the date of the financial statements for the company’s most
recently completed financial period contained in the prospectus.
In light of ongoing MD&A reporting requirements for public companies, forwardlooking disclosure of known trends and uncertainties that the issuer reasonably
expects will impact on the results of its operations may be necessary or appropriate.
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STIKEMAN ELLIOTT LLP
The use of forward-looking information, including future-oriented financial
information (FOFI) and financial outlooks, by Canadian public issuers is regulated
by National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102). These
requirements apply to all written disclosure of forward-looking information and
provide that an issuer may not disclose forward-looking information unless it has a
"reasonable basis" for the information. In addition, disclosure of any material
forward-looking information must comply with each of the following elements:
■ the information must be identified as forward-looking information;
■ users must be cautioned that actual results may vary from the forward-looking
information and material risk factors that could cause actual results to differ
materially from the forward-looking information must be identified;
■ the material factors or assumptions used to develop the forward-looking
information must be stated; and
■ the issuer must describe its policy for updating forward-looking information if
it includes procedures in addition to those described in the section of NI 51-102
dealing with updates to FLI required in the Management's Discussion and
Analysis (MD&A) or MD&A supplement.
THE PROSPECTUS PROCESS
FORWARD-LOOKING INFORMATION (FLI) - FUTURE ORIENTED FINANCIAL
INFORMATION (FOFI) AND FINANCIAL FORECASTS
FOFI and financial outlooks comprise a subset of FLI and, in addition to those set out
above, further requirements exist for this category of FLI. In preparing FOFI or a
financial outlook, a reporting issuer must:
■ use assumptions that are reasonable in the circumstances;
■ limit the period covered by the FOFI or financial outlook to a period for which
the information in the FOFI or financial outlook can be reasonably estimated;
■ use the accounting policies the reporting issuer expects to use to prepare its
historical financial statements for the period covered by the FOFI or the
financial outlook; state the date management approved the FOFI or financial
outlook; and
■ explain the purpose of the FOFI or financial outlook and caution readers that
the information may not be appropriate for other purposes.
NI 51-102 also requires that a reporting issuer discuss in its MD&A disclosure
relating to updates, comparison to actual results and withdrawal of material
forward-looking information. Exceptions are available from the inclusion of such
information in certain circumstances where the prescribed disclosure has already
been included in a news release.
The question of whether forecasts in a prospectus need to be revised in respect of
results that come to light after filing of the prospectus, but prior to the closing of an
IPO, was canvassed in the Supreme Court of Canada decision of Kerr v. Danier
Leather. Upholding the ruling of the Ontario Court of Appeal, the Supreme Court
held that a company and its directors were not liable for forecasts contained in an
IPO prospectus that subsequently became inaccurate. The disclosure requirements
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31
THE PROSPECTUS PROCESS
under the Ontario Securities Act were found to impose no obligation on the issuer to
update a forecast in the prospectus to reflect results as at the date of closing. Under
securities laws, once a receipt for the final prospectus is issued, only a material
change in the business, operations or capital of the issuer must be disclosed. The
Supreme Court of Canada found that changes to forecasted financial results were
likely to be “material facts” but not “material changes.”
SIGNIFICANT ACQUISITIONS - FINANCIAL INFORMATION
NI 41-101 and its related forms require the inclusion in a prospectus of financial
statements for an acquired business, where such an acquisition is considered a
“significant acquisition”. Generally, the disclosure requirements under NI 41-101
have been harmonized with those of NI 51-102 Continuous Disclosure Obligations
and the latter instrument’s significance tests have been adopted. A standard two
years of historical financial statements will be required for significant acquisitions
(plus any applicable interim periods), along with pro forma statements, based on
the historical financial statements that are required. The disclosure requirements
are based on the principle that issuers should be required to include in their
prospectus the disclosure that would otherwise have been required in a business
acquisition report (BAR) had they been a reporting issuer and, therefore, required
to file a BAR.
An acquisition is considered "significant" if the reporting issuer's proportionate
share of consolidated assets, consolidated investments or consolidated income from
continuing operations associated with such an acquisition exceeds 20% of the
issuer's consolidated assets or consolidated income from continuing operations. A
40% significance level for consolidated assets or consolidated investments is used
for IPO venture issuers, although this has been proposed to be increased to 100%.
Acquisitions falling below the threshold levels need not be disclosed using a long
form prospectus.
Historical financial statements for a significant probable acquisition are also
required, the test being the same as for significant acquisitions. An acquisition is
probable if a reasonable person would believe that the likelihood of completion is
high. Required historical financial statement disclosure in this context is generally
similar to that outlined with respect to a significant acquisition.
CLEARING THE PROSPECTUS WITH THE SECURITIES COMMISSION
Preliminary prospectus
Once the decision to “go public” has been made, an issuer must file a preliminary
prospectus, which will be reviewed and commented on by only the OSC if the OSC is
its principal regulator, or the OSC and its principal regulator in other cases. As
described above, the clearing of the preliminary prospectus is often an urgent
matter, as generally the issuer is anxious to receive the proceeds of the offering and
the underwriters (or agents) have determined that the markets are appropriately
receptive to the offering, subject to adverse market changes occurring prior to
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With the preliminary prospectus, the issuer will file various supporting documents
including a personal information form completed by each of its directors and
executive officers disclosing their names, addresses, birthdates and certain
additional personal information. Each such person will be subject to a security
check. The purpose of the security check is for the regulators to satisfy themselves
that there are no reasonable grounds to believe that the business of the issuer will
not be conducted with integrity and in the best interests of its securityholders.
THE PROSPECTUS PROCESS
closing, and are eager to commence the “road shows” with registered
representatives (e.g. salespersons) and potential purchasers regarding the issuer
and the proposed offering. If the principal regulator is the OSC, the receipt of the
OSC results in a deemed receipt from each jurisdiction in which the prospectus was
filed under the Passport System. If the principal regulator is not the OSC, the receipt
of the principal regulator would result in a deemed receipt from all Passport System
regulators and, if the OSC cleared the prospectus, of the OSC.
Under amendments to marketing rules implemented in 2013, a new “testing the
waters” exemption from the prospectus requirement now permits issuers to solicit
expressions of interest prior to filing a preliminary prospectus where the issuer has
a reasonable expectation of filing a preliminary long form prospectus in respect of
an IPO. Pursuant to this exemption, an investment dealer that is authorized in
writing to do so by the issuer is permitted to make solicitations to accredited
investors. The exemption is intended to allow issuers to assess interest in a
potential public offering before incurring costs related to the offering.
After a preliminary prospectus has been filed and receipted, the “waiting period”
commences. Historically, Canadian securities laws only expressly permitted for the
distribution of the preliminary prospectus or the solicitation of expressions of
interest from prospective purchasers during the waiting period. The distribution of
communications such as notices, circulars, advertisements or letters was also
permitted provided certain requirements were met.
While such distributions are still permitted, under the 2013 amendments, dealers
may now also distribute “standard term sheets” and “marketing materials". Both of
these terms have specific defined meanings under the amended rules and are
accompanied by specified filing and other requirements and restrictions.
Roadshows may also be conducted, and are not restricted in terms of who may
attend, provided applicable conditions are satisfied. Other marketing activities
during the waiting period are regulated.
Comment letters and responses
After the receipt is issued for the preliminary prospectus, the principal regulator
reviews the preliminary prospectus to ensure that the issuer has complied with the
statutory prospectus requirements and provides a comment letter to the issuer
outlining any “deficiencies”. If the principal regulator is not the OSC, the OSC will
STIKEMAN ELLIOTT LLP
33
THE PROSPECTUS PROCESS
also review the materials and advise the principal regulator of any concerns. One or
more (usually two) comment letters may be issued.
The issuer (with the assistance of the underwriters, the issuer’s auditors and legal
counsel for the issuer and the underwriters) will then respond in writing to the
comment letter and agree to make changes to the disclosure in the preliminary
prospectus as suggested, or explain why such changes are inappropriate or
unnecessary. The response letter typically commences a negotiation exercise with
respect to any disclosure issues in the preliminary prospectus.
