Technology IPOs on the TSX
We've translated our IPO guide into Slideshare, to make it easier to review the slides and incorporate them into your own decks. This deck covers:
- advantages and disadvantages of going public
- IPO readiness - step to prepare in the 12 months before an IPO
- which market: TSX or NASDAQ?
- IPO process
- special issues for U.S. companies going public on the TSX
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Technology Initial Public Offerings - Legal and Practical Considerations for Issuers Listing on the TSX
1. TECHNOLOGY INITIAL PUBLIC OFFERINGS
LEGAL AND PRACTICAL CONSIDERATIONS FOR
ISSUERS LISTING ON THE TSX
1
2. CONTENTS
1. Advantages and Disadvantages of Going Public
2. IPO Readiness: Steps to Prepare in the 12 Months Before an
IPO
3. Which market: TSX vs. NASDAQ
4. IPO Process
5. Special Issues for U.S. Companies Going Public on the TSX
2
3. Why go public?: Advantages
• Raising capital
• Liquidity for investors
• Enhanced ability to offer equity incentives to employees
• Enhanced ability to fund M&A activity (either through cash or
freely-tradable shares)
• Perception among customers, suppliers, lenders and others of
greater stability and accountability
3
4. IPO: Disadvantages
• Risk of non-closure: volatile markets mean that IPO window opens and
closes very quickly
• Constant pressure to meet/exceed analyst and market expectations
• Historical performance and to a certain extent, new business plans, must
be publicly disclosed
• Low trading volumes (a problem on the TSX) can limit liquidity
• If less than $100 million post-IPO market cap, Canadian securities laws
require 18-month statutory escrow for directors, officers, 20%
shareholders & 10% shareholders with board nominees
• Regulatory/enforcement environment places new pressures on Board and
management
• Risk of securities class actions
• Vulnerability to proxy contests and unsolicited take-over bids – few
defenses are available to Canadian public companies
4
6. Assessing IPO Readiness
1. Financial Performance
2. Size of Offering
3. Board of Directors/Board Committees
4. Other Corporate Governance
5. Management
6. Shareholders
7. Employees
8. Due Diligence
9. Communications/Publicity
10. Material Contracts
11. Cheap Stock
12. Financial Statements/IFRS Conversion
13. Other Things to Think About
6
7. IPO Readiness – Financial Performance
• Underwriters often have minimum revenue/profitability
benchmarks for technology issuers:
– TSX: annual revenues of at least $40M and multiple
quarters of profitability
– NASDAQ: annual revenues of at least $100M and
established track record of profitability
• Other critical factors for technology companies:
– Expectation for margins of 50% + depending on the specific
sector
– Growth prospects over 2 and 5 year periods
– Strategy for product and customer diversification
– Addressable market size
• Meet early with potential underwriters to assess benchmarks
in your sector
7
8. IPO Readiness – Size of Offering
• Most underwriters have a minimum offering size:
– TSX: $20-40M
– NASDAQ: $60M
• Offering should be large enough to create post-IPO liquidity
• Many Canadian underwriters prefer that 100% of IPO is a
treasury offering (all proceeds go the company), limiting the
scope to effect a secondary offering for significant pre-IPO
investors
8
9. IPO Readiness – Board of Directors
• Expectations for Board governance have been established by
institutional investors and Canadian securities regulators:
– Majority of board members should be independent (e.g.,
4/6, 4/7, 5/8, 5/9, 6/10) (note: TSX requires at least 2
independent directors)
– Independent Board chair (or independent “lead director”)
• At least some directors should have public company
experience
• Board size: Board should be large enough so there are enough
independents to staff committees, but small enough to
facilitate decision making (ideal Board size for small-cap/mid-
cap companies is 7)
9
10. IPO Readiness – Board of Directors (Con’t)
• Independent Board members will expect:
– appropriate cash/option incentives
– adequate D&O insurance coverage
– contractual indemnification agreements
• The bottom line is that 6 months to 1 year of lead time is
usually required to recruit and familiarize a properly-
constituted Board (particularly for VC-backed companies,
which often have Boards dominated by investor
representatives)
10
11. IPO Readiness – Board Committees
• Minimum securities regulatory requirement:
• Audit Committee composed of three independent directors (subject to
a limited one-year post-IPO grace period)
• All Audit Committee members must be “financially literate”
