Going Public in Canada & the United States
There are four main ways a company can “go public” in the United States and Canada. One is issuing securities in an offering or transaction registered with all relevant securities commissions (initial public offering). A second is registering your company and its outstanding securities with the Securities and Exchange Commission (the “SEC“), State and or provincial regulators (non-offering registration of existing securities). The third is conducting a reverse takeover of a public shell company or other public vehicle. The fourth is through a listing on the TSX Venture Exchange (“TSX-V) as a capital pool company. In the US, the last option is not available and the routes open to going public are the first three. In Canada, all four means of going public are available to companies.
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. 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. Direct public offerings are more effective in the US than in British Columbia, since in BC, companies need to be listed on a recognized exchange (the US OTC Markets are not recognized by Canadian securities regulators).
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 under the federal securities 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.
Canadian resident or operating companies may also become US reporting companies by registering their outstanding securities with the SEC. They may choose to register using the forms provided by the SEC for foreign issuers (Form 20F) or use Form 10 which is provided for US domestic issuers. There are several differences between the two forms of registration and perceived and real advantages and disadvantages.
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.
Going public via a reverse takeover remains a popular method for small and micro-cap companies in the US and Canada. 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 that its securities are listed or quoted for trading. After the merger, 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 a reverse takeovers tends to take less time to complete than either an initial public offering or US Form 10 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 a real risk when conducting an initial public offering;
- initial public offerings and US Form 10 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.
Capital Pool Companies
In Canada, the TSX-V has allowed companies to list whose sole purpose is to conduct a reverse merger or acquire the assets of promising company or venture. They are called capital pool companies (“CPC“) and are exclusive to the TSX-V. A CPC must merge or acquire a company or asset within 18 months of listing on TSX-V. This is called a qualifying transaction. After a successful qualifying transaction, the CPC becomes a regular listed company on TSX-V. All CPCs must comply with TSX-V policy 2.4.
A CPC which fails to merge or acquire a company or asset within the required time frame is de-listed from the TSX-V and may or may not be subsequently listed on the NEX Board which was recently created by the TSX-V for companies which no longer meet the listing standards of the TSX-V. A CPC which has been delisted from the TSX-V can still complete a reverse merger or acquisition which would qualify it to re-list on the TSX-V, the CSE or the TSX so long as at the end of the transaction the company meets the listing standards or the exchange it proposes to be listed on.