Going Public in Canada

Transcription

1 Going Public in Canada Issues and considerations Asssociated with an Initial Public Offering Stikeman Elliott LLP

2 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

3 Going Public in Canada Issues and Considerations Associated with an Initial Public Offering Introduction Whether and How to Go Public... Section A Obtaining an Exchange Listing... Section B Timing the IPO... Section C Getting Your Company Ready... Section D The Art of the Prospectus... Section E Life as a Canadian Public Company... Section F Tax Issues to Consider... Section G Stikeman Elliott LLP

4 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 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. Stikeman Elliott LLP

5 The Prospectus Going public generally requires the preparation of a disclosure document called a prospectus containing all material information concerning the business and 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 (which provides access to information filed by public companies and investment funds) and on the OSC s website at Insider trading reports can be accessed through the System for Electronic Disclosure by Insiders, or SEDI, at Stikeman Elliott would also be pleased to provide more specific information upon request. 2 Introduction Stikeman Elliott LLP

6 Going Public: Whether and How to Go Public Advantages and Disadvantages of Being a Public Company... 2 Initial Public Offering (IPO)... 3 Treasury Versus Secondary Offering... 3 Escrow Issues for Initial Public Offerings... 4 Who must escrow shares?... 4 Escrow release timetable... 5 Secondary offerings under the prospectus... 5 Transfers in escrow... 6 Other resale restrictions... 6 Alternatives to IPO... 7 Reverse Take-overs (Backdoor Listings)... 7 Capital Pool Company (CPC)... 7 Special Purpose Acquisition Corporation (SPAC)... 8 Considerations for International Companies... 8 This is Section A of Going Public in Canada, published by Stikeman Elliott. Stikeman Elliott LLP

7 Going Public: Whether and How to Go Public 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, A2 Going Public: Whether and How to Go Public Stikeman Elliott LLP

8 compliance with the requirements of securities laws and stock exchange rules, 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 Stikeman Elliott LLP Going Public: Whether and How to Go Public A3

9 distribution are being borne by the selling securityholders, this must be disclosed in a statement along with the rationale. 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 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. A4 Going Public: Whether and How to Go Public Stikeman Elliott LLP

10 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 , 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. 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 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 in the IPO by the issuer are sold before any sale is completed under the secondary offering. Stikeman Elliott LLP Going Public: Whether and How to Go Public A5

11 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 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 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 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 that the prescribed notices are filed. Appropriate pre-ipo structuring may be completed to avoid the limitations on resale in certain cases. A6 Going Public: Whether and How to Go Public Stikeman Elliott LLP

12 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. 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 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 certain listing requirements of the TSX-V. Once the qualifying transaction has closed, Stikeman Elliott LLP Going Public: Whether and How to Go Public A7

13 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 A8 Going Public: Whether and How to Go Public Stikeman Elliott LLP

14 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. 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 Going Public: Whether and How to Go Public A9

15 Going Public: Obtaining an Exchange Listing 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 the following pages (and are available on the TSX s website at 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. This is Section B of Going Public in Canada, published by Stikeman Elliott. Stikeman Elliott LLP

16 Industrial, Technology, and Research and Development Companies Minimum Listing Requirements TSX Non- Exempt Technology Issuers TSX Non- Exempt Research & Development (R&D) Issuers TSX Non- Exempt Forecasting Profitability TSX Non- Exempt 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 Working capital to carry on the business, and an appropriate capital structure 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 B2 Going Public: Obtaining an Exchange Listing Stikeman Elliott LLP