Once discussions with the principal regulator reach a satisfactory resolution, required
changes to the preliminary prospectus are made by the issuer and, after pricing, the
final prospectus (together with a black-lined copy showing changes from the
preliminary prospectus) is filed. A receipt for the final prospectus is then issued.
Conditional listing
Generally, an original listing application is made to a stock exchange after a receipt
is received for the preliminary prospectus upon which a conditional listing is
granted to the issuer, subject to the fulfillment of certain standard conditions. These
conditions include obtaining a receipt for the final prospectus, the closing of the
offering, minimum distribution of securities and delivery of certain documentation
to the exchange.
PROSPECTUS LIABILITY
Civil liability for misrepresentation
A prospectus must provide full, true and plain disclosure of all material facts relating
to the securities issued or proposed to be distributed. Where a prospectus or any
amendment to the prospectus contains a misrepresentation at the time of purchase, a
purchaser who bought a security offered during the period of distribution is deemed
to have relied on the misrepresentation, and as such has a statutory right of action for
damages against:
■ the issuer or a selling securityholder on whose behalf the distribution is made;
■ each underwriter of the securities who is required to sign the prospectus;
■ every director of the issuer at the time the prospectus or the amendment to the
prospectus was filed;
■ every person or company whose consent has been filed pursuant to a
requirement of the regulation (e.g. lawyers and accountants) but only with
respect to reports, opinions or statements that have been made by them; and
■ every person or company (e.g. the CEO and the CFO) who signed the prospectus
or the amendment to the prospectus other than the persons or companies
included in the first four bullet points above.
Further, where the purchaser purchased the security from a person or company
referred to in the first or second bullet point above, or from another underwriter of
the securities, the purchaser may elect to exercise a right of rescission against such
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Under the Ontario Securities Act, no action may be commenced to enforce the
statutory right of action for damages or rescission more than:
■ in the case of an action for rescission, 180 days after the purchaser purchased
the subject securities; or
■ in the case of an action for damages, the earlier of (i) 180 days after the
purchaser first had knowledge of the misrepresentation, and (ii) three years
after the date on which the purchaser purchased the subject securities.
THE PROSPECTUS PROCESS
person, company or underwriter, in which case the purchaser will have no right of
action for damages against such person, company or underwriter. The starting point
for an action in damages is the existence of a misrepresentation in the prospectus at
the time of purchase of securities offered by the prospectus. A “misrepresentation” is:
■ an untrue statement of “material fact”, being a fact that would reasonably be
expected to have a significant effect on the market price or value of the
securities issued or proposed to be issued; or
■ an omission to state a material fact that is required to be stated or that is
necessary to make a statement not misleading in light of the circumstances in
which it was made.
Defences for misrepresentation
The statutory civil liability remedy available to purchasers for misrepresentations
contained in a prospectus avoids some of the problems with common law actions
for misrepresentation, such as establishing detrimental reliance.
Under the Ontario Securities Act, no person or company is liable for damages or
rescission if the person or company proves that the purchaser purchased the
securities with knowledge of the misrepresentation.
Underwriters and directors are only liable if:
■ they failed to conduct such reasonable investigation as to provide reasonable
grounds for a belief that there had been no misrepresentation; or
■ they believed that there had been a misrepresentation.
Establishing that a reasonable investigation was conducted has become known as
the “due diligence defence”.
DUE DILIGENCE
Generally, due diligence is undertaken by the underwriters, with the assistance of
their counsel, in order to ensure that the prospectus contains full, true and plain
disclosure of all material facts relating to the securities issued or proposed to be
distributed. Due diligence also allows the underwriters to rely on a due diligence
defence to any action alleging misrepresentation in the prospectus, which might be
brought against them under statutory civil liability provisions.
The due diligence process typically involves extensive discussions with senior
management of the issuer during preparation of the preliminary prospectus,
inspection of the issuer’s principal assets, review of the issuer’s material agreements
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THE PROSPECTUS PROCESS
(e.g., financing agreements), review of the issuer’s financial statements and financial
plan, and discussions with senior management of the issuer, its auditors and other
outside advisors or experts (e.g., geologists) prior to filing each of the preliminary
prospectus and the final prospectus, at which time a formal list of questions is
addressed to senior management of the issuer and its auditors. Although legal
counsel typically undertake much of the legal due diligence and assist with business
due diligence, due diligence generally is undertaken for the benefit of the
underwriters and remains their responsibility. Directors and signing officers may
also wish to have issuer’s counsel undertake similar enquiries for their benefit.
THE UNDERWRITING AGREEMENT
The underwriting agreement defines the essential terms of the relationship between
the issuer and the underwriters in the IPO process, including:
■ the size and price of the issue;
■ the underwriters’ compensation and reimbursement of expenses;
■ whether it is a primary and/or secondary offering;
■ whether it is a “best efforts” agency arrangement (in which the underwriter
agrees, subject to certain conditions, to use its best efforts to find purchasers
for the issuer) or a “firm commitment” underwriting (in which the underwriter
commits, subject to certain conditions, to purchase the whole issue from the
issuer and assumes the risk of reselling to purchasers);
■ the scope of the offering and restrictions on underwriters’ authority to sell in
different jurisdictions; and
■ the conditions of closing of the offering.
In the case of an IPO, the underwriting agreement is typically entered into
immediately after “pricing” the deal (which typically occurs after the close of the
markets on a day after the preliminary prospectus has been cleared by the relevant
Securities Commission(s) but immediately before the final prospectus is filed). Prior
to signing the underwriting agreement, the issuer and the underwriters are typically
bound only by an engagement letter, which may, among other things, require the
issuer to reimburse the underwriters some or all of their expenses in connection
with preparation for the IPO in the event that it does not proceed (and possibly lost
fees if another transaction is instead completed).
The underwriting agreement generally requires the issuer to use its best efforts to
obtain all necessary receipts for the final prospectus within a specified time period,
and imposes on the issuer (and selling securityholders) an obligation to prepare and
file any amendment to the prospectus required to be filed by applicable securities
laws during the period of distribution. This can be a significant obligation for an
issuer if the underwriters remain in distribution longer than expected, and time
limits are sometimes negotiated. The underwriting agreement also requires the
issuer to notify the underwriters promptly of any material change in the affairs of
the issuer, any change in any material fact contained in the prospectus or any new
material fact not stated in the prospectus.
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THE PROSPECTUS PROCESS
The underwriting agreement typically requires the issuer to deliver a variety of
documents to the underwriters upon filing the final prospectus, including:
■ signed copies of the prospectus;
■ French language (translation) opinions from the issuer’s Quebec counsel (as to
non-financial contents of the prospectus) and the auditors (as to the financial
contents of the prospectus);
■ a comfort letter from the issuer’s auditors as to any financial and accounting
information contained in the prospectus;
■ evidence of the listing of offered shares on relevant stock exchanges; and
■ commercial copies of the prospectus in specified quantities, within specified
time periods and at specified locations.
The underwriting agreement typically contains numerous representations and
warranties in favour of the underwriters, including:
■ general representations as to the accuracy and completeness of the prospectus
disclosure; and
■ specific representations as to organization of the issuer and its material
subsidiaries, issued and outstanding capital, qualifications to conduct business
in compliance with applicable laws, options or other rights to purchase
unissued securities, no conflict between the terms of the offering and the
issuer’s constating documents and material agreements, and the absence of
material undisclosed litigation, liabilities, defaults or violations of law.
The scope of specific representations about the issuer, its business operations and
its financial affairs is a matter for negotiation between the issuer and the
underwriters in the context of the particular transaction. Representations from
selling securityholders range from simple representations concerning ownership of
the securities being sold to representations mirroring those made by the issuer.
