GOING PUBLIC IN CANADA

Transcription

1 GOING PUBLIC IN CANADA

2 Miller Thomson is one of Canada s most respected national business law firms, committed to delivering what matters most - added experience, added clarity, added value. With more than 480 professionals in 11 offices across the country, we offer a complete range of business law, advocacy and personal legal services to assist domestic and international decision-makers with all of their Canadian legal needs, providing advice on Canadian common and civil law, in both English and French. Our firm s Capital Market and Securities Group provides issuers, underwriters and other market participants with the full spectrum of capital markets transactional and advisory legal services. Our lawyers act as both issuers and underwriters counsel in offerings of equity, debt, preferred shares, innovative hybrid instruments as well as derivatives and structured products. We routinely advise issuers and underwriters involved in public offerings carried out under the multi-jurisdictional disclosure system (MJDS) and other cross-border offerings. We pride ourselves in developing novel solutions to our clients needs in capital market transactions. To find out more about how we can assist you, visit

3 MILLER THOMSON LLP GOING PUBLIC IN CANADA 1. OVERVIEW 1 Introduction 1 Canadian Regulatory Regime 1 The Toronto Stock Exchange and TSX Venture Exchange 2 Reasons to List in Canada 2 Advantages/Disadvantages of Going Public 3 2. METHODS OF GOING PUBLIC 4 Initial Public Offering 4 Reverse Takeover 4 TSX-V Capital Pool Company 4 TSX Special Purpose Acquisition Company 5 3. THRESHOLD ISSUES 6 Escrow Restrictions 6 Toronto Stock Exchange Minimum Listing Requirements 7 TSX Venture Exchange Minimum Listing Requirements 8 4. LISTING COSTS PRELIMINARY STEPS 11 Preparing a Business Plan and Creating a Corporate Image 11 Preparing Financial Statements 11 Developing Reporting Systems 11 Modifying the Corporate Structure 11 Appointing Independent Directors 12 The Role of Experts 12 Special Considerations for U.S. Based Issuers PROSPECTUS PROCESS 14 Introduction 14 Prospectus Exemptions 14 Preparing, Filing and Qualifying the Prospectus 14 Forms of Prospectus 17 Documents Filed Together with the Prospectus 20 Civil Liability 21 Multijurisdictional Disclosure System 22

4 7. ONGOING CONTINUOUS DISCLOSURE OBLIGATIONS 23 General 23 Financial Statements 23 Management Discussion & Analysis 24 Delivery of Financial Statements and MD&A to Securityholders 24 Forward-Looking Information 24 Annual Information Form 25 Proxies and Information Circulars 25 Executive Compensation 26 Material Change Reports 26 Business Acquisition Reports 27 Documents Affecting the Rights of Securityholders 27 Material Contracts 27 Exemptions for Foreign Issuers CORPORATE GOVERNANCE REQUIREMENTS 29 Disclosure Requirements 29 Audit Committees 30 Nominating Committee 30 Compensation Committee 30 Disclosure Controls and Procedures and Internal Controls over Financial Reporting 31 Shareholder Meetings 31 Civil Liability for Misrepresentations in Secondary Market Disclosure 32 SCHEDULES Schedule A - Schedule B - Minimum Requirements for Listing on the Toronto Stock Exchange and the TSX Venture Exchange Prospectus Timelines

5 1. OVERVIEW Introduction This guide is an overview of the practical considerations for issuers considering a public offering in Canada. Included in this guide is a discussion of the primary advantages and disadvantages of going public in Canada, key structuring issues, how to obtain a listing on a Canadian exchange, the prospectus clearance process and continuous disclosure and corporate governance obligations for public companies in Canada. While this guide is not meant to be exhaustive, we hope that you will find it to be a useful reference source. You should not act on information provided in this guide without consulting with legal counsel. Should you require further information about going public in Canada or any specific topic discussed in this guide, Miller Thomson would be pleased to provide you with that information upon request. Canadian Regulatory Regime Securities regulation in Canada is currently a provincial jurisdiction. Each of the ten provinces and three territories is responsible for regulating capital markets in their own jurisdiction. Each has its own administrative/quasi-administrative agency that regulates securities markets (each, a Securities Commission ). While there is currently no federal securities regulator in Canada, significant progress has been made to coordinate the system among the provinces and territories. To help harmonize securities laws across Canada, the various Securities Commissions have adopted several National Policies and National Instruments, which are securities rules that apply throughout Canada. In addition, certain Multilateral Instruments and Multilateral Policies have been adopted, which are rules which apply in more than one, but not in all, Canadian jurisdictions. Serious efforts are currently underway to create a single federal national securities regulator in Canada. In June, 2009, the government of Canada announced the launch of the national Canadian Securities Transition Office ( CSTO ) to assist in the establishment of a federal securities regulatory regime and a single federal regulatory authority. The CSTO is specifically responsible for the development of a new federal Securities Act and the development of a transition plan. All provinces and territories, except for Ontario, (the passport regulators ) have signed on to a passport system which is a mutual recognition system that provides a single window of access to Canada s capital markets for domestic and foreign issuers. It enables participants to clear a prospectus or obtain a discretionary exemption and to register as a dealer or adviser, by obtaining a decision from the securities regulator in their home province or territory and having that decision apply in all other participating jurisdictions. The jurisdiction that will take the lead as principal regulator is the securities regulatory authority or regulator in the jurisdiction in which the issuer s head office is located. Although Ontario has not signed on to the passport system (i.e. it is not a passport regulator ), the system has been designed to accommodate that. For example, if the principal regulator for a prospectus or exemption application is the Ontario Securities Commission ( OSC ) and the prospectus or exemption application is also filed in one or more passport jurisdictions, only the OSC will review the prospectus or exemption application and the passport jurisdictions will rely on the OSC s review. In circumstances where the principal regulator is a passport regulator and the prospectus or exemption application is also filed in Ontario, the principal regulator will review the prospectus or exemption application, and the OSC, as a non-principal regulator, will coordinate its review with the principal regulator. 01