• Market expectations:
• at least Chair of Audit Committee will be a Chartered Accountant (or
equivalent designation)
• separate Compensation Committee composed of a majority of
independent directors (ideally 100% independent directors)
• separate Nominating and Governance Committee composed of a
majority of independent directors (ideally 100% independent directors)
11
12. IPO Readiness – Corporate Governance
– Canadian securities regulators have published governance
guidelines, including:
• Director independence requirements
• Formal written mandates and position descriptions for Board and
Committee chairs
• Written Code of Conduct and Business Ethics, which will be made
publicly available
• Regular “in camera” Board meetings without management present
• Composition of board committees
– These guidelines are not mandatory, but there is a
“disclose and justify” requirement if guidelines are not
followed
12
13. IPO Readiness – Management
• Underwriters attribute great importance to the strength of the
management team
• For TSX IPOs it is desirable (but not strictly necessary) for CEO
and CFO to have public company experience
• Executive employment agreements should be aligned with
market and key employee expectations, especially provisions
related to:
– change of control (including option acceleration)
– termination
– non-competition/non-solicitation
13
14. IPO Readiness – Shareholders
• Review registration rights agreements to check for rights to
require or participate in a secondary offering
• Underwriters usually require all directors, officers, significant
pre-IPO shareholders to sign 6-12 month post-IPO lock-ups:
shareholder agreements, option plans, warrants should
contain lock-up provisions from the outset
• Preferred shares will generally need to be
eliminated/converted to common shares on the IPO
• Other shareholder action may be required before the IPO to
clean up capital structure, remove “private company”
restrictions, implement stock split/consolidation, amend by-
laws, etc.
14
15. IPO Readiness – Employees
• Employee equity incentive plans will often need to be
amended before the IPO:
– to comply with stock exchange requirements
– to provide additional flexibility to deal with options on a
future acquisition of the company
• Plans should be carefully designed before the IPO, as stock
exchange rules could constrain ability to amend the plan after
the company is public (for example, by requiring shareholder
approval for amendments)
• In IPO lead-up, employee information sessions are
recommended to familiarize employees with new public
company processes (publicity, codes of conducts)
15
16. IPO Readiness – Prepare for Due Diligence
• Underwriters due diligence will focus on company’s business,
industry, products/services, suppliers, growth
strategy/projections, material contracts, IP, human resources,
regulatory compliance, financial statements
• Well in advance of IPO, review a standard underwriters’ due
diligence checklist and identify any record-keeping deficiencies
• Expect underwriters to conduct key customer and supplier
reference calls and plan accordingly
• Due diligence will include a detailed minute book review to
verify capitalization: it will cost more in fees and “impression”
to clean up minute books than it will to take care of them in
the first instance
16
17. IPO Readiness – Public Communications
• Ensure company’s news releases, website and public
communications do not contain financial projections,
forecasts, overreaching statements, or any commentary that
could “prime” the market “gun jumping” is a serious matter
and could result in regulatory action to delay the IPO
• Formal communications policy should be established, with
assistance of legal counsel, in the months leading up to the IPO
17
18. IPO Readiness – Material Contracts
• Material contracts will need to be publicly filed as part of IPO –
conduct early review with legal counsel to determine
requirements and properly set customer/supplier expectations
• Try to avoid change-of-control restrictions in material
contracts, as these can be especially difficult to manage for
public companies
• Confidentiality provisions in material contracts should allow
for disclosures if “required by applicable securities laws or
stock exchange rules or policies”
18
19. IPO Readiness – “Cheap Stock”
• Historically Canadian securities regulators have not been
concerned with “cheap stock” (pre-IPO shares issued for less
than IPO price in the lead-up to the IPO) but recently,
Canadian regulators have started reviewing pre-IPO issuances
to directors, officers, promoters, 10% shareholders