The underwriting agreement will contain an indemnity in favour of the
underwriters (and their directors, officers, etc.) from the issuer (and sometimes
from selling securityholders) in respect of any untrue statement in the prospectus
(excluding statements or facts relating solely to the underwriters), non-compliance
by the issuer with applicable securities laws and any order or investigation based on
an untrue statement or omission in the prospectus or restricting the distribution or
trading of the issuer’s securities. It will also contain termination rights in favour of
the underwriters which, if exercised, permit the underwriters to “walk away” from
their underwriting commitment. These termination rights triggers can be the
subject of negotiation between the issuer and the underwriters, and typically
include:
■ any investigation or order that operates to prevent or restrict distribution of
the subject securities or trading in the issuer’s securities (e.g., a cease trade
order);
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THE PROSPECTUS PROCESS
■
■
■
any occurrence of national or international consequence which, in the opinion
of the underwriters, seriously adversely affects the financial markets or the
business of the issuer;
in an IPO, the state of the financial markets is such that, in the opinion of the
underwriters, the offered securities cannot be profitably marketed; and
the occurrence of a material change which, in the opinion of the underwriters,
would reasonably be expected to have a significant adverse effect on the market
price or value of the securities.
FRENCH LANGUAGE
Any entity that carries on business in Province of Quebec, which may include the
distribution of securities or the solicitation of purchasers in the province of Quebec,
will be subject to the Quebec Charter of the French Language. The Charter states,
among other things, that “contracts pre-determined by one party, contracts
containing printed standard clauses, and the related documents, must be drawn up
in French”. They may be drawn up in another language as well at the express wish of
the parties. The Charter does not distinguish between contracts governed by the
laws of Quebec and those governed by other laws, and any agreements entered into
with potential purchasers in Quebec would, as a result of the statutory provisions,
be required to be either in the French language or indicate that the contract and any
documents incorporated therein by reference were drawn up in the English
language at the express wish of the parties. In addition, the Securities Act (Quebec)
imposes a French language requirement, subject to certain exceptions, on offering
documents such as prospectuses and offering memoranda, as well as certain
continuous disclosure documents.
EXEMPTIONS FROM THE PROSPECTUS REQUIREMENT
There are a number of options available for distributing securities on a prospectus
exempt basis, generally referred to as exempt distributions or private placements.
Private placements have, for the most part, been harmonized across the country in
the form of National Instrument 45-106 Prospectus and Registration Exemptions (NI
45-106). The instrument provides a range of prospectus exemptions for both
private and public issuers of securities.
While NI 45-106 provides the exemptions most often relied upon exemptions, some
jurisdictions, including Ontario, continue to retain certain additional local
exemptions.
The prospectus exemptions available under NI 45-106 are generally divided into the
following categories: capital raising; transaction specific; exemptions for investment
funds; employee, executive officer, director and consultant exemptions; and
miscellaneous exemptions.
The most frequently used among the capital raising exemptions are the “accredited
investor” and “minimum investment amount” exemptions. The “accredited investor”
exemption provides a prospectus exemption for trades to qualified persons,
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The “minimum investment amount” exemption is available to any person or entity
that purchases as principal securities of a single issuer that have an acquisition cost
of a minimum of C$150,000 at the time of the trade.
THE PROSPECTUS PROCESS
including individuals. Included among the qualified entities are certain types of
banks and other financial institutions, trust companies, pension funds, registered
charities, investment funds, domestic and international governmental bodies and
entities other than individuals or investment funds with net assets of C$5 million.
An individual may also qualify as an “accredited investor” if he or she, alone or with
a spouse, owns financial assets having an aggregate net realizable value over C$1
million; has net assets of at least C$5 million; or has net income before taxes in
excess of C$200,000 alone, or C$300,000 together with his or her spouse.
In addition to these two most frequently used exemptions, an additional exemption
is also available to private issuers. If an entity is not a reporting issuer or an
investment fund, it may rely on the private issuer exemption provided it has not
distributed securities other than to a prescribed list of investors and its securities
are subject to restrictions on transfer and beneficially owned by no more than 50
persons, not including employees and former employees of the issuer or its
affiliates. Other capital raising exemptions include exemptions in certain
jurisdictions for trades to family, friends and business associates of the issuer
(which exemption is not available in Ontario), for trades to founders, control
persons and family (which are available only in Ontario), for trades made pursuant
to a prescribed form of offering memorandum (which exemption is not available in
Ontario), trades to affiliates and trades made under rights offerings or pursuant to
dividend or distribution reinvestment plans.
Securities regulators are also currently considering new capital raising prospectus
exemptions that would, among other things, introduce a “crowdfunding” exemption
to allow reporting and non-reporting issuers to raise money from non-accredited
investors and an exemption for trades to existing security holders (which would be
somewhat more flexible than the traditional rights offering exemption) and extend
to Ontario the exemptions available to family, friends and business associates of the
issuer and for trades made pursuant to a prescribed form of offering memorandum.
Transaction exemptions include exemptions for distributions related to business
combinations and reorganizations, assets acquisitions, take-over bids and issuer
bids and securities issued for debt. NI 45-106 also makes available specific
exemptions for investment funds as well as for issuances to employees, executive
officers, directors and consultants. These may apply to issuances of equity
securities themselves or to grants and exercises of securities issued as equity
compensation, such as stock options.
Documentation used in connection with a private placement may vary depending
upon the size and nature of the issuer, the exemption relied upon and the identity
and relationship of the purchaser to the issuer. Generally, however, the
documentation consists of a subscription agreement, and where applicable, an
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THE PROSPECTUS PROCESS
40
agency or underwriting agreement. The documentation may also include an offering
memorandum but this is not mandatory (unless the offering memorandum
exemption is being relied upon). The subscription agreement, or similar document,
typically contains contractual representations, warranties and covenants between
the issuer and the purchaser. It also generally includes or is accompanied by some
form certificate whereby the purchaser provides confirmation of the necessary
elements of any prospectus exemption being relied upon, if applicable. For example,
if the exemption relied upon is the “accredited investor” exemption, the purchaser
will usually be asked to complete a certificate that indicates which category of
accredited investor applies to the purchaser. While an offering memorandum is not
required to be prepared when relying on the accredited investor and other
exemptions, if one is delivered, some provinces and territories also provide a
statutory right of action to purchasers where an offering memorandum contains a
misrepresentation.
STIKEMAN ELLIOTT LLP
GOING PUBLIC IN CANADA
F
Life After Going Public
Ongoing Compliance Requirements ................................................................................. 42
Continuous Disclosure Obligations ................................................................................... 42
Financial statements .................................................................................................... 43
Management’s Discussion & Analysis ......................................................................... 43
Annual Information Forms (AIFs) ................................................................................. 44
Material change reporting ............................................................................................ 44
Business acquisition reports ........................................................................................ 45
Documents affecting the rights of securityholders ....................................................... 46
Material contracts ......................................................................................................... 46
Corporate Governance...................................................................................................... 47
Shareholder Meetings, Communication and Proxy Materials ........................................... 48
Stock Exchange Requirements ......................................................................................... 49
Statutory Liability for Secondary Market Disclosure ......................................................... 49
Fees .................................................................................................................................. 50
Insider Trading Issues/Insider Reports ............................................................................. 51
© STIKEMAN ELLIOTT LLP
LIFE AFTER GOING PUBLIC
Life after Going Public
ONGOING COMPLIANCE REQUIREMENTS
After becoming a reporting issuer, a public entity and its directors, officers,
employees and other related persons face a number of new obligations primarily,
but not exclusively, having to do with disclosure of corporate information to
securityholders and the investing public. These disclosure obligations are both of a
regular periodic nature (as in the case of annual information forms (AIFs),
management’s discussion and analysis (MD&A), annual and quarterly financial
statements, annual and quarterly certifications and annual meeting proxy circulars)
and timely nature (such as press releases, material change reports and insider
reports). Generally, these documents must be filed electronically, either on SEDAR
or, in the case of insider reports, on SEDI.