6 The Toronto Stock Exchange and TSX Venture Exchange The two principal exchanges for equity securities in Canada are the Toronto Stock Exchange (the TSX ) and the TSX Venture Exchange (the TSX-V ). TMX Group owns and operates both exchanges. The TSX is the market for senior issuers. The TSX-V is the market for more junior issuers that have not yet met the requirements for listing on the TSX. In order to secure a listing on the TSX or the TSX-V, an issuer that does not already have securities listed on the relevant exchange must complete a listing application which, together with supporting data, must demonstrate that the issuer is able to meet the applicable minimum listing requirements of the exchange. The issuer must also sign a listing agreement to formally place on record the issuer s commitment to comply with exchange requirements for the continuance of its listing. Reasons to List in Canada Access to Large Market The TMX Group marketplace is one of the largest stock markets in the world. It is second in the world and first in North America in terms of number of listed companies (1,462 on the TSX, 2,375 on the TSX-V). TMX Group is eighth in the world and third in North America by total listed company market capitalization valued at $1.8 trillion as at year-end of Comparatively Lower Costs of Going Public The costs of listing and maintaining a listing on each of the TSX and the TSX-V are generally lower than the equivalent costs in other major markets such as those in New York or London. Furthermore, going public in the United States typically involves higher ongoing compliance costs and greater risk due to the more litigious environment and more rigorous regulatory system. Access to a Strong Investor Market The TMX Group exchanges attract significant investment from institutional and retail investors in Canada and around the world. Approximately 40% of the equity trading on the TMX Group s exchanges originates from outside of Canada. Special Advantages of the TSX Venture Exchange The TMX Group offers junior issuers a streamlined graduation path from the TSX-V to the TSX. In 2009, 20 issuers graduated from the TSX-V to the TSX. The TSX-V has also introduced the NEX board, which allows companies that have fallen below the TSX-V s ongoing listing standards which would otherwise be designated as inactive and given 18 months to meet the standards or be delisted, to continue trading. The NEX board relieves these issuers of the pressure of a delisting deadline and allows them to remain more visible as potential takeover targets or investment opportunities. Smaller Issuer Expertise Generally speaking, the TMX Group exchanges provide a less costly and less onerous regulatory regime, enabling smaller cap companies to list more efficiently than many exchanges outside of Canada. Mining and Energy Expertise The TMX Group lists the largest number of mining companies and the largest number of energy companies in the world. Over 55% of the world s public mining companies and over 40% of the world s public energy companies are listed with the TMX Group. Because of the TMX Group s extensive experience with the mining and energy industries, special rules exist to expedite the listing process for issuers in these industries. Financing Flexibility The TMX Group exchanges enable issuers to raise as little as $500,000 to substantial amounts, depending on their needs. 1 TMX Group, A Capital Opportunity: Guide to Listing. 02

7 Advantages/Disadvantages of Going Public Going public is a major decision for any issuer. Public company status provides many advantages, but also imposes certain burdens that an issuer should consider before embarking on the process. Advantages The advantages of going public include: Access to capital both for specific projects and future growth and typically on more favourable conditions than private equity financing, and without the interest costs of debt financing. Greater liquidity for existing and future shareholders note, however, that securities held by principals may be subject to escrow requirements imposed by statute and/or arrangements with underwriters. Greater liquidity options for founders founders may sell all their shares or use them as collateral for personal loans. Increased credibility the greater transparency and visibility that comes with public issuer status generally enhances corporate image and may assist in developing relationships with the community, customers and suppliers. Ability to use equity as compensation to management permits greater flexibility in compensation arrangements. Ability to use equity as compensation for purchases enhances the ability of an issuer to complete mergers utilizing liquid stock as consideration. Disadvantages Up-front costs initial costs of going public, including management time and internal resources. Ongoing costs to meet continuous disclosure and corporate governance requirements of the exchanges and securities regulators. Decreased flexibility for founders public companies become subject to various restrictions under listing rules and that can impact activities, including issuing securities and related party transactions, among other things. Greater pressure on management to meet shareholder expectations of continuing success and profit as well as expectations of a broader variety of stakeholders. Loss of confidentiality due to extensive corporate and financial reporting obligations. Potential for civil liability the issuer, directors and certain advisors could all be held liable for misrepresentations in public disclosure documents. Potential loss of certain tax benefits current income tax laws provide certain credits and deductions to Canadian-controlled private corporations which are no longer available to a company once it has gone public. Increased vulnerability to hostile takeovers particularly where founders own less than the majority of the outstanding stock. Enhanced ability to borrow the increase in equity base creates more leverage for growth by improving a company s debt to equity ratio. Method of valuation through the market provides a more accurate assessment of fair market value of the enterprise. 03