• If IPO investors will receive an “unconscionably low percentage
of ownership” compared to capital invested, Canadian
Securities Administrators (CSA) staff may recommend against
receipting the IPO prospectus
• No quantitative guidance has been published
• Issuers need to be prepared to justify pricing of pre-IPO shares
and options; consider using a third party valuator if IPO is
imminent
19
20. IPO Readiness – Financial Statements
• IPO prospectus requirements include:
– 3 years of annual financial statements and 2 years of balance sheet data –
must be AUDITED (note: 3rd year can be dropped if audited 9-month
statements are included and business is not seasonal)
– Comparative interim financial statements for the quarter and year-to-date
period ended more than 45 days before the date of the prospectus - must be
REVIEWED by auditors
• Financial statements in prospectus may become stale and need to be
updated before IPO closing – important to organize timeline appropriately
• Common areas of securities commission review for technology companies:
– Need for going concern note
– Acquisition accounting
– Requirement for segmentation
– Revenue recognition, especially for software companies
20
21. IPO Readiness – IFRS Requirements
• IFRS Transition Information:
– IPO prospectus must include an opening statement of financial
position as of the date of transition to IFRS, and
– IFRS 1 reconciliations for the date of transition and most recent annual
period
• See OSC Corporate Finance – IFRS Release No. 4 for summary
requirements for:
– Presentation of IFRS transition information in prospectuses
– GAAP for financial statements in prospectuses filed in the year of
transition
– GAAP for financial statements in IPO prospectuses filed in the first year
after transition
http://www.osc.gov.on.ca/documents/en/Companies/ifrs_20
110818_ifrs-release4-prospectus-issues.pdf
21
22. IPO Readiness – Other
• Increase D&O insurance coverage – ideally before IPO marketing begins.
• IPO can raise stakes on outstanding litigation/disputes, so attempt to
resolve before filing if possible.
• Consider unwinding related party transactions involving insiders (e.g., loans
by the company to directors, officers or principal shareholders).
• Many companies conduct a pre-IPO “market check” or “dual track” M&A
process to consider acquisition opportunities prior to the IPO.
• Consider implementation of shareholder rights plan to better control the
timing and process of any unsolicited take-over bid after the IPO (although
consult with underwriters in advance, as this can send the wrong message
to investors).
22
24. Which Exchange: TSX or NASDAQ?
NASDAQ TSX
Prestige Can provide issuer with Lower profile & Canadian focus.
greater profile and Much stronger in mining/energy
validation in U.S. and global than technology/industrial listings.
markets.
Access to Greater potential for broad Friendly environment, including
Capital investor base and higher analyst coverage, for small-cap or
trading volumes. mid-cap issuers. Balance between
Dominated by companies institutional and retail investors.
with market cap in excess Home base advantage for
of $500M. Smaller Canadian issuers. Can provide
companies can be stepping stone to listing on other
“stranded” with no analyst exchanges including NASDAQ or
coverage and/or thinly NYSE.
traded stock.
24
25. Which Exchange: TSX or NASDAQ?
NASDAQ TSX
Process/ SEC review required (unless 3-6 month timeline from date of
Timeline company is already public in first organizational meeting.
Canada and can use MJDS). Canadian securities regulatory
Minimum 6 month timeline review process is streamlined
from date of first compared to SEC process: average
organizational meeting. time from filing of preliminary IPO
prospectus to receipting of final
prospectus is 30-40 days.
Regulatory SOX compliance required, No SOX compliance for Canadian
Burden including auditor attestation issuers. In many respects, Canadian
of internal controls. requirements otherwise align to
Exemption may be available U.S. requirements.
recent JOBS Act reforms.
25
26. Which Exchange: TSX or NASDAQ?
NASDAQ TSX
Costs Underwriting discount and Underwriting discount and
commission typically 7% of commission typically 5-7% of
gross proceeds. IPO and gross proceeds. IPO and
ongoing legal/accounting ongoing legal/accounting costs
costs higher in U.S. generally significantly less in
Canada.
Accounting U.S. GAAP permitted. IFRS required (unless issuer is
Principles also public in the U.S.).
Escrow None, other than Statutory escrow if post-IPO
Requirements contractual underwriter market capitalization is less
lock-ups. than C$100 million.