National Instrument 51-102 Continuous Disclosure Obligations (NI 51-102) provides
a nationally harmonized set of continuous disclosure rules for reporting issuers
other than investment funds. In addition, instruments introduced partly in response
to the Sarbanes-Oxley legislation in the U.S. require CEO and CFO certification of
disclosure in public companies’ annual and interim filings, regulate the role and
composition of audit committees and support the work of the Canadian Public
Accountability Board in its oversight of auditors of public companies. Finally,
securities legislation also includes a regime for statutory civil liability for “secondary
market” disclosure.
CONTINUOUS DISCLOSURE OBLIGATIONS
NI 51-102 sets out a nationally harmonized set of continuous disclosure obligations
for reporting issuers (other than investment funds, whose disclosure is regulated
under National Instrument 81-106 Investment Fund Continuous Disclosure), relating to
financial statements, AIFs, MD&A, business acquisitions, material change reporting,
information circulars, proxies and proxy solicitation and other disclosure matters.
NI 51-102 makes a distinction between reporting issuers depending on the
exchange on which their securities are listed. Reporting issuers whose securities are
not listed on the TSX, a U.S. marketplace or more senior marketplaces outside of
Canada and the U.S. are defined as “venture issuers.” The distinction between
venture issuers and other reporting issuers affects, among other things, filing
deadlines, the requirement to file an AIF, calculations with regards to the
significance of business acquisitions requiring disclosure, corporate governance
disclosure, audit committee composition and disclosure and certain exemptions
from executive compensation disclosure.
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Annual financial statements
Reporting issuers (other than venture issuers) must file their annual financial
statements on or before the 90th day after the end of the most recently completed
financial year. Venture issuers must file their annual financial statements on or
before the 120th day after the end of the most recently completed financial year.
Interim financial reports
Reporting issuers (other than venture issuers) must file their interim financial
reports on or before the 45th day after the end of the interim period. Venture
issuers must file their interim financial statements on or before the 60th day after
the end of the interim period.
LIFE AFTER GOING PUBLIC
Financial statements
Approval of financial statements
The board of directors of each reporting issuer is required to approve both interim
and annual financial statements prior to their filing. However, reporting issuers with
audit committees may delegate the approval function for interim financial
statements to the members of the audit committee.
Delivery of financial statements to securityholders
NI 51-102 requires that the financial statements and MD&A of a reporting issuer be
delivered to securityholders upon request. Applying the procedures set out in
National Instrument 54-101 Communication with Beneficial Owners of Securities of a
Reporting Issuer, the reporting issuer must send a request form to the beneficial
owners of its securities who are identified under that Instrument as having chosen
to receive securityholder materials. Issuers should consult with their registrar and
transfer agent regarding the preparation of the request form (as no form is
mandated) so that it may be included with annual reports or management
information/proxy circulars.
Securityholders requesting financial statements and MD&A must be sent a copy of
the requested materials, without charge, by the later of 10 calendar days after the
applicable filing deadline and 10 calendar days after the issuer receives the request.
However, an issuer is not required to send copies or financial statements that were
filed more than two years before the issuer receives the request.
Management’s Discussion & Analysis
MD&A is supplemental analysis and explanation that accompanies, but does not
form part of, the issuer’s financial statements. It is a narrative description of the
issuer’s current financial situation and future prospects, and is intended to give a
reader the ability to look at the issuer through the eyes of management by providing
both a historical and prospective analysis of the business of the issuer.
A reporting issuer is required to file and send its MD&A in respect of its annual and
interim financial statements in accordance with the deadlines set for the filing of
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LIFE AFTER GOING PUBLIC
financial statements, described above. As with financial statements, the board of
directors of each reporting issuer is required to approve the MD&A accompanying
both interim and annual financial statements prior to their release. Once again,
reporting issuers with audit committees may delegate the approval function for
interim MD&A to the members of the audit committee. MD&A must comply with
Form 51-102F1, and requires, for example, discussions of off-balance-sheet
transactions, transactions between related parties, proposed transactions,
contractual obligations and payments due, liquidity, and changes in customer
buying patterns or the issuer’s selling practices. Form 51-102F1 also requires an
analysis of the issuer’s ability to generate sufficient cash in the short and long term
to maintain capacity, including a description of sources of funding. Securities
Commissions have also taken an increasing interest in MD&A disclosure relating to
environmental matters, including the impact upon an issuer’s business of climate
change and related issues.
Annual Information Forms (AIFs)
The AIF is a disclosure document that must be filed annually by reporting issuers
that are not venture issuers, intended to provide the public with the relevant
background material essential to a proper understanding of the issuer, its
operations and prospects for the future. A current AIF, however, is one of the basic
qualification criteria for making use of the short form prospectus system, so venture
issuers wishing to make use of the system will need to ensure they comply with this
requirement.
The AIF focuses on material information, and the prescribed contents include
information regarding the incorporation or organization of the issuer, its
subsidiaries, the general development of its business, a narrative description of its
business including social or environmental policies that are fundamental to
operations, selected consolidated financial information, the market for its securities,
directors and officers, material contracts not entered into in the “ordinary course of
business”, and certain additional information. To some extent, an AIF resembles a
prospectus, and the filing of an AIF is part of the eligibility criteria enabling an issuer
to raise capital through a truncated short form prospectus offering system used by
more “senior” issuers.
Material change reporting
NI 51-102 also requires that where a “material change” occurs in the affairs of a
reporting issuer, the reporting issuer must issue and file with the relevant securities
authority: (i) a material change report and (ii) a press release directed to the
investing public. A “material change” is defined as a change in the business,
operations or capital of the reporting issuer that would reasonably be expected to
have a significant effect on the market price or value of any of the securities of the
reporting issuer. The definition also includes a decision to implement such a change
by the board of directors or persons acting in a similar capacity or senior
management of the reporting issuer who believe that confirmation of the decision
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A confidential material change report may be filed by a reporting issuer if, in the
reasonable opinion of the issuer, the disclosure would be unduly detrimental to the
interests of the issuer. However, after a confidential material change report is filed,
an issuer is required to regularly advise the Securities Commission(s) on the
reasons for requiring confidential treatment and to promptly disclose the material
change if the issuer becomes aware, or has reasonable grounds to believe, that
persons are trading with knowledge of that material change.
LIFE AFTER GOING PUBLIC
by the board of directors or any other persons acting in a similar capacity is
probable. Material change reports must be filed in the form prescribed by Form 51102F3 as soon as practicable, and in any event within ten days of the date on which
the material change occurs. The news release disclosing the nature and substance of
the change must be issued and filed immediately when the change occurs.
NP 51-201 Disclosure Standards (NP 51-201), which provides guidance on “best
disclosure” practices, supplements the disclosure requirements above and urges, in
particular, that any announcement of material changes should be factual and
balanced, neither over-emphasizing favourable news nor under-emphasizing
unfavourable news. In short, announcements must be clear, accurate and objective.
Further, it suggests a number of best practices to assist reporting issuers in
complying with continuous disclosure rules, and preventing insider trading and
selective disclosure.
While NI 51-102 legally compels the disclosure of material changes, the TSX
Company Manual also contains timely disclosure guidelines, the violation of which
could lead to sanction by the TSX. Under the TSX rules, issuers are to promptly
disclose all material information. This timely disclosure policy is expressly designed
to supplement and expand on the material change reporting requirements set out in
NP 51-201 Disclosure Standards, and is expressed to be the primary timely
disclosure standard for all TSX listed issuers.This is supported by a statement of the
CSA in NP 51-201 that the CSA expects listed issuers to comply with the
requirements of the TSX. The TSX Company Manual defines “material information”
as any information relating to the business and affairs of an issuer that results in, or
would reasonably be expected to result in a significant change in the market price or
value of any of the issuer’s listed securities, and consists of both material facts and
material changes relating to the business and affairs of the listed company. The
materiality of information must be assessed by each company in the context of its
own affairs, and will vary depending on factors such as the size of the company’s
profits, assets and capitalization as well as the nature of its operations.