8 2. METHODS OF GOING PUBLIC Initial Public Offering An initial public offering (an IPO ) is the traditional method of going public and the one which is discussed in greatest detail in this guide. An IPO is typically completed via a long form prospectus offering in conjunction with an initial listing on a stock exchange. Reverse Takeover A reverse takeover (an RTO ) occurs when a private company acquires control of a public company, typically a shell company with no active operations but which has a listing and reporting issuer status. The RTO might be structured in a number of ways, including: (a) issuing shares of the public company in exchange for assets or shares of the private company, or (b) an amalgamation or merger of the public shell and the private company. The resulting issuer from an RTO must continue to meet the original listing requirements of the TSX or TSX-V, as the case may be, and submit to a TSX approval process similar to that of an original listing application. An RTO can, depending on the structure, be completed more quickly and with less expense than an IPO. Going public as a CPC is a two-stage process. In the first stage, the company incorporates, prepares and files a prospectus (outlining management s intention to raise between $200,000 and $4,750,000), issues shares (to at least 200 arm s length shareholders, each of whom buys at least 1,000 shares), completes the distribution and is listed. The second stage, which must be completed within 24 months of the prospectus offering, involves the CPC identifying an appropriate business as its qualifying transaction. The CPC prepares and files with the TSX-V a filing statement or information circular providing prospectus-level disclosure concerning the business that is to be acquired, and obtains TSX-V approval. Shareholder approval is typically not required. Typically, completion of the qualifying transaction is accompanied by a private placement financing and a name change for the issuer. TSX-V Capital Pool Company The Capital Pool Company ( CPC ) program is a program operated by the TSX-V that provides companies with an opportunity to obtain financing earlier in their development than would normally be possible through a traditional IPO. The program permits a new shell company (the CPC) with no assets, other than cash (a minimum of the greater of $100,000 and 5% of total funds raised) and no commercial operations, to carry out an IPO and become listed on the TSX-V. The funds raised must be used to identify and evaluate assets or businesses which, if acquired, will qualify the CPC for regular listing on the TSX-V. 04

9 TSX Special Purpose Acquisition Company Like the TSX-V, the TSX has initiated a program which allows for the listing of a shell company, a Special Purpose Acquisition Company ( SPAC ), that will later acquire an operating business with the proceeds raised. Like CPCs, a SPAC listing involves a two-step process. A SPAC must first be listed and raise a minimum of $30 million through its IPO, at least 90% of which must be placed into escrow. The proceeds are then to be used to acquire an operating company (the qualifying acquisition ) or assets within 36 months of such listing. The business or assets acquired must have an aggregate fair market value equal to at least 80% of the value of the escrowed funds. Once the SPAC has completed its qualifying acquisition, which must meet TSX listing requirements, it is treated as a regular issuer by the TSX. Because SPACs are much larger than CPCs, they are subject to more stringent regulatory requirements. The TSX has imposed a number of mandatory listing requirements for SPACs, including the following: (c) at least 300 public holders of securities, holding at least one board lot each; and Pricing a SPAC seeking listing on the TSX must issue securities pursuant to the IPO for a minimum price of $2.00 per share or unit. The SPAC must prepare an information circular with prospectus-level disclosure concerning the qualifying acquisition and the resulting issuer, which it must submit to the TSX for approval prior to mailing it to shareholders. A SPAC must also file a non-offering prospectus with the appropriate securities commissions. The SPAC may only complete the acquisition if a majority of its securityholders, not including the founders, approve. If the transaction is approved, securityholders who voted against the qualifying acquisition have the right to convert their securities for their pro rata portion of the escrowed funds. If the qualifying acquisition is not completed within the 36 months allowed, the SPAC must complete a liquidation distribution to distribute the escrowed funds to securityholders on a pro rata basis, at which point the SPAC will be delisted. Financing the SPAC cannot obtain any debt financing (excluding ordinary course short term trade or accounts payables) other than contemporaneously with, or after, completion of its qualifying acquisition; Public Distribution a SPAC seeking a TSX listing must satisfy all of the criteria below: (a) at least 1,000,000 freely tradeable securities are held by public holders; (b) the aggregate market value of the securities held by public holders is at least $30,000,000; and 05