17 Minimum Listing Requirements TSX Non- Exempt Technology Issuers TSX Non- Exempt Research & Development (R&D) Issuers TSX Non- Exempt Forecasting Profitability TSX Non- Exempt Profitable Issuers TSX Exempt Industrial Companies Products and Services Evidence that products or services at an advanced stage of development or commercialization and that management has the expertise and resources to develop the business Minimum 2 year operating history that includes R&D activities. Evidence of technical expertise and resources to advance its research and development programs 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. Public Distribution and Market Capitalization 1,000,000 free trading public shares $10,000,000 held by public shareholders 300 public shareholders each holding a board lot Minimum $50 million market capitalization 1,000,000 free trading public shares $4,000,000 held by public shareholders 300 public shareholders each holding a board lot Sponsorship Generally Required Not Required Stikeman Elliott LLP Going Public: Obtaining an Exchange Listing B3

18 Oil and Gas Companies Minimum Listing Requirements TSX Non-Exempt Oil & Gas Development Stage Issuers TSX Non-Exempt Oil & Gas Exploration and Development Issuers TSX Exempt Oil & Gas Issuers Net Tangible Assets, Earnings or Revenue No requirements 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 Working Capital and Financial Resources Distribution, Market Capitalization and Public Float 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 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 Minimum market value of the Issued securities that are to be listed of at least $200,000,000 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 Sponsorship May be Required Not Required Property Requirements Contingent resources of $500,000,000 $3,000,000 proved developed reserves $7,500,000 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 Standards of Disclosure for Oil & Gas Activities) B4 Going Public: Obtaining an Exchange Listing Stikeman Elliott LLP

19 Exploration and Mining Companies Minimum Listing Requirements Property Requirements Recommended Work Program Working Capital and Financial Resources Net Tangible Assets, Earnings or Revenue Other Criteria Management and Board of Directors Distribution, Market Capitalization and Public Float TSX Non-Exempt Exploration and Development Stage Advanced Exploration Property. Minimum 50% ownership in the property $750,000 on advanced exploration property as recommended in independent technical report 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 $3,000,000 net tangible assets TSX Non-Exempt Producer Three years proven and probable reserves as estimated by independent qualified person (if not in production, a production decision made) Bringing the mine into commercial production 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. $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 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 TSX Exempt Three years proven and probable reserves as estimated by independent qualified person Commercial level mining operations Adequate working capital to carry on the business. Appropriate capital structure. $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 Up-to-date, comprehensive technical report prepared by independent qualified person 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. 1,000,000 free trading public shares $4,000,000 held by public shareholders 300 public shareholders with board lots Sponsorship Generally Required Not Required Stikeman Elliott LLP Going Public: Obtaining an Exchange Listing B5

20 Going Public: Timing the IPO An indicative timetable for an IPO of securities by a Canadian corporation is set out below. 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 Task 1 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 2 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 3-4 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 5 Oral due diligence session with company s management, auditors and 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 This is Section C of Going Public in Canada, published by Stikeman Elliott. Stikeman Elliott LLP

21 Week Task 6-9 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 C2 Going Public: Timing the IPO Stikeman Elliott LLP

22 Going Public: Getting Your Company Ready Prepare a Business Plan... 2 Prepare Audited Financial Statements... 2 Auditor oversight... 2 Develop Appropriate Reporting and Control Systems... 3 Select Advisers... 3 Creating a Corporate Image... 3 Selecting an Underwriter... 4 Modifications to Corporate Structure... 4 Appointment of Independent Directors... 5 Preparation of New Contracts... 5 Establishment of Share Incentive Plans... 6 This is Section D of Going Public in Canada, published by Stikeman Elliott. Stikeman Elliott LLP

23 Going Public: Getting Your Company Ready 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 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. D2 Going Public: Getting Your Company Ready Stikeman Elliott LLP

24 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 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 Life as a Canadian Public Company). 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. 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. Stikeman Elliott LLP Going Public: Getting Your Company Ready D3

25 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. 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. D4 Going Public: Getting Your Company Ready Stikeman Elliott LLP

26 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. 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. 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. A uniform corporate governance disclosure rule, National Instrument Disclosure of Corporate Governance Practices and the associated National Policy 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 as a Canadian Public Company. 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 Stikeman Elliott LLP Going Public: Getting Your Company Ready D5