Business acquisition reports
A reporting issuer completing a “significant acquisition” is required to file a
Business Acquisition Report (BAR) on Form 51-102F4 within 75 days after the date
of acquisition, which is extended to 90 days (120 days for venture issuers) in some
circumstances.The 20% and 40% threshold tests for determining whether an
acquisition is “significant” are the same as those under the prospectus requirement,
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LIFE AFTER GOING PUBLIC
described in Section E under “Significant Acquisitions - Financial Information”. The
BAR describes the significant acquisition and its effect on the reporting issuer.
Unless an exemption from inclusion is available, the BAR must also include the
prescribed annual and interim financial statements of the acquired business (with
the annual statements for the most recently completed financial year required
generally to be audited), together with pro-forma financial statements. Under
National Instrument 52-107 Acceptable Accounting Principles and Auditing
Standards, the financial statements of an acquired business included in a BAR may
be prepared in accordance with one of a number of prescribed accounting principles
including Canadian GAAP applicable to publicly accountable enterprises, U.S. GAAP
and International Financial Reporting Standards.
Documents affecting the rights of securityholders
A reporting issuer must file copies of the following documents, including any
material amendments, on SEDAR (paper copies may be filed if the document is
dated prior to March 30, 2004 and if it does not exist in an acceptable electronic
format for SEDAR filing):
■ Articles of incorporation or other constating documents of the issuer;
■ By-laws currently in effect;
■ Securityholder or voting trust agreements that are accessible by the reporting
issuer and that can be reasonably regarded as material to an investor;
■ Securityholders’ rights plans (i.e. “poison pills”); and
■ Any other contract of the reporting issuer (or a subsidiary of the reporting
issuer) that creates or can reasonably be regarded as materially affecting the
rights or obligations of its securityholders generally.
Material contracts
A reporting issuer must also file a copy of any material contract the issuer or a
subsidiary enters into, other than those entered into in the ordinary course of
business. This requirement applies to any contract entered into within the last
financial year, or before the last financial year if the contract is still in effect. There is
an exception for any contract entered into before January 1, 2002. The ordinary
course of business exemption does not apply, however, to certain types of contracts,
including contracts with directors, officers or promoters (other than employment
contracts), continuing contracts to sell a majority of an issuer’s products or services
or to purchase a majority of its required goods, services or materials, certain
franchise, licence agreements or intellectual property agreements, external
management or administration agreements and other contracts upon which an
issuer’s business is substantially dependent. A financing or credit agreement,
meanwhile, must generally be assessed on a case-by-case basis to determine
whether it is material and whether it was entered into in the ordinary course of
business. If the contract has a direct correlation to anticipated cash distributions, it
will not be protected from filing by the “ordinary course of business” exception.
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CORPORATE GOVERNANCE
In addition to the types of disclosure discussed above, Canadian reporting issuers
are also subject to prescribed governance requirements and related disclosure
similar to, albeit less stringent than, those imposed under U.S. securities laws.
LIFE AFTER GOING PUBLIC
Subject to certain exceptions, contracts may generally be filed with provisions
redacted or omitted if an executive officer of the issuer believes that disclosure of
such provisions would be seriously prejudicial to the interests of the issuer or would
violate confidentiality provisions. Where provisions are redacted or omitted, the
copy of the contract filed on SEDAR must include a brief description of the
undisclosed provisions. The Securities Commissions do not expect more than a
limited number of contracts to be filed as issuers are not expected to enter into
contracts that are unusual in their businesses on a regular basis.
CEO and CFO certifications and related MD&A disclosure
National Instrument 52-109 Certification of Disclosure in Issuers’ Annual and Interim
Filings (NI 52-109) requires reporting issuers to file interim and annual certificates,
certified by the CEO and CFO (or equivalent) of the issuer. For non-venture issuers,
the certificates include certifications regarding fair presentation of financial
condition, financial performance and cash flow and confirmation that the interim
and annual filings do not contain any misrepresentations. The certificates must also
include certifications regarding the establishment and maintenance of disclosure
controls and procedures (DCP) and internal control over financial reporting (ICFR),
including the design of DCP to provide “reasonable assurance” that material
information relating to the issuer, including its consolidated subsidiaries, is made
known to the certifying officers and the design of ICFR to provide “reasonable
assurance” regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with the issuer’s GAAP. In
addition, corresponding disclosure is required in the issuer’s MD&A, including the
certifying conclusions about the effectiveness of DCP and ICFR and any changes in
ICFR during the relevant period that have materially affected, or are reasonably
likely to materially affect, the issuer’s ICFR. The certificate required of a venture
issuer, meanwhile, need only include certifications regarding review, fair
presentation and a lack of misrepresentations.
Audit committee composition and disclosure
National Instrument 52-110 Audit Committees governs the function, powers and
composition of the audit committee, and requires issuers to provide certain
prescribed disclosure regarding its composition and functions. Specifically, each
reporting issuer to whom the rule applies is required to have an audit committee
comprised of a minimum of three directors, who are all (subject to certain
exemptions, including exemptions for venture issuers) independent and financially
literate. The audit committee is required, inter alia, to review the issuer’s financial
statements, MD&A and annual and interim earnings press releases before the issuer
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generally publicly discloses this information. The audit committee must also be
satisfied that adequate procedures are in place for the review of the issuer’s public
disclosure of financial information extracted or derived from the issuer’s financial
statements and periodically assess the adequacy of those procedures. The
prescribed disclosure required under the audit committee rule must be included in
the issuer’s AIF. The audit committee must also have a written charter and establish
procedures for the receipt, retention and treatment of complaints regarding
accounting, internal controls and auditing matters as well as confidential
submissions from employees regarding accounting and auditing concerns.
Governance rules
National Instrument 58-101 Disclosure of Corporate Governance Practices
(Disclosure Instrument) and National Policy 58-201 Corporate Governance
Guidelines (Guidelines), collectively referred to below as the Governance Rules are
similar in substance to the NYSE’s corporate governance listing standards and
reflect what the OSC and other Securities Commissions consider to be Canadian and
U.S. best practices.
The purpose of the Governance Rules is to provide greater transparency for the
marketplace regarding issuers’ corporate governance practices. They include both
mandatory disclosure requirements (principally in an issuer’s management proxy
circular) and the requirement to file on SEDAR any written code of business conduct
and ethics (and subsequent amendments) that an issuer has adopted. Recognizing
that many junior issuers will have fewer formal procedures in place to ensure
effective corporate governance, the Corporate Governance Rules impose fewer
disclosure obligations on venture issuers.The specific disclosure requirements
under the Disclosure Instrument are informed by the recommended best practices
in the corresponding Guidelines. The stated purpose of the Guidelines is to provide
guidance on corporate governance practices, and the Guidelines are not intended to
be prescriptive. For example, under the Guidelines, it is recommended that the
board by comprised of a majority of independent directors, that independent
directors hold regularly scheduled meetings at which non-independent directors
and members of management are not in attendance, and that the board adopt a
written code of business conduct and ethics.
While issuers are encouraged to consider the Guidelines in developing their own
corporate governance practices, they are not required to disclose their practices in
comparison to the provisions of the Guidelines.
SHAREHOLDER MEETINGS, COMMUNICATION AND PROXY MATERIALS
Annual meetings are generally required by the applicable corporate law, constating
documents for non-corporate entities, and sometimes the exchange. When a
meeting is to be held, NI 51-102 requires that a reporting issuer send a prescribed
form of proxy when giving notice of a meeting. When soliciting proxies, the
reporting issuer must generally also provide shareholders with an information
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STIKEMAN ELLIOTT LLP
LIFE AFTER GOING PUBLIC
circular with the notice of the meeting. The circular must be filed with the OSC,
other Securities Commissions and the TSX. National Instrument 54-101
Communication with Beneficial Owners of Securities of a Reporting governs direct
communication between reporting issuers and beneficial owners of securities and
between third parties, such as bidders and dissidents in proxy contests, and
beneficial owners of securities. Issuers are permitted to send materials directly to
beneficial holders who have not objected to receiving materials directly, and
indirectly through intermediaries to those that have objected. NI 54-101 also
permits communication by electronic means, such as email, provided prescribed
requirements are satisfied. Meanwhile under recently-enacted “notice-and-access”
provisions, reporting issuers are permitted to deliver proxy-related materials by
posting the relevant information circular and other materials on a non-SEDAR
website and sending a notice advising shareholders that proxy-related materials
have been posted and explaining how to access the material.