10 3. THRESHOLD ISSUES Escrow Restrictions General National Policy Escrow for Initial Public Offerings sets out a uniform policy of Canadian regulators regarding the circumstances in which the principals of an issuer must agree to escrow certain securities in connection with a public offering. The purpose of the escrow policy is to increase investor confidence by aligning the interests of the issuer s management and principal securityholders to those of the issuer by restricting their ability to sell their securities for a period of time following an IPO. Principals Must Escrow Shares The escrow rules restrict principals from selling or otherwise dealing with escrowed securities until they are released from escrow according to the terms of a standard form of escrow agreement. Principals include the following: a person or company that acted as a promoter of the issuer within the two years before the IPO prospectus; a director or senior officer of the issuer or any of its material operating subsidiaries at the time of the IPO prospectus; a person or company that holds securities carrying more than 20% of the voting rights attached to the issuer s outstanding securities immediately before and immediately after completion of the IPO; A principal that holds securities carrying less than 1% of the voting rights attached to an issuer s outstanding securities immediately after its IPO is not subject to the escrow restrictions. Release of Escrowed Securities The release of escrowed securities varies depending on the escrow classification of the issuer. For this purpose, issuers are classified in one of the following categories: Exempt Issuer an issuer that, following its IPO, has listed securities on the TSX and is classified by the TSX as an exempt issuer or has a market capitalization of at least $100 million. Established Issuer an issuer that, following its IPO, has securities listed on the TSX and is not classified by the TSX as an Exempt Issuer, or has securities listed on the TSX-V and is a TSX Venture Tier 1 issuer. Emerging Issuer an issuer that, following its IPO, is not an Exempt Issuer or an Established Issuer. In the case of Exempt Issuers, no escrow is imposed. Principals of Established Issuers will have their escrowed securities released over an 18-month period. Principals of Emerging Issuers will have their escrowed securities released over a 36-month period. The following table illustrates the release periods for Established Issuers and Emerging issuers. a person or company that holds securities carrying more than 10% of the voting rights attached to the issuer s outstanding securities immediately before and immediately after the issuer s IPO, and has elected or appointed, or has the right to elect or appoint a director or senior officer of the issuer or any of its material operating subsidiaries; and a principal s spouse and their relatives who live at the same address as the principal. 06

11 Established Issuers Emerging Issuers % Released Cumulative Amount Cumulative Released Released Released Date of 25% exempt 25% 10% exempt 10% the IPO from escrow from escrow 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% *All percentages set out in the table are based on the initial amount of escrowed securities, not on the remaining escrowed securities at each point in time. Toronto Stock Exchange Minimum Listing Requirements General When companies apply for a listing on the TSX, they are grouped into one of three categories: Industrial (General), Mining or Oil and Gas. All special purpose issuers such as exchange-traded funds, split share corporations, income trusts, investment funds and limited partnerships are listed under the Industrial (General) category. All SPACs are listed under the Industrial (General) category. In instances where the primary nature of the business cannot be distinctly categorized, the exchange will designate the company to a listing category after reviewing the company s financial statements and other documentation. There are different requirements for companies to obtain a listing, depending on the classification of their business. The TSX always maintains the discretion to list issuers that do not meet the minimum listing requirements or refuse to list an issuer that meets the minimum requirements for listing. Under TSX rules, it is possible to obtain an advance view on whether the issuer in question would meet the TSX listing requirements of any particular category. Distribution, Market Capitalization and Public Float To qualify for a TSX listing, an issuer must have at least 1,000,000 freely tradable shares having an aggregate market value of at least $4,000,000 ($10,000,000 for issuers classified by the TSX as technology issuers 2 ) held by at least 300 public holders. In some circumstances, technology issuers must have a minimum market capitalization of $50 million. Management Companies applying for a listing on the TSX must be able to show evidence of a successful operation or, where the company is relatively new and its business record is limited, there must be other evidence of management experience and expertise. In all cases, the quality of management of an applicant company is an important factor for the TSX in considering a listing application Technology Issuers include innovative growth companies engaged in hardware, software, telecommunications, data communications, information technology and new technologies.

12 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, a chief executive officer ( CEO ), a chief financial officer ( CFO ) who is not also the CEO, and a corporate secretary. See Section 5 Preliminary Steps Appointing Independent Directors for discussion of the meaning of independent. The minimum original listing requirements for the TSX are set out in detail in Schedule A. International Issuers International issuers are issuers which are already listed on another recognized exchange and are incorporated outside of Canada. International issuers are able to apply for listing on the TSX. There are no longer special or unique requirements for the management or the financial requirements for international issuers to list on the TSX. The criteria used for original listing requirements are now consistent for all issuers, regardless of where the issuer is based. However, international issuers are generally required to have some presence in Canada and must be able to demonstrate, as with all issuers, that they are able to satisfy all of their reporting and public company obligations in Canada. This may be satisfied by having a member of the board of directors or management, an employee or a consultant of the issuer situated in Canada. TSX Venture Exchange Minimum Listing Requirements General The TSX-V minimum listing requirements are specifically designed for emerging companies and recognize that they have different financial needs than more established businesses. The TSX-V classifies issuers as Tier 1 or Tier 2 based on standards, including historical financial performance, stage of development and financial resources. Tier 1 is the highest tier of the TSX-V and is reserved for the more advanced issuers with the most financial resources. Tier 1 issuers benefit from less stringent filing requirements. The majority of TSX-V issuers trade as Tier 2 issuers. The TSX-V categorizes Tier 1 and Tier 2 issuers by industry segment and applies specific requirements to each industry segment. Each Tier 1 and Tier 2 issuer is grouped into one of the following categories: (i) technology or industrial; (ii) mining; (iii) oil and gas; (iv) real estate or investment; or (v) research and development. The basic distribution requirement for Tier 1 issuers is at least 1,000,000 securities of the class to be listed which are held by shareholders who are not promoters, insiders or associates or affiliates of insiders, nor any member of the pro group 3 ( Public Shareholder ), free of any resale restrictions and having a market capitalization of at least $1,000,000. The basic distribution requirement for Tier 2 issuers is at least 500,000 securities of the class to be listed which are held by Public Shareholders free of any resale restrictions and having a market capitalization of at least $500,000. The minimum original listing requirements of the TSX-V are set out in Schedule A. 3 Generally, the pro group includes dealer group members of the TSX-V and employees, partners, officers, directors and affiliates of members, along with associates of any such parties. 08