26
27. Which Exchange: TSX or NASDAQ?
• A Canadian-incorporated, TSX-listed company can
interlist on Nasdaq using the Multi-jurisdictional
Disclosure System (MJDS)
• The MJDS process is much quicker than a traditional
NASDAQ IPO
• Requirements for southbound MJDS
– Issuer must be Canadian incorporated and public in Canada
for at least 12 months
– Issuer must be a “foreign private issuer” for U.S. securities
law purposes
– Issuer must have market cap of at least US$75M
27
29. TSX IPO Process, Steps and Timeline
1. Select Underwriter
2. Kick-off Meeting
3. Draft Preliminary Prospectus
4. Due Diligence
5. Engagement Letter & Formation of Underwriting Syndicate
6. Filing of Preliminary Prospectus and Regulatory Review
7. The Road Show
8. Pricing and Filing of Final Prospectus
9. Over-Allotment
10.Post-IPO Compliance
29
30. Sample IPO Timeline – TSX
(Issuer with calendar year end)
August September October
August 1 - 10: September 1: First two weeks of October:
• Select underwriter • Preliminary prospectus • Clear remaining regulatory
• Pre-filing discussions with TSX substantially complete comments
• Determine whether offering will • Obtain TSX conditional listing
include Quebec – if yes, start Sept. 14/15: approval
translating financial statements • Oral due diligence session • Investor road show
• Initial organizational meeting, • Customer reference calls by
including management underwriters End of October:
presentation to working group • Engagement letter signed and • Deal is priced and underwriting
underwriters form syndicate agreement is signed
August 10 – August 30: • File preliminary prospectus (with • File final prospectus
• Drafting sessions Q2 financials) • Closing 3-5 days after pricing
• Issuer populates electronic data • Submit TSX listing application
room Note:
• Underwriters concurrently End of September: Preliminary prospectus will have to
perform due diligence • First comment letter received be amended to include Q3
from principal regulator financial statements for filings after
November 15
30
31. 1. Selecting the Underwriter
• Underwriter must be the right match for the sector and the size of the deal.
A larger more prestigious bank may not be the best fit, unless leads have a
high level of interest in the company.
• Informal meetings with prospective underwriters may start 1-2 years
before IPO.
• Final selection of underwriters is often a formal competitive process
conducted by the issuer’s board.
• Factors in selection: reputation; experience in sector; distribution
capability; aftermarket performance; research department; continuing
financial advisory and M&A services; fee expectations.
• Underwriters can never guarantee an IPO price, but pricing range should be
extensively discussed in order to prevent significant discrepancies in
expectations.
31
32. 2. Kick-Off Meeting
• After underwriters are selected, an initial organizational
meeting will be held including:
– representatives of the issuer (CEO, CFO, other senior business
development personnel)
– legal counsel for the issuer and underwriter
– issuer’s auditors
• Responsibility for gathering information and preparing initial
drafts of various sections of the preliminary prospectus will be
allocated.
• Preliminary timelines will be settled.
• Logistics for selection of printers, transfer agent, etc. will be
discussed.
32
33. 3. Drafting the Preliminary Prospectus
• Prospectus serves two purposes that must be balanced:
– A liability document: a prospectus must not contain an untrue statement of a
material fact or omit to state a material fact that is required to make a
statement not misleading
– A marketing document: will be used by the underwriters to sell the securities
• A “material fact” is a fact that significantly affects, or would reasonably be
expected to have a significant effect on, the market price or value of the
securities being offered.
• Although balancing conflicting purposes may result in a less glowing report
on the issuer, it is better to err on the side of caution than to unrealistically
raise expectations.
• Inclusion of projections, forecasts and other forward-looking financial
information is particularly sensitive and must be reviewed carefully with
underwriters.
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34. 3. Drafting the Preliminary Prospectus
Practical Tips:
• All prospectuses follow a similar format. The best preparation
for prospectus drafting is reviewing prospectuses by similar
companies.
• Sections dealing with the market and industry will require
back-up through third party reports (e.g., IDC, Gartner). Since
reports must be paid for and the consent of the third parties
obtained, determine early which references will be used.
34
35. 3. Drafting the Preliminary Prospectus
• Most Canadian prospectuses now follow a plain English
format, but examples of a more formal drafting style still exist.
The working group should decide on a uniform approach.
• Developing Management’s Discussion and Analysis (MD&A)
can be very time consuming, especially given competing
demands on the CFO’s attention. Try to allocate specific blocks
of time for this task.
• Expect to hold several in-person drafting sessions with the
working group over a 3-4 week period, especially on the
“Business” sections of the prospectus.