STOCK EXCHANGE REQUIREMENTS
Once its securities are listed on the TSX, a company must fulfill a number of
requirements on a continuing basis, including filing the relevant company reporting
forms, in order to maintain its listing. These requirements exist in addition to the
legal continuous disclosure obligations required under NI 51-102, described above.
The TSX forms standardize the reporting format of changes in corporate
information that companies most frequently have to provide. The types of changes
include changes in general company information (e.g. change in head-office, fiscal
year-end), changes in investor relations contact, changes in principal business as
well as changes in outstanding and reserved securities.
Further, among other requirements:
■ every company must also comply with the filing requirements of the TSX, such
as by giving immediate notice to the TSX of any proposed issuance of securities
out of treasury. The TSX has a right to either accept or reject the notice for
filing, or apply certain conditions such as shareholder approval. There is an
additional listing fee payable in respect of any further listing of an issuer’s
securities; and
■ every company must immediately notify its shareholders and the TSX of any
action with respect to dividends or rights and must give at least seven trading
days’ notice of a dividend or rights offering record date. Every company which
proposes to change its name, split or consolidate its stock or undergo a share
reclassification must make a substitutional listing application to the TSX.
Changes to the form of its share certificate and amendments to an issuer’s
articles must also be communicated to the TSX.
STATUTORY LIABILITY FOR SECONDARY MARKET DISCLOSURE
Securities laws also impose civil liability for secondary market disclosure. The most
significant causes of action for secondary market disclosure pertain to
misrepresentations made by, or on behalf of, a reporting issuer in its continuous
STIKEMAN ELLIOTT LLP
49
LIFE AFTER GOING PUBLIC
disclosure documents or in public oral statements, and failures to make timely
disclosure of material changes. In addition to the issuer itself, its directors and
officers, significant shareholders (and their directors and officers), among others,
could be subject to such a cause of action. In contrast to the common law cause of
action for negligent misrepresentation, which requires each plaintiff to prove that it
relied to its detriment on the alleged misrepresentation, a plaintiff has a statutory
right of action without regard to whether the purchaser or seller of securities relied
on the alleged misrepresentation. In other words, reliance is not required or relevant.
Although the secondary market civil liability provisions speak of a statutory “right”
of action, the prospective plaintiff can commence a proceeding under these
provisions only with the leave of the court. Leave will be granted only if the court is
satisfied that:
■ the action is being brought in good faith; and
■ there is a “reasonable possibility” that the action will be resolved in favour of
the plaintiff.
While the amendments create statutory causes of action, they also create a number
of defences that may preclude liability or limit damages in certain situations. These
defences include:
■ due diligence;
■ properly qualified forward-looking information; that the plaintiff knew of the
material change or misrepresentation;
■ that the material change was confidentially disclosed to the OSC;
■ reasonable reliance on an expert; that corrective action was taken; and
■ reasonable reliance on representations contained in a third party’s public filing.
FEES
The fee regime in Ontario under OSC Rule 13-502 Fees requires registrants,
investment fund managers and reporting issuers to pay annual “participation fees”
and “activity fees”, as appropriate. The participation fee category is comprised of a
“corporate finance participation fee” and a “capital markets participation fee”, and is
intended to reflect a market participant’s proportionate expected participation in
Ontario’s capital markets in the upcoming year.
Participation fees
Corporate finance participation fees must generally be paid by all Ontario reporting
issuers, other than investment funds that have investment fund managers. The fees
are based on the market participant’s capitalization, as a measure of its participation
in Ontario’s capital markets, with fees ranging from $890 for companies with a
capitalization of under $10 million, to a maximum of $89,990 for companies with a
capitalization of $25 billion and over. Most mid-size Canadian issuers having a
market capitalization of between $50 million and $250 million can expect to pay
between $5,725 and $11,950 per annum as their participation fee in Ontario.
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The participation fees are payable by the earlier of the date on which an issuer’s
annual financial statements are required to be filed and the date on which such
statements are actually filed. An issuer who is late in paying its participation fee will
face a late filing penalty of one-tenth of 1% of the unpaid portion of the fee payable
for each business day that it remains unpaid. A capital markets participation fee
must also be paid based on specified Ontario revenues, and range from $835 for
companies with revenues of under $250,000 to just over $2 million for companies
with revenue of $2 billion and over. Capital market participation fees are generally
due on December 31 of each calendar year, with late penalties similar to those of
corporate finance participation fees.
Activity fees
Activity fees are flat fees charged for specified activities (for example, prospectus
review or filing of an exempt trade report). Every person or company that files a
document or takes an action listed in OSC Rule 13-502 is subject to the activity fee
referable to that action. For example, a preliminary prospectus will generally be
subject to a single fee of $3,750 per prospectus irrespective of the type or size of the
offering.
A late fee applies to the late filing of certain documents (for example, annual
financial statements, interim financial statements and AIFs, as well as insider
reports).
Other provinces
Other provinces in Canada also impose their own annual, filing, and activity fees.
Annual sustaining fees based on the market value of listed securities are also levied
by the TSX.
INSIDER TRADING ISSUES/INSIDER REPORTS
Securities legislation prohibits any person in a “special relationship” with a
reporting issuer from purchasing or selling securities of the reporting issuer with
knowledge of a material fact or material change with respect to the reporting issuer
that has not been generally disclosed. Persons in a special relationship include,
among others (i) any person or company that is an insider, affiliate or associate of
the reporting issuer; (ii) a person or company that is engaging in any business or
professional activity, that is considering or evaluating whether to engage in any
business or professional activity, or that proposes to engage in any such activity
with, or on behalf of the reporting issuer; (iii) a person who is a director, officer or
employee of the reporting issuer; and (iv) a person who learns of a material fact or
material change with respect to the issuer from a person in a special relationship
and knew or ought reasonably to have known such person to be in such a
relationship. There are also prohibitions with respect to tipping, which consists of
informing, other than in the necessary course of business, another person or
company of a material fact or material change with respect to the reporting issuer
before it has been generally disclosed. Many of these terms have specific definitions
STIKEMAN ELLIOTT LLP
51
LIFE AFTER GOING PUBLIC
in Canadian securities law that should be understood by anyone in such a “special
relationship” because insider trading and tipping are offences that carry criminal
penalties. Civil remedies are also available to a purchaser and seller of securities,
and to the issuer, in connection with this kind of activity. For these purposes, the
Securities Act (Ontario) provides that a “security” includes: (a) a put, call, option or
other right or obligation to purchase or sell securities of the reporting issuer; (b) a
security, the market price of which varies materially with the market price of the
securities of the issuer; and (c) a related derivative.
