Chapter 19: IPO

Disadvantages of an IPO

- regulatory burden - increased public scrutiny - risk of shareholder litigation - reduced flexibility in decision making - potential loss of control - potential for higher taxes

Waiting periods during the IPO process

- review by Canadian securities regulators - amend prospectus in response to comment letter - review by stock exchange - road show: a series of meetings across different cities in which top executives from a company have the opportunity to talk with current or potential investors.

Composition requirements of the Board of Directors

-at least two independent directors -at least three directors who are financially literate (audit committee)

Contents of the Prospectus

-description of securities, plan of distribution and use of proceeds -description of business, corporate structure, recent acquisitions and risk factors -detailed financial information -management's discussion and analysis -information on management, directors and principal shareholders

Things to do to prepare for an IPO [USSR FR]

-update business plan -select team: lawyers, auditors and underwriters -strengthen management team and board -review internal systems/procedures -financial statements for prospectus and tax planning -review governance practices, employment agreements and stock option plan

What is a Reverse Take Over (RTO)?

1. Dormant publicly-listed company acquires private company 2. Shareholders of private company become controlling shareholders of public company 3. Proxy circular (Like the prospectus but not for IPOs, for general meetings) to public shareholders must contain prospectus level disclosure

How does a firm display continuous disclosure?

- Annual Information Form -Annual financial statements - management's discussion and analysis - information circular for meetings - annual report - disclosure of material changes - certifications by CEO and CFO - business acquisition report

Due Diligence of underwritiers

- Issuer and underwriter liable for misrepresentation of stocks; they need to make sure they do their due diligence. -examining facilities, management team, financial records, corporate record

Three needs for the financial statements in the prospectus

- Must include last three years of record - Must be audited - Any financial statements for recent or proposed acquisition

Advantages to IPO's

- new capital - raise profile - acquisition currency - alternative to sale - increased employee retention

TSX Listing Requirement's

- pre-tax earnings of at least $300,000 - pre-tax cash flow of at least $700,000 - net tangible assets of $7,500,000 - adequate working capital - management and board with adequate experience - 1,000,000 free trading shares - $4,000,000 held by public shareholders - 300 public shareholders each holding a board lot

Steps when drafting the Prospectus [PUFA FaCTU]

1. Preliminary prospectus 2. Underwriters due diligence 3. File for preliminary approval 4. Advertising of IPO during waiting period 6. Final prospectus 7. Conditional listing approval 8. Test market conditions for IPO 9. Underwriting agreement

What is a Capital Pool Company

A new, fledgling company trading on Canada's TSX Venture exchange that has no commercial operations and no assets except for cash. A capital pool company (CPC) uses its cash holdings to evaluate promising businesses or assets that it would acquire in a qualifying transaction, which it has to complete within 24 months of listing.

Escrow

Escrow is a financial agreement involving two parties, usually a buyer and a seller. The buyer deposits money, securities or other funds into the escrow account, where they are held until both parties involved meet certain pre-defined conditions. The funds then transfer to the seller. The escrow agent is a third party who acts as the escrow account trustee by overseeing the fulfillment of the escrow agreement, and then releasing the funds. Directors, officers, principal shareholders and promoters are often subject to this if they own stock in the IPO. - Usually a timed release over 18 to 36 months after IPO restrict those who are key to success from selling

Define IPO

The issuance of shares to a large number of shareholders usually accompanied by a listing on a stock exchange

List of costs of an IPO

underwriters' fees (6-10%), legal, auditors, filing fees with Canadian securities regulators, listing fees, printing costs, marketing expenses translation costs transfer agency fees investor relations firm travel