An Overview of Some of Your Options When Going Public
There are three main ways a company may “go public” in the United States or in Canada. One, is issuing securities in an offering or transaction registered with all relevant securities commissions. A second is registering your company and its outstanding securities with the Securities and Exchange Commission “SEC”, State and or provincial regulators. The third is conducting a reverse takeover of a public shell company or other public vehicle. Venture Law Corporation has had experience with all three methods of going public.
It is our opinion that no one method is superior to another. It is a choice driven by business interests, timing and ease of accomplishment given the facts of the particular client seeking to go public.
In this article we intend to briefly cover off the trends we have observed in going public transactions.
Initial Public Offering
Going public via an initial public offering is theoretically available to companies of all sizes. Traditional initial public offerings, however, require an underwriter. Finding a willing underwriter in the US and Canada is often difficult if not impossible to accomplish by small and micro-cap companies. Although underwriters and public investors were very interested in concept and start-up companies in the mid-nineties this interest has since disappeared. Underwriters now want solid proof of corporate success before they are willing to back any company regardless of size or industry. As well, they are not interested if the amount being raised does not warrant the cost and expense of their involvement in the process. This does not mean that the door to going public via an underwritten initial public offering is closed for small and micro-cap companies. There are underwriters in the US and Canada who are focused on this area of the market. It is a matter of knowing where to look and finding the right fit.
We have noticed a real movement by small companies in the US going public through direct public offerings in the United States. Many small companies are using direct public offering as a non-traditional initial public offering. One of the main advantages of a direct public offering is companies avoid the expense and complications of an underwriter and underwriter’s counsel. A direct public offering can be very effective particularly when the amount being raised is under $2,000,000 and the internet is utilized to sell all or part of the offering. Companies file a Form SB-1 or SB-2 prospectus with the SEC and all applicable State regulators. Once the prospectus has been cleared the company then files a Form 8A electing to become a reporting company (public company) under the 1934 Exchange Act.
Unfortunately, doing a direct public offerings in British Columbia is next to impossible to accomplish. The BC Securities Commission informally has expressed that it will not clear a prospectus of a company which is not concurrently listing its securities for trading on a recognized exchange. The OTC Bulletin Board and new BBXchange are not recognized exchanges in BC for this purpose. There are a number of ways around the BC rules, but it requires careful planning and a willingness in some instances to physically move the business and the principals to the US or outside of Canada. As well, any BC resident investors would receive restricted securities assuming a prospectus exemption was available under BC securities laws.
Registration of Existing Securities
In 1999, hundreds of companies filed Form 10SB documents with the SEC to register their companies and their outstanding securities with the SEC to become fully reporting at the federal level. This rush to register was caused when the OTC Bulletin Board imposed eligibility requirements on OTCBB quoted companies which included being a reporting company with the SEC. The disclosure required in a Form 10SB is similar in content to that required in a prospectus. Unlike a prospectus, however, not all Form 10SB documents are reviewed by the SEC. The SEC instead randomly selects which Form 10SB documents will undergo a complete review. We drafted, submitted and cleared dozens of Form 10SB documents at this time. Many companies still chose to file Form 10SB documents in order to go public.
Canadian resident or operating companies may also become US reporting companies by registering their outstanding securities with the SEC. They may chose to register using the forms provided by the SEC for foreign issuers (Form 20F) or use Form 10SB which is provided for US domestic issuers. There are several difference between the two forms of registration and perceived and real advantages and disadvantages. We have experience filing both forms and can go over the pluses and minuses of each approach and what makes sense for you given your company and your needs.
Companies may also elect to register their outstanding securities in the US or Canada by filing a prospectus qualifying these securities for resale. Canadian transactions will need an underwriter if the shares are to be registered in Canada and the company wishes to become a reporting issuer in Canada. A recent twist is a number of Canadian companies have taken to filing Form SB-2 prospectuses with the SEC to qualify shares originally issued in Canada under provincial private placement exemptions for resale in the US. These prospectuses have not been concurrently filed with applicable provincial securities commissions. Instead, it appears that the company and sellers intend to rely on a trading exemption like that provided in BC Instrument 72-502 once the company is US reporting issuer under the 1934 Exchange Act to sell the securities registered in the US or alternatively are just ignoring applicable Canadian securities laws.
Going public via a reverse takeover remains a popular method for small and micro-cap companies to go public and create a trading market for their securities in the US and Canada. A number of our clients have gone public via a reverse takeover.
A reverse takeover is where an operating private company merges into or is acquired directly or indirectly by a non-active or shell company. The value of the shell company is in its reporting issuer status and/or the fact its securities are listed or quoted for trading. At the end of the day the former management, the board of directors and the majority of the stockholders of the operating company control the former shell company.
Reverse takeovers are popular with small and micro-cap companies for a number of reasons:
- Generally (not always) a reverse takeover tends to take less time to complete than either an initial public offering or US Form 10SB registration filing;
- Often the public shell company provides the shareholder spread and public float requirements needed to list on an exchange or quotation service;
- There is no risk of the transaction not closing due to unstable market conditions which is real risk when conducting an initial public offering;
- Initial public offerings and US Form 10SB registrations tend to require greater attention from management than reverse takeover transactions;
- There is no need for an underwriter to complete a reverse takeover; and
- There is often less dilution of ownership.
There are wide variety of shell companies available in the US and Canada; from SEC fully reporting blank check companies to companies quoted on the PinkSheets, OTCBB, NASDAQsm or listed on the TSX Venture exchange either as CPC companies or inactive shells with or without cash. We have assisted various clients completing reverse takeover transactions with all of these shell vehicles.
The legal rules to complete a reverse takeover vary depending on the regulatory jurisdictions involved, the number of stockholders in both companies, the stage of development of the operating company and whether the shell company is reporting or non-reporting. Reverse takeovers can become quite complicated particularly when national borders are crossed and certain exchange rules apply. You must comply with all applicable securities law when completing an reverse takeover.
A Few Last Words
If you are planning to go public you should arm yourself with as much information as possible about your choices. You want to make the best decision for your company and your circumstances. Don’t blindly follow what your competition is doing or the advice of a friend. Get good legal advice from someone who knows the process. We have seen subtle and not so subtle changes to all three methods of going public in the last five years. We expect many more changes in the future. If at all possible involve your legal counsel early in the process. It may actually save you money, time and trouble down the road.