Under National Instrument 55-104 Insider Reporting Requirements and Exemptions,
every “reporting insider” of a reporting issuer must file an insider report within five
days of a change in the reporting insider’s: (a) beneficial ownership of, or control or
direction over, whether direct or indirect, securities of the reporting issuer; or (b)
interest in, or right or obligation associated with, a related financial instrument
involving a security of the reporting issuer. A reporting insider includes the
reporting issuer itself as well as: (i) the CEO, CFO, COO or director of the reporting
issuer, of a significant shareholder of the reporting issuer or of a major subsidiary of
the reporting issuer; (ii) a person or company responsible for a principal business
unit, division or function of the reporting issuer; (iii) a significant shareholder based
on post-conversion beneficial ownership of the reporting issuer’s securities and the
CEO, CFO, COO and every director of the significant shareholder based on postconversion beneficial ownership; (iv) a management company that provides
significant management or administrative services to the reporting issuer or a major
subsidiary of the reporting issuer, every director of the management company,
every CEO, CFO and COO of the management company, and every significant
shareholder of the management company; and (v) any other insider that in the
ordinary course receives or has access to information as to material facts or
material changes concerning the reporting issuer before the material facts or
material changes are generally disclosed and who directly or indirectly, exercises, or
has the ability to exercise, significant power or influence over the business,
operations, capital or development of the reporting issuer. Significant shareholders
are those generally holding more than 10% of the voting securities, including on a
post-conversion basis of convertible or similar securities in some circumstances.
Supplemental insider reporting requirements of NI 55-104 require the filing of
insider reports with respect to certain agreements, arrangements or understandings
that (i) have the effect of altering the reporting insider's economic exposure to the
reporting issuer; (ii) involve, directly or indirectly, a security of the reporting issuer
or a related financial instrument involving a security of the reporting issuer; and
(iii) do not otherwise trigger the obligation to file an insider report. Upon becoming
a reporting insider, the reporting insider must file an insider report to disclose any
such agreement or arrangement that was entered into prior to the date the person
became a reporting insider and that is still in effect. “Economic exposure” generally
refers to the link between a person’s economic or financial interests and the trading
52
STIKEMAN ELLIOTT LLP
In addition to the insider reporting requirements, the TSX’s Policy Statement on
Timely Disclosure sets out procedures with respect to disclosure, confidentiality and
employee trading pursuant to which issuers are urged to establish confidentiality
and trading policies to govern, among other things, the establishment of “black out
periods” and “open windows” for trading in the company’s securities by employees
and others.
LIFE AFTER GOING PUBLIC
STIKEMAN ELLIOTT LLP
53
price of the securities or the economic or financial interests of the reporting issuer
of which the person is an insider.
GOING PUBLIC IN CANADA
G
Certain Tax Consequences of Becoming a
Public Corporation
Small Business Deduction ................................................................................................ 56
Enhanced Capital Gains Exemption ................................................................................. 56
Capital Dividend Account .................................................................................................. 57
Stock Options .................................................................................................................... 57
Qualification for Investment of Listed Shares ................................................................... 58
© STIKEMAN ELLIOTT LLP
CERTAIN TAX CONSEQUENCES
Certain Tax Consequences
of Becoming a Public Corporation
The following summary highlights certain income tax considerations that may be
relevant in the context of a private corporation going public.
SMALL BUSINESS DEDUCTION
A corporation is not entitled to the small business deduction (a reduction in federal
and provincial income tax in respect of certain types of business income) unless it is
a “Canadian-controlled private corporation” (CCPC) throughout a taxation year.
Upon the listing of shares of a corporation on a designated stock exchange in Canada
(which includes the TSX and Tiers 1 or 2 of the TSX Venture), the corporation will
become a “public corporation” and will cease to be a “private corporation” and a
CCPC for the purposes of the Income Tax Act (Canada) (the Tax Act). Where a
corporation ceases to be a CCPC because its shares become listed, it will generally be
deemed to have a year-end for tax purposes. Once the corporation becomes a public
corporation, it will not be entitled to the small business deduction and the effective
federal and provincial tax rates will generally increase for the first $500,000 of
taxable income.
ENHANCED CAPITAL GAINS EXEMPTION
Capital gains realized by individuals on the disposition of shares of a “qualified small
business corporation” are eligible for the enhanced lifetime capital gains exemption
of $800,000. To qualify for the exemption, among other things, the shares must be
shares of a “small business corporation” (as defined in the Tax Act) at the time of the
disposition. In general terms, a small business corporation is a CCPC substantially all
of whose assets are used principally in an active business carried on primarily in
Canada.
As described above, when a corporation’s shares are listed on a designated stock
exchange in Canada, the corporation becomes a “public corporation” and its shares
cease to qualify for the enhanced exemption.
An individual can elect for certain purposes to be treated as having disposed of his
or her shares in a small business corporation immediately before the corporation
becomes a public corporation by reason of the listing of a class of its shares on a
designated stock exchange. The individual may designate an amount that will be
considered to be the proceeds of disposition of the shares in a range between the
adjusted cost base of the shares and their fair market value. The individual is also
treated as having reacquired the shares at a cost equal to the designated proceeds of
disposition immediately after the corporation becomes public. By designating an
appropriate amount, the individual can take full advantage of any unused portion of
his or her capital gains exemption without having to undertake an actual realization
transaction.
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CAPITAL DIVIDEND ACCOUNT
The capital dividend account of a corporation represents, in general terms, the nontaxable portion of net capital gains of the corporation that accrued while the
corporation was a private corporation. The amount of the capital dividend account
may be distributed as capital dividends free of tax to Canadian resident
shareholders provided the appropriate election is filed in respect of the dividend.
In order to qualify as a capital dividend, the dividend must be payable by a “private
corporation” (as defined in the Tax Act). A public corporation is not able to pay a
capital dividend even if the balance in its capital dividend account accrued while it
was a private corporation. Accordingly, it is prudent planning to ensure that any
balance in the capital dividend account is distributed as a capital dividend prior to
the corporation becoming a public corporation.
CERTAIN TAX CONSEQUENCES
The election must be made in the form prescribed by the Canada Revenue Agency
and, generally, on or before April 30 in the year following the year in which the
corporation becomes a public corporation. There is a provision for the late filing of
the election on payment of a specified penalty.
It should be noted that the election in respect of capital dividends must be filed on the
form prescribed by the Canada Revenue Agency (together with certain other required
documents) no later than the day on which the dividend becomes payable or the first
day on which any part of the dividend is paid, whichever is earlier. The Tax Act does
provide for late filed elections (where the dividend was paid by a corporation at the
time it was a private corporation) on payment of a specified penalty.
STOCK OPTIONS
The rules under the Tax Act with respect to the taxation of stock options granted by
a CCPC are generally more favourable than those that apply to options granted by a
public corporation.
Where stock options are granted by a CCPC to an employee that was dealing at arm’s
length with the CCPC, a taxable benefit is deemed to be received by the employee
only when the shares (that are the subject of the option) are in fact sold. The taxable
benefit is equal to the excess of the value of the shares at the time the employee
acquired them over the amount paid to the corporation for the shares (plus the cost
of the option, if any). Where the employee is deemed to receive such a benefit and
provided he or she held the shares for two years from their date of acquisition, the
employee will be entitled to a deduction equal to one-half of the amount of the
deemed benefit.
Stock options granted by a public corporation will generally be subject to less
favourable treatment. The taxable benefit will generally be deemed to be received
by the employee in the year in which the employee exercises the option and
acquires the shares. The amount of the taxable benefit is computed on the same
basis as described above in respect of a CCPC. A deduction equal to one-half of the
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57
CERTAIN TAX CONSEQUENCES
amount included in the employee’s income as a taxable benefit is also available to
the employee provided certain conditions are met. These conditions include the
requirement that the employee deal at arm’s length with the corporation at certain
relevant times, that the shares be prescribed shares (generally speaking, a
straightforward common share) and that the amount payable by the employee to
acquire the shares under the option agreement is not less than the fair market value
of the shares at the time the option was granted.
As a result of the more beneficial treatment of stock options granted by a CCPC, it
may be advisable for a corporation that qualifies as a CCPC to consider the issuance
of additional stock options to employees prior to the date the shares of the
corporation are listed. So long as the corporation qualified as a CCPC at the time the
options were granted, the more favourable treatment will continue to be applicable
even if the corporation ceases to be a CCPC (and becomes a public company) prior
to the issuance of the shares pursuant to the exercise of the options.