13 Foreign Issuers The TSX-V distinguishes foreign issuers from domestic issuers. Foreign issuers are issuers whose majority of mind and management, or whose control person is a resident outside of Canada or the United States, or the majority of whose principal operating assets are located outside of Canada or the United States. United States companies that are not foreign issuers are treated the same as Canadian issuers for the purpose of the TSX-V. TSX-V review procedures are more extensive for foreign issuers than for domestic issuers. Foreign issuers must have a sponsor, approved by the TSX-V, that must undertake review procedures which include site visits, title opinions, independent reports prepared by experts in the foreign jurisdiction in the case of oil and gas issuers, a review of prior and concurrent financings, and where the foreign issuer engages auditors not from Canada or the United States, the foreign issuer s auditors must engage a Canadian auditor to advise on matters of Canadian Generally Accepted Accounting Principles ( GAAP ) and Generally Accepted Auditing Standards ( GAAS ) applicable to all financial statements audited or reviewed by the foreign auditors and all reports and letters filed by the foreign auditors with the foreign exchange. Maintaining a Listing on the TSX Venture Exchange The minimum requirements to maintain a listing on the TSX-V are lower than the thresholds for obtaining an initial listing for both Tier 1 and Tier 2 issuers. In order to maintain a listing in Tier 1, an issuer must have at least 750,000 listed shares which are held by Public Shareholders free of any Resale Restrictions and having a market capitalization of at least $750,000. For Tier 2 issuers to maintain a listing on the TSX-V, they must have at least 300,000 listed shares held by Public Shareholders free of any Resale Restrictions and having a market capitalization of at least $100,000. The TSX-V strongly recommends a pre-filing conference in an application for listing by a foreign issuer in order to canvass and address with the TSX-V issues relating to the issuer s application. Where a foreign issuer chooses not to request a pre-filing, the TSX-V will require additional time to review the issuer s application and may not respond within the normal time limits. 09

14 4. LISTING COSTS The following table sets out an estimated range of fees that will be incurred in going public on the TSX and TSX-V. Toronto Stock Exchange TSX Venture Exchange Listing Fees $10,000 - $200,000 $7,500 - $40,000 Accounting and Auditing Fees $75,000 - $100,000 $25,000 - $100,000 Legal Fees $400,000 - $750,000 $75,000 + Underwriters Commission 4-6% Up to 12% Source: TMX Group Actual costs will, of course, vary from these estimated ranges depending on the nature and complexity of the transaction and relative sophistication of the issuer, its management, internal controls and reporting processes. Other fees may include, but are not limited, to: Securities Commission prospectus filing fees Transfer agency fees Investor relations costs Geological or engineering reports Printing costs French language translation costs Valuation reports Directors and Officers liability insurance Ongoing costs relating to continuous disclosure obligations under Canadian securities laws. 10

15 5. PRELIMINARY STEPS Preparing a Business Plan and Creating a Corporate Image It is often useful for an issuer to have a business plan prepared in advance of approaching potential underwriters and obtaining financing. The business plan will also assist in drafting certain parts of the prospectus. Management should give careful consideration to the corporate image that the company will project when it goes to market. The image should provide an accurate reflection of the company, its business and its strengths. This should be done carefully and well in advance of going public since it is prohibited to prime the market in anticipation of a public offering. Preparing Financial Statements As a general rule, a prospectus must include income statements, statements of retained earnings and cash flow statements for the previous three years, and balance sheets for the previous two years and for the most recently completed quarterly period since the last year end. Generally, all annual and interim financial statements included in a prospectus, along with all continuous disclosure and other filings delivered by issuers to Canadian securities regulators, must be prepared in accordance with Canadian GAAP and annual financial statements must be audited in accordance with Canadian GAAS and must be accompanied by an auditor s report without reservation. There are exceptions available to permit, in some instances, preparation and audit in accordance with U.S. GAAP and U.S. GAAS or International Financial Reporting Standards. By preparing the necessary financial statements in the years preceding the decision to go public, the company will be in a much better position to deal with the multitude of other important tasks involved in going public without the additional burden of concurrently preparing and auditing financial statements. Developing Reporting Systems Private companies tend to have much more informal management reporting and control systems than are required for public companies. A company should develop and implement appropriate reporting and control systems before the company goes public since, among other things, the CEO and CFO are required to sign certificates that carry personal liability attesting to the company s annual filings and reporting and control systems and procedures. See Section 8 Corporate Governance Requirements Disclosure controls and procedures and internal controls over financial reporting. Modifying the Corporate Structure In some instances it may be preferable to take public only certain operating units of a consolidated business, as opposed to the entire company. In that case, it may be necessary to restructure the company or transfer assets within the company among operating entities. Tax and accounting considerations are critical in evaluating whether to restructure a company. For example, if a private company has been structured to minimize taxes, the consequences of a corporate restructuring and decision to go public must be carefully analyzed and assessed. Transferring assets among corporate entities may also necessitate valuations by a qualified third party. The company s constating documents, including its articles and by-laws, will have to be reviewed to determine if they will need to be amended to reflect public company status. For instance, any private company restrictions will have to be removed from the articles before completion of the offering. In January 2011, International Financial Reporting Standards will replace Canadian GAAP for most Canadian public companies. 11