35
36. 4. Underwriter Due Diligence
• Due diligence is usually carried on at the same time as
prospectus drafting. Most due diligence should be completed
before filing of preliminary prospectus. However, high-level
diligence will continue until the completion of the offering.
• Underwriters will provide a due diligence checklist of
documentary requests - issuer responds by populating virtual
data room. Expect follow-up documentary requests and
questions.
• Underwriters’ counsel will prepare “circle up” of financial
information in the prospectus auditors will be required to
provide comfort on circled items (extent of comfort is often
heavily negotiated).
36
37. 4. Underwriter Due Diligence
• Directors and officers will be asked to fill out detailed D&O
questionnaires to confirm the information in the draft
prospectus.
• Business due diligence may take the form of site visits,
customer calls, or supplier reference checks. These usually
occur fairly late in the process (e.g., in the days before the
filing the preliminary prospectus).
• Oral due diligence sessions will be held immediately before the
filing of preliminary and final prospectus – management,
auditors, legal counsel will be required to respond to detailed
questions on the prospectus and the business more generally.
• Underwriters can be expected to conduct their own
background checks on senior management.
37
38. 5. Underwriting Engagement Letter and
Syndication
• Careful review of the engagement letter will mean that much
of the underwriting agreement, except for pricing, will be
boilerplate.
• Some of the principal terms of underwriters’ engagement that
may be contained in the engagement letter:
– Size of offering
– Split between treasury and secondary offering
– Underwriting commission/discounts
– “Fully underwritten” vs. “best efforts” underwriting
– Syndication position of lead underwriter
– Expense reimbursement (including cap)
– Alternative transaction fee (including trailer)
– Indemnification of underwriter
38
39. 5. Underwriting Engagement Letter and
Syndication
• Lead underwriter will co-ordinate syndication with
other underwriters, usually several days before the
preliminary prospectus is filed. The issuer should play
an active role in selecting the syndicate members.
39
40. 6. Filing of Preliminary Prospectus and
Regulatory Review – Where to File
• For most IPOs, issuers file in all Canadian provinces and
territories
• If the issuer’s head office is in Quebec, or the underwriters
want to offer securities in Quebec, the preliminary prospectus
will have to be translated/filed in French. Two sets of
translators are used: financial translators for the financial
statements, notes and MD&A, and legal translators for the
rest.
• Under the CSA’s Passport system, one province is the principal
regulator and the issuer will usually only deal with the
securities commission in that province
40
41. 6. Filing of Preliminary Prospectus and
Regulatory Review - Timing
• The principal regulator will use best efforts to provide a first
comment letter within 10 working days of the date of the
preliminary prospectus.
• The issuer responds to the principal regulator through a formal
exchange of correspondence, as well as telephone/email.
• The principal regulator will use best efforts to provide
subsequent comment letters within 3 working days after the
filing of an amended preliminary prospectus.
• A confidential pre-filing with the principal regulator may be
recommended if the filing raises novel or substantive issues or
novel policy concerns.
41
42. 6. Filing of Preliminary Prospectus and
Regulatory Review
• TSX or other stock exchange review of the preliminary
prospectus will take place concurrently with review
by the securities commission; however, the TSX
expects the issuer to initiate a pre-filing discussion
several weeks before the preliminary prospectus is
filed.
• Final prospectus can be filed once principal regulator
is satisfied with responses to all comments, has
reviewed a draft of the final prospectus, and has
cleared the issuer to file final materials.
42
43. 6. Filing of Preliminary Prospectus and
Regulatory Review
• The period between obtaining the receipt for the
preliminary and final prospectus is known as the
“waiting period”.
• During the waiting period, the issuer should observe
restrictions on publicity, including product sales
campaigns. Sales literature and activities, including
press releases, should be reviewed by legal counsel
during this period.
43
44. 7. Road Show
• The road show can commence once a receipt for the
preliminary prospectus has been obtained.
• Issuer is usually represented by CEO and CFO.
• For a TSX IPO, meetings are conducted in-person in
financial centers across North America and
sometimes Europe.
• Road show activities overlap with prospectus
regulatory review and a sensitive period for the
business – issuer needs management and finance
team depth to manage competing demands.