QUALIFICATION FOR INVESTMENT OF LISTED SHARES
Shares listed on a designated stock exchange are qualified investments under the
Tax Act for registered retirement savings plans, registered education savings plans,
deferred profit sharing plans, registered disability savings plans, registered
retirement income funds and tax free savings accounts. Accordingly, by having its
shares so listed, a corporation’s potential investor base will be broadened. Private
company shares are qualified investments only in limited circumstances.
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GOING PUBLIC IN CANADA
Schedule “A”:
TSX Original Listing Requirements
Industrial, Technology, And Research and Development Companies ............................. 60
Oil and Gas Companies .................................................................................................... 62
Exploration and Mining Companies .................................................................................. 63
Note: Please see the TSX Guide to Listing, available on the TMX website, for any
changes to the requirements outlined below.
© STIKEMAN ELLIOTT LLP
TSX ORIGINAL LISTING REQUIREMENTS
INDUSTRIAL, TECHNOLOGY, AND RESEARCH AND DEVELOPMENT COMPANIES
Minimum
Listing
Requirements
TSX NonExempt
Technology
Issuers
TSX NonExempt
Forecasting
Profitability
TSX NonExempt
Profitable
Issuers
TSX Exempt
Industrial
Companies
Earnings or
Revenue
Evidence of pretax earnings
from on-going
operations for
the current or
next fiscal year
of at least
$200,000
Pre-tax
earnings
from ongoing
operations of
at least
$200,000 in
the last fiscal
year
Pre-tax
earnings from
on-going
operations of at
least $300,000
in the last fiscal
year
Cash Flow
Evidence of pretax cash flow
from on-going
operations for
the current or
next fiscal year
of at least
$500,000
Pre-tax cash
flow of
$500,000 in
the last fiscal
year
Pre-tax cash
flow of
$700,000 in the
last fiscal year,
and an average
of $500,000 for
the past 2 fiscal
years
Net Tangible
Assets
$7,500,000
$2,000,000
$7,500,000
Adequate
Working
Capital and
Capital
Structure
Funds to cover all
planned
development
expenditures,
capital
expenditures, and
G&A expenses
for 1 year
Funds to cover
all planned R&D
expenditures,
capital
expenditures
and G&A
expenses for 2
years
Cash in
Treasury
Min. $10 million in
the treasury, with
majority raised by
prospectus
offering
Min. $12 million
in the treasury,
with majority
raised by
prospectus
offering
Products and
Services
Evidence that
products or
services at an
advanced stage
of development
Minimum 2 year
operating
history that
includes R&D
activities.
Evidence of
technical
expertise and
resources to
advance its
research and
development
programs
or
commercialization
and that
management has
the expertise and
resources to
develop the
business
60
TSX NonExempt
Research &
Development
(R&D) Issuers
STIKEMAN ELLIOTT LLP
Working capital to carry on the business, and an
appropriate capital structure
Management, including the board of directors, should have adequate experience and
technical expertise relevant to the company’s business and industry as well as adequate
public company experience. Companies are required to have at least two independent
directors.
Public
Distribution
and Market
Capitalization
1,000,000 free
trading public
shares
$10,000,000 held
by public
shareholders
1,000,000 free trading public shares
$4,000,000 held by public shareholders
300 public shareholders each holding a board lot
300 public
shareholders
each holding a
board lot
Minimum $50
million market
capitalization
Sponsorship
Generally Required
Not Required
STIKEMAN ELLIOTT LLP
TSX ORIGINAL LISTING REQUIREMENTS
Management
and Board of
Directors
61
TSX ORIGINAL LISTING REQUIREMENTS
OIL AND GAS COMPANIES
Minimum Listing
Requirements
TSX Non-Exempt Oil &
Gas Development Stage
Issuers
TSX Non-Exempt Oil & Gas
Exploration and Development
Issuers
Net Tangible
Assets, Earnings
or Revenue
No requirements
Working Capital
and Financial
Resources
Adequate funds to either: (a)
execute the development plan and
cover all other capital expenditures
& G&A + debt service expenses, for
18 months with a contingency
allowance; OR
(b) bring the property into
commercial production, & adequate
working capital to fund all budgeted
capital expenditures + carry on the
business. 18 month projection of
sources & uses of funds signed by
CFO; appropriate capital structure
Distribution,
Market
Capitalization and
Public Float
At least 1,000,000 freely tradable
shares with an aggregate market
value of $4,000,000; 300 public
holders, each with one board lot or
more
TSX Exempt Oil & Gas
Issuers
Pre-tax profitability from
ongoing operations in last
fiscal year. Pre-tax cash
flow from ongoing
operations of $700,000 in
last fiscal year and
average pre-tax cash flow
from ongoing operations of
$500,000 for the past two
fiscal years
Adequate funds to
execute the program and
cover all other capital
expenditures & G&A +
debt service expenses for
18 months with a
contingency allowance;
18 month projection of
sources and uses of
funds signed by CFO;
appropriate capital
structure
Adequate working capital
to carry on the business.
Appropriate capital
structure
At least 1,000,000 freely tradable shares with an
aggregate market value of $4,000,000;
300 public shareholders, each holding one board lot or
more
Minimum market value of the Issued
securities that are to be listed of at
least $200,000,000
62
Sponsorship
May be Required
Property
Requirements
Contingent resources of
$500,000,000
$3,000,000 proved
developed reserves
Recommended
Work Program
Clearly defined development plan,
satisfactory to the Exchange, which
can reasonably be expected to
advance the property
Clearly defined program
to increase reserves
Management and
Board of Directors
Management, including the board of directors, should have adequate experience and technical
expertise relevant to the company’s business and industry as well as adequate public company
experience. Companies are required to have at least two independent directors.
Other Criteria
Up to date technical report prepared by an independent technical consultant (NI 51-101
Standards of Disclosure for Oil & Gas Activities)
STIKEMAN ELLIOTT LLP
Not Required
$7,500,000 proved
developed reserves
Minimum Listing
Requirements
TSX Non-Exempt
Exploration and
Development Stage
TSX Non-Exempt
Producer
TSX Exempt
Property
Requirements
Advanced Exploration
Property. Minimum 50%
ownership in the property
Three years proven and
probable reserves as
estimated by independent
qualified person (if not in
production, a production
decision made)
Three years proven and
probable reserves as
estimated by independent
qualified person
Recommended Work
Program
$750,000 on advanced
exploration property as
recommended in
independent technical report
Bringing the mine into
commercial production
Commercial level mining
operations
Working Capital and
Financial Resources
Minimum $2,000,000
working capital, but
sufficient to complete
recommended programs,
plus 18 months G&A,
anticipated property
payments and capital
expenditures. Appropriate
capital structure
Adequate funds to bring the
property into commercial
production; plus adequate
working capital for all
budgeted capital
expenditures and to carry on
the business. Appropriate
capital structure.
Adequate working capital to
carry on the business.
Appropriate capital
structure.
Net Tangible Assets,
Earnings or Revenue
$3,000,000 net tangible
assets
$4,000,000 net tangible
assets; evidence indicating
a reasonable likelihood of
future profitability supported
by a feasibility study or
historical production and
financial performance
$7,500,000 net tangible
assets; pre-tax profitability
from ongoing operations in
last fiscal year; pre-tax cash
flow of $700,000 in last
fiscal year and average of
$500,000 for past two fiscal
years
Other Criteria
Up-to-date, comprehensive technical report prepared by
independent qualified person. 18-month projection (by
quarter) of sources and uses of funds, signed by CFO
Management and
Board of Directors
Management, including the board of directors, should have adequate experience and
technical expertise relevant to the company’s business and industry as well as adequate
public company experience. Companies are required to have at least two independent
directors.
Distribution, Market
Capitalization and
Public Float
1,000,000 free trading public shares
$4,000,000 held by public shareholders
300 public shareholders with board lots
Sponsorship
Generally Required
TSX ORIGINAL LISTING REQUIREMENTS
EXPLORATION AND MINING COMPANIES
Up-to-date, comprehensive
technical report prepared by
independent qualified
person
Not Required
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63