16 Appointing Independent Directors National Instrument Disclosure of Corporate Governance Practices ( NI ) and National Policy Corporate Governance Guidelines ( NP ) provide guidance on what Canadian securities regulators currently consider to be the best standards of corporate governance for public companies. The guidelines set out in NI-201 are not mandatory, but issuers are encouraged to consider the guidelines in developing their own corporate governance practices. Generally, it is considered good corporate governance to have a majority of independent directors. For companies about to go public, this means appointing new, independent directors to the board. For the purpose of NI and NP , the meaning of independence is adopted from Section 1.4 of National Instrument Audit Committees. The test of independence is whether the director has any direct or indirect material relationship with the issuer. A material relationship is a relationship which could, in the view of the issuer s board of directors, be reasonably expected to interfere with the exercise of a member s independent judgment. Directors and officers liability insurance will generally be necessary. The Role of Experts Underwriters The central role of the underwriters is to market and sell the securities subject to the public offering to institutional and retail investors. The lead underwriter is involved in coordinating the process from start to finish, working closely with all parties including the issuer, its lawyers and auditors. In order to fulfill its role of marketing, pricing and selling the securities, the lead underwriter will typically perform a thorough due diligence analysis of the issuer s business, including, among other things, its management, business plan, financial position and prospects. The lead underwriter advises on how the deal should be structured, the timing of offering and ultimately the price at which the securities should be issued. Lawyers Lawyers play a vital role in the IPO process. Lawyers are responsible for ensuring compliance with securities laws, which involves navigating through a web of securities laws and rules in the relevant provinces and territories of Canada. The issuer and the lead underwriter (on behalf of all of the underwriters) engage separate legal counsel. Lawyers for the issuer take the lead role in drafting the prospectus, communicating with securities regulators and the relevant stock exchange, including preparing the stock exchange listing application and clearing the prospectus with the securities regulators. Legal counsel for the underwriters are responsible for conducting legal due diligence on the issuer to assist the underwriters in establishing a due diligence defence to any claims based on faulty disclosure, reviewing material agreements of the issuer and reviewing and commenting on the prospectus and ancillary documents. Accountants/Auditors Accountants provide an advisory role in the IPO process and assist in the preparation of financial statements for inclusion in the prospectus. As experts, accountants file a consent with the relevant Securities Commissions to the inclusion or incorporation by reference, as the case may be, of their audit report in the prospectus. The accountants also file a statutory comfort letter with the relevant Securities Commissions with respect to interim financial statements included in the prospectus. The accountants also provide a long form comfort letter to the underwriters. The long form comfort letter is broader in scope than that provided to the Securities Commissions and is intended to bolster the due diligence defence of the underwriters by providing the underwriters with varying degrees of comfort on the financial disclosures contained in the prospectus. Other Experts Certain expert reports may be required if technical or other information is included in a prospectus. Examples of applicable expert reports may include geological or engineering reports (for mining or oil and gas issuers), business plans, valuations or appraisals. 12

