How to Bring an Initial Public Offering to Market

Updated September 2013

This How-To Brief outlines the steps involved in assisting a company complete an initial public offering in Canada.

Information contained in this How-To Brief is of a general nature. A lawyer should consider the circumstances of each individual case and choose and recommend to the client the practice and procedure that best suits that case. The information is not a substitute for the member's own research, analysis and judgment. The Law Society of Upper Canada does not provide substantive legal advice or opinions.

Articling students must always act in accordance with their status as students-at-law. Please refer to the Articled Student-at-law Rights to Appear Before Courts and Tribunals and the Rules of Professional Conduct and consult with your articling principal before undertaking any task.

1Initial considerations

  • Discuss the pros and cons of becoming a public company with the client.
  • Discuss various methods of going public in Canada (i.e., initial public offering, reverse takeover, capital pool transaction, etc.) and various stock exchanges that may be appropriate for the listing of the company's securities (i.e., TSX, TSX Venture Exchange, Canadian National Stock Exchange, etc.).
  • Provide an overview of the regulatory environment for the public offering of securities in Canada.
  • Provide an overview of the process including discussion of pre-transaction preparations, key participants in the process, cost considerations, transaction timelines (3–6 months) and potential risks and liabilities
  • Discuss the legal consequences of becoming a public company including annual and quarterly financial statement filing, ongoing disclosure of material facts and changes related to the business, preparation and filing of annual information forms and shareholder meeting materials, insider reporting and compliance with rules of exchange where the company's securities are listed.

2Pre-transaction preparation and organization

Initial planning should commence as far as six months in advance and may include

  • the creation or updating of a business plan
  • the assembly of the transaction team (underwriters, lawyers, auditors, printers and transfer agent)
  • the strengthening of the board of directors, management and internal systems and procedures
  • corporate restructuring
  • tax planning for shareholders
  • the creation of new shares
  • the creation of a stock option plan
  • the review of accounting policies and financial records
  • the review and/or settlement of outstanding litigation involving the company
  • the review of material contracts
  • the compilation of due diligence materials whether in hard copy or virtual data room
  • discussion of escrow considerations

The underwriters host a formal organizational meeting to launch the process.

3Preliminary prospectus and due diligence

To complete a public offering, the company must clear a prospectus with the securities regulators. As mentioned above, the prospectus performs a dual role: (a) it is a marketing document pursuant to which the business story is sold to prospective investors; and (b) it is a consumer protection document designed to give prospectus investors "full, true and plain disclosure of all material facts relating to the securities being sold."

A prospectus is often created in a manner that balances this dual role. To guide the company in including full disclosure of all material facts, the company must comply with, among other things, National Instrument 41-101, General Prospectus Requirements, and Form 41-101F1, Information Required in a Prospectus.