44
45. 8. Pricing and Filing the Final Prospectus
• Underwriters will develop a preliminary view on pricing toward
the end of the road show.
• Process for pricing and “going final”:
– Once underwriters have compiled their book, they will present
proposed pricing to issuer’s board
– Issuer’s board approves the transaction
– Underwriting agreement is signed
– Prospectus is finalized by filling in price/number of shares, and any
price dependent information
– Final prospectus is filed, receipted and delivered to investors
– Statutory period to allow exercise of rescission rights elapses
– Closing occurs 3-5 business days after filing of final prospectus
– On closing, shares are issued and trading commences
45
46. 8. Pricing and Filing the Final Prospectus
• Alternative PREP procedures allow final prospectus to
be filed without pricing information – issuer merely
has to file “pricing supplement”, which does not
require regulatory review.
• Pricing will also determine statutory escrow
requirements. Escrow will apply if the post-IPO
market capitalization is less than Cdn$100M.
46
47. 9. Over-Allotment/Green Shoe
• Gives underwriter option to acquire additional
securities after the initial IPO closing.
• Over-allotment option is limited to a maximum of
15% of original offering.
• Underwriters will use the over-allotment securities to
cover an over-subscribed book.
• If share price declines after the initial IPO closing,
underwriters will instead cover over-subscriptions by
buying in the market, supporting the IPO price.
47
48. 10. Post-IPO Compliance
• Management must be ready for annual/quarterly
reporting cycles.
• Quarterly financial statements, MD&A and CEO/CFO
certifications:
– filings are due 45 days after quarter-end for TSX issuers
– financial statements must be approved by the Board (Board
approval usually given only on recommendation of Audit
Committee)
– practice is for financial statements to be reviewed by
auditors; if no review, or auditors cannot complete review
or express a reservation, this must be disclosed
48
49. 10. Post-IPO Compliance
• Audited annual financial statements, annual MD&A
and Annual Information Form (AIF) must be filed 90
days after year-end for TSX companies
• Annual shareholders meeting must take place within
180 days after year-end under most corporate
statutes and TSX rules; first notice must be filed at
least 55 days before the meeting to comply with
notice and record requirements under securities laws
49
50. 10. Post-IPO Compliance
• Periodic disclosure requirements must be monitored:
– Material change reports - 10 days after material
change
– Filing of new material contracts
– Business acquisition reports for significant
acquisitions (note: required audited historical
financial statements for the target and audited pro
forma financial statements) – 75 days after closing
– Change of auditor notices
50
51. 10. Post-IPO Compliance
• Timely disclosure requirements:
– All “material information” must be announced by press
release under TSX timely disclosure policy
– It can be difficult to determine what is material until there
is a track record of how markets react to corporate
announcements
– Adoption of formal disclosure policy and management
disclosure committee recommended
51
53. U.S.-incorporated Issuers
• U.S.-incorporated companies going public on the TSX
will need to comply with both U.S. and Canadian
securities laws.
• TSX IPO process will be significant influenced by U.S.
issuer’s approach to U.S. securities law compliance:
– Option A: Full compliance – file concurrent U.S.
registration statement and comply with U.S. securities
legislation, including SOX.
– Option B: Exemption – stay below thresholds on number
of shareholders of record and issue shares only in
registration-exempt transactions shares will trade on the
TSX with a “.S” designation. This can limit liquidity for
investors.
53
54. • Full compliance with U.S. regime has some
advantages for U.S.-incorporated issuers:
– U.S. registration statement can generally be “wrapped”
with Canada-specific information and certifications to
comprise a Canadian long-form prospectus
– U.S. issuer can continue to use U.S. GAAP and will not need
to convert to IFRS or provide reconciliations
– U.S. issuer will be able to complete continuous disclosure
filings using U.S. forms once it is northbound-MJDS eligible
(requirements: must be public in the U.S. for 12 months
and have a public float of at least USD$75M)
– This can be good approach if the TSX offering is seen as a
stepping stone to NASDAQ
54
55. • A further alternative is to reorganize the U.S. issuer
outside of the United States so that it can go public
on the TSX as a “foreign private issuer” (FPI) – this can
be challenging from securities and tax law
perspective, and is only worthwhile if the issuer is
confident that it will continue to qualify as a FPI for a
significant period of time post-closing
55