17 Special Considerations for U.S. Based Issuers There are unique considerations for U.S. incorporated issuers seeking to go public in Canada. If the U.S. issuer is not already a reporting company in the United States, the U.S. issuer could, conceivably, trigger public reporting obligations under Section 12(g) of the United States Securities Exchange Act of 1934, as amended, (the 1934 Act ) by going public in Canada if it meets certain asset and shareholder base size tests, even if it is not listed on a U.S. exchange and has never filed a registration statement with the SEC. Under section 12(g) of the 1934 Act, once an issuer has $10 million in assets and 500 shareholders of record on a world-wide basis, U.S. reporting obligations are triggered. Some private U.S. issuers that decide to go public in Canada have elected to redomicile to Canada by continuance (or otherwise) in order to take advantage of certain accommodations that exist for foreign private issuers, as defined under U.S. securities laws. A foreign private issuer is any non-u.s. issuer other than one that meets the following: (i) more than 50% of its outstanding voting securities are directly or indirectly held of record by residents of the United States; and (ii) any one of the following: (a) the majority of its executive officers or directors are U.S. residents or citizens; (b) more than 50% of its assets are located in the United States; or (c) its business is administered principally in the United States. The advantages of securing foreign private issuer status are many. First off, a foreign private issuer will not be caught by the section 12(g) reporting requirement unless 300 or more of its world wide shareholders are resident in the United States. Secondly, even if the foreign private issuer triggers the section 12(g) reporting requirement, it may qualify for what is known as a Rule 12g3-2(b) reporting exemption. This exemption permits a foreign private issuer to avoid the U.S. reporting obligations provided that the issuer furnishes its Canadian disclosure materials to the SEC. The exemption is not available if, during the prior 18 months, the issuer had a 1934 Act reporting obligation due to filing a registration statement or having a U.S. listing (or it acquired another issuer that did) or the issuer s securities are quoted in an automated inter-dealer quotation system. An additional consideration for a U.S.-based issuer involves financial statement requirements for a Canadian prospectus and ongoing reporting purposes. Generally, a U.S. incorporated issuer will be required by its governing statute to prepare financial statements in accordance with U.S. GAAP. Canadian rules permit a U.S. incorporated issuer to reconcile its financial statements to Canadian GAAP, rather than preparing a full set of duplicative Canadian GAAP financial statements. Nevertheless, GAAP reconciliation can be a costly process from an audit point of view and, in some circumstances, may not present the issuer s financial statements in the most desired light. Another issue of concern for a U.S.-based company conducting a public offering in Canada is compliance with Regulation S. Regulation S provides certain safe harbours for offshore distributions by U.S. issuers. Typically, a U.S. issuer conducting a Canadian offering will, in order to avail itself of the safe harbours provided by Regulation S, among other things, emboss the share certificates with a Regulation S restrictive legend. The TSX has established what is known as the Dot S marketplace to accommodate U.S. - based issuers with securities bearing a Regulation S legend. Some issuers whose securities have traded in the Dot S system have found that the Dot S market lacks liquidity and the process is cumbersome. In some cases, these factors have caused U.S. - based issuers to carry out a redomiciling transaction to Canada to avoid the Dot S trading system altogether. U.S. incorporated issuers have a number of options in terms of a redomiciling transaction. The decision as to whether to redomicile, and the form of any redomiciling transaction, may be driven largely by U.S. and Canadian tax considerations, which are beyond the scope of this paper. Included among those options are: a continuance of the issuer into a Canadian jurisdiction; and an RTO-type share exchange transaction whereby the U.S. issuer is acquired by a Canadian shell company which then conducts the public offering. 13

18 6. PROSPECTUS PROCESS Introduction Unless an exemption is available, a company cannot distribute securities in Canada without a prospectus. The issuance or sale of previously unissued securities to Canadian residents constitutes a distribution, as does any sale by a control person. 4 The information requirements of the prospectus can vary depending on such factors as the nature of the securities offered, the type and size of the issuer and the industry in which the issuer operates. The prospectus must be prepared in accordance with Canadian securities law form requirements and must contain full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed. The prospectus should be presented in an easy-to-read format. Prospectus Exemptions The various exemptions from the requirement to file a prospectus have generally been consolidated under National Instrument Prospectus and Registration Exemptions. One of the most commonly used exemptions is the accredited investor exemption, which exempts sales to specifically defined accredited investors that purchase as principal. Accredited investors include, among others, Canadian banks, loan and trust companies, insurance companies, certain registered advisers and dealers, governments and pension funds, and individuals earning a minimum annual income or holding assets of a minimum value. An exemption is also available for individual purchasers subscribing in cash for securities of an issuer valued at $150,000 or greater. In all jurisdictions, except Ontario, executive officers, directors and control persons of the issuer and certain of their close friends, family and business associates are exempt. In Ontario, founders, affiliates of founders, control persons and certain family members of executive officers, directors or founders of the issuer are exempt. Preparing, Filing and Qualifying the Prospectus General The first step in the public offering/prospectus process is to establish a working group to prepare the prospectus. The working group should include senior officers of the issuer, representatives of the underwriters, their respective counsel and the issuer s auditors. The draft preliminary prospectus is generally prepared primarily by the issuer and its counsel, but members of the working group actively contribute to the drafting. Preparation can take several weeks depending upon the complexity of the issuer and its business, and whether any corporate restructuring is required prior to going public. Once an issuer decides to go public, however, there is generally a push to move through the process as quickly as possible in order to offer the securities while the markets remain receptive and before market conditions change. Appendix B sets out a complete going public timetable. The prospectus process is a multi-step process. The first step involves preparing and filing a preliminary prospectus, which is, essentially a draft prospectus that excludes certain content including pricing information until the final prospectus is filed. Prior to filing, the preliminary prospectus goes through a due diligence review by the issuer, the underwriters and their respective counsel to ensure accuracy. Once the preliminary prospectus is certified by the issuer and the underwriters, it is filed with the Securities Commissions. During the period between the receipt of the preliminary prospectus by the issuer from the Securities Commissions and the final prospectus filing, often called the waiting period, the underwriters may solicit expressions of interest, but may not actually finalize any sales. The underwriters 4 Control person is defined under the Securities Act (Ontario) as a person or company, acting individually or in concert with a combination of persons or companies, who holds a sufficient number of the voting rights attached to all outstanding voting securities of an issuer to materially affect the control of the issuer, and, if a person or company holds more than 20 percent of such voting rights, that person or company or combination of persons or companies is deemed to hold a sufficient number of voting rights to materially affect control of the issuer. Depending on the facts, a person holding less than 20 percent may also be considered a control person. 14