The principal sections of a prospectus include

  • The face page—A snap shot of the terms of the offering and the parties to the offering as well as the required warnings and disclaimers.
  • Prospectus summary—A summary of the terms of the offering, the company’s business and financial information, the use of the proceeds of the offering and risk factors.
  • Glossary—Used to define technical terms, most commonly found in a prospectus relating to a technology, biotech or resource company.
  • Industry overview—Describes the industry in which the company's business is carried on including a discussion of the nature and size of the market for the company’s products and services and any key industry trends.
  • Description of business—Describes all aspects of the company's business including a description of its products and services; its growth strategies; its competitive advantages; its customers; its research and development; its intellectual property rights; its sales, marketing and distribution activities; its facilities; its employees; the regulatory environment in which it operates and its competition.
  • MD&A—Management’s discussion and analysis of the company's results of its operations and financial condition. The form of MD&A is set out in Form 51-102F1, Management’s Discussion and Analysis.  
  • Selected consolidated financial information—A summary of the company’s audited and any interim financial statements for the requisite periods that are included in the prospectus.
  • Consolidated capitalization—Describes the share and loan capital of the company.
  • Dividend policy—Describes the company’s policy regarding the distribution of dividends.
  • Description of share capital—Describes the company’s authorized and issued and outstanding share capital.
  • Directors and officers—Disclosure of directors and officers including respective positions held with the company, their respective principal occupations within the preceding five years, any corporate cease trade orders or bankruptcies, any personal bankruptcies, any penalties and sanctions imposed on them and any existing or potential conflicts of interest between the company and a director or officer of the company.
  • Executive compensation—Disclosure required by Form 51-102F6, Statement of Executive Compensation.
  • Principal shareholders—Disclosure of each 10+% shareholder of the company.
  • Prior sales—The number and prices of any common shares sold by the company within 12 months before the date of the prospectus.
  • Use of proceeds—Discloses the estimated net proceeds of the offering, after payment of commissions and expenses.
  • Plan of distribution—The name of underwriters, any market out, any over-allotment and any minimum under the offering.
  • Risk factors—The risk factors material to the company that a reasonable investor would consider relevant to an investment in the securities being distributed such as cash flow and liquidity problems of the company if any, experience of management, the general risks inherent in the business carried on by the company, environmental and health risks, reliance on key personnel, the arbitrary establishment of the offering price, regulatory constraints and economic or political conditions and financial history.
  • Interest of management and others in material transactions—Describes the nature and approximate amount of any material interest of any director, executive officer or principal shareholder within the three years prior to the date of the prospectus.
  • Material contracts—Includes particulars of every material contract, other than those entered into in the ordinary course of business, within two years before the date of the prospectus.
  • Legal proceedings—Includes particulars of any legal proceedings material to the company
  • Purchasers’ statutory rights—Describes the purchasers’ statutory rights of withdrawal and rescission.
  • Consolidated financial statements—Includes the company’s audited and any interim financial statements for the requisite periods (such statements to be prepared in accordance with International Financial Reporting Standards (IFRS)).
  • Certificates—Includes the certificates of the company and underwriters certifying the information in the prospectus in the required form are included.

Should the company desire to offer securities in the Province of Quebec, Quebec law requires that the prospectus be prepared in the French language thereby requiring translation. While not a difficult process and relatively routine, the translation does add to the overall costs of completing the financing.

While the preliminary prospectus is being drafted, the underwriters and their counsel are conducting due diligence on the company to ensure that the prospectus does not contain a "misrepresentation" (i.e., an untrue statement of a material fact 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).

In general, the company and parties preparing the prospectus are held personally liable for misrepresentations in the prospectus, unless such party, other than the issuer or any selling security holder, can prove that it conducted "due diligence" and therefore had "reasonable grounds to believe" that the part of the prospectus for which it was responsible contained neither false statements nor omissions. The due diligence process is, therefore, taken very seriously by all parties and generally involves a thorough review of corporate records, financial information and material agreements as well as an inspection of operating facilities and management backgrounds. In essence, every independent fact in the prospectus must be verified, and detailed records of the due diligence process must be maintained in contemplation of defending against a misrepresentation claim.

A board meeting is called to approve the filing of the preliminary prospectus on SEDAR and the financial information contained therein.

4The regulatory review and marketing phase

In the four to eight weeks prior to closing, the preliminary prospectus is vetted by the securities commission for comments. Issues are then negotiated and settled, and the prospectus is changed to reflect the regulator's comments.  Also during this phase, the underwriters and key members of the company's management team make a series of presentations to institutional investors and investment dealers over a period of five to 10 days (the "road show"). The underwriting agreement is also negotiated and finalized, and an application for listing is filed with the applicable stock exchange.

5The final prospectus phase

Once all outstanding matters have been resolved with the Canadian securities commissions, clearance is obtained to file final material with such regulators. The preliminary prospectus is then updated to include any changes to the information that was provided in the preliminary prospectus, including the disclosure relating to the pricing of the offering and the information derived therefrom and any additional disclosure requested of the regulators through the review process.

Assuming the market is still receptive and subject to any final due diligence issues and board approval, the issue is priced, the underwriting agreement is executed and the final prospectus is filed and commercially printed.

6Closing

Closing documents are signed, the securities and the proceeds from the issue are exchanged and the company’s shares begin to trade in the public market.

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