19 must maintain a list of all parties to whom a preliminary prospectus is sent and afterwards send the final prospectus to each such party. During this period, the regulators will issue written comment letters noting deficiencies in the preliminary filing to which the working group will respond. The issuer must file a final prospectus within 90 days following receipt for the preliminary prospectus. Prospectus Amendments In the event that a material adverse change occurs in the affairs of the issuer at a time in which the preliminary prospectus has been receipted by the regulator but a final prospectus has not yet been receipted, an amendment to the preliminary prospectus must be filed as soon as practicable but no later than 10 days after the change occurs. If an amendment to a preliminary prospectus is filed, the amended preliminary prospectus must be delivered as soon as practicable to each recipient of the preliminary prospectus. In circumstances where a final prospectus has been filed and receipted by the regulators but the distribution to which it relates is not yet completed and either: (i) a material change in the affairs of the issuer occurs (whether adverse or positive); or (ii) the issuer and dealers add additional securities to the distribution not already covered by the final prospectus, an amendment to the final prospectus must be filed as soon as practicable but no later than 10 days after the date of the change. Since statutory rights of withdrawal are available to a purchaser for a period of two business days from the receipt or deemed receipt of a final prospectus or any amendment thereto, the issuer and the dealer group will want to ensure that the amended final prospectus is delivered to each recipient of the final prospectus in order to start the clock running on the withdrawal rights. Amendments to a preliminary or final prospectus can take the form of an amended and restated prospectus or an amendment that does not fully restate the prospectus. Marketing Restrictions Securities laws limit marketing activities and the content of any marketing material distributed during a public offering. When a prospectus offering is proposed, Canadian securities rules generally prohibit any act in furtherance of a trade in those securities until a preliminary prospectus is filed. Accordingly, once an issuer proposes to go public and has entered into preliminary discussions with an underwriter, it must not engage in activities such as press interviews, internet postings and the like that refer to, promote or discuss the proposed offering in any way. However, normal media contact consistent with past practice may continue, provided that the media contact is not designed to in any way promote the offering or promote the business of the issuer more aggressively or differently than previously was the case. Once a receipt is issued by the regulators for the preliminary prospectus, limited marketing activities are permitted. During the period between the filing of the preliminary prospectus and the final prospectus, the dealer group may solicit expressions of interest from potential purchasers using the preliminary prospectus. In addition, certain other limited marketing efforts are permitted in this period, provided that certain precautions are taken. In particular, the dealer group may utilize greensheets and conduct road shows. A greensheet is, essentially, a brief summary of the information contained in the preliminary prospectus coupled with other publicly available information prepared by the dealer group for distribution to the retail and institutional sales force to guide them in discussions with clients. The greensheet may not contain information that is inconsistent with the preliminary prospectus and must not be distributed beyond the dealer group s sales force. Road shows are a series of 15

20 meetings that may be organized by the dealer group in various cities to market the offering. Generally speaking, the following procedures should govern any road show: attendance should be limited to registered brokers and institutional investors who qualify to purchase without a prospectus under accredited investor exemptions (i.e. no media or retail investors); any verbal representations, overhead slides or PowerPoint presentations should be strictly limited to information contained in the preliminary prospectus or information that is publicly available; no financial forecast or projection should be given at the sessions that is not contained in the preliminary prospectus; and hard copies of overhead slides and PowerPoint presentations should not be provided to attendees. Pricing and Closing Once the preliminary prospectus deficiencies are resolved and the Securities Commissions have indicated that they are clear to receive final materials, the issuer and the underwriters will, based on market conditions prevailing at the time, price the offering, sign the underwriting or agency agreement and file the final prospectus with all information completed. An issuer may contract with an underwriter through a traditional underwriting arrangement or through a best efforts agency arrangement. Under the former arrangement, the underwriter takes on the sale risk by purchasing the securities for resale to the public. If the underwriter is, for any reason, unable to resell any of the purchased securities, it bears the market risk. Under the best efforts agency arrangement, the dealer group acts as agent for the sale of the shares by agreeing to use its best efforts to sell the securities, but not guaranteeing their sale. Typically, the underwriting arrangement carries a higher sales commission than an agency arrangement to compensate the dealer group for the enhanced risk. Once a receipt is issued by the regulators for the final prospectus, the underwriters can proceed to confirm sales and distribute the final prospectus in the jurisdictions in which the prospectus has been qualified. An agreement to purchase securities is not immediately binding upon the purchasers and following receipt of the final prospectus or any related amendment, purchasers have up to two days to withdraw from the purchase agreement. Also, if the prospectus discloses that a minimum value of funds is required to be raised, if such amount is not raised within 90 days of the issuance of the final receipt, the subscription funds must be returned to the subscribers in full. Additional time is permitted if amendments to the prospectus are filed and receipted. At the closing, following the expiration of the purchasers withdrawal rights, the issuer issues the securities to the underwriters against payment for them, less the underwriting or agency fee. The underwriters then allocate or retain them according to the subscriptions received and the underwriting arrangement. Securities may be issued through the book-entryonly ( BEO ) system whereby the entire issue is registered in the name of CDS Clearing and Depository Services Inc.'s nominee name ( CDS & Co. ). If so, physical share certificates are not issued to beneficial shareholders. Transactions in BEO securities take place through participants in the CDS system (banks and dealers) and trades are reflected on the records maintained by CDS of the positions of those participants. Alternatively, definitive certificates representing the securities may be issued to the purchasers. 16