Much has been written about when a business should go public and the considerations that inform that choice. Assuming the decision to go public has been made, second in importance to that determination is how a private company (PrivateCo) should go public.

In general, two routes exist for a PrivateCo to go public—an initial public offering (IPO) of securities or a negotiated reverse merger transaction (RMT) with an existing public company. The IPO process centers on the creation of a public company from a PrivateCo. An IPO may be accomplished by either a marketed listing of securities of PrivateCo or a direct listing of PrivateCo's securities on a stock exchange. Alternatively, a RMT involves the acquisition of a PrivateCo by an existing public company (typically a shell or inactive company), resulting in the shareholders of the PrivateCo ultimately owning a majority of the shares of the resulting public issuer (resulting issuer), which subsequently carries on the business of the PrivateCo. A RMT may be accomplished by one of three means: (1) an acquisition of PrivateCo (a QA or qualifying acquisition) by a special purpose acquisition corporation (SPAC), (2) an acquisition of PrivateCo (a QT or qualifying transaction) by a capital pool company (CPC), or (3) a reverse takeover (RTO) of an existing public company.

Here we compare the main elements to be considered by a PrivateCo in evaluating going public by way of an IPO, SPAC, CPC or RTO. Our Routes to the Public Markets in Canada guide contains additional detail on the advantages and disadvantages of, principal components of, and the process to implement going public by way of an IPO, SPAC, CPC and RTO.

IPO

RMT

SPAC

CPC

RTO

Perception
  • Traditional method, most common and well known route to the public markets.
  • Relatively new method, limited success in Canada.
  • Well understood method; suitable for smaller issuers.
  • Historical successes in oil and gas and mining (primarily on the TSXV), with recent success in cannabis and green industries (primarily on the CSE).

Timing
  • 5–7months.1
  • 3–4months.2
  • 3–4months.3
  • 3–6months.4

Stock
Exchanges
  • TSX, TSXV, NEO, CSE.
  • TSX, NEO, CSE.
  • TSXV.
  • TSX, TSXV, NEO, CSE.

Size
  • The majority of new listings on the TSX (the exchange for senior issuers) are IPOs, with the market capitalization of new IPO listings ranging from ~$44 million to $7 billion (YTD December 2022).
  • In the past 10 years, 11 QAs have been completed on the TSX, with the market capitalization of the issuer ranging from ~$68 million to $1.5 billion (2022).
  • The majority of new listings on the TSXV are CPCs and the issuers resulting from CPC QTs, with the market capitalization of such resulting issuers being ~$14 to $189 million (YTD December 2022).
  • RTOs are completed on all exchanges, with the market capitalization of new RTO listings ranging from ~$4 to $44million on the TSXV and ~$2.4 to $4 billion on the TSX (YTD December 2022).

Pricing & Marketing
  • Share price determined at time of the IPO between underwriters and PrivateCo.
  • Intensive marketing.
  • Price subject to market volatility.
  • Risk of IPO timing being rescheduled due to market volatility and underwriter timelines.
  • Share price determined at beginning of transaction between principals of SPAC and PrivateCo as part of merger negotiations.
  • No marketing required unless concurrent financing undertaken.
  • SPAC QA success unrelated to market volatility.
  • Share price determined at beginning of transaction between principals of CPC and PrivateCo as part of merger negotiations.
  • No marketing required unless concurrent financing undertaken.
  • CPC QT success unrelated to market volatility.
  • Share exchange ratio determined at beginning of transaction between RTO issuer and PrivateCo as part of merger negotiations.
  • No marketing required unless concurrent financing undertaken.
  • RTO transaction success unrelated to market volatility.

Costs
  • Full range of direct costs.5
  • Typical underwriter fees: 4%-6% on the TSX and up to 12% on the TSXV, NEO and CSE.
  • Lower direct costs than IPO, as the listed issuer (SPAC, CPC or RTO issuer) is already publically listed.5
  • Higher indirect costs associated with due diligence of the PrivateCo or RTO issuer and negotiating and implementing the RMT.
  • Financial advisory fees depend on the size and structure of the transaction.
  • Sponsor fees (if required).
  • Agency fees if a concurrent financing is undertaken.

Process
  • Comprehensive diligence and preparation of documentation disclosing all relevant information about the PrivateCo's business.
  • Extensive engagement with underwriters and market analysts.
  • Stringent securities commissions review.
  • SPAC undertakes IPO to raise capital for a QA.
  • Merger is completed through a QA post-listing of the SPAC, with shareholders of SPAC approving the QA, if required.
  • Comprehensive diligence and preparation of documentation disclosing all relevant information about the PrivateCo's business.
  • CPC undertakes IPO to raise capital for a QT.
  • Merger is completed through a QT post-listing of the CPC, with shareholders of the CPC. approving the QT, if required.
  • Comprehensive diligence and preparation of documentation disclosing all relevant information about the PrivateCo's business.
  • Merger is completed through a RTO transaction, with shareholders of RTO issuer approving the RTO.
  • Additional financing and other corporate transactions possible (which may require PrivateCo and RTO issuer approvals).
  • Comprehensive diligence and preparation of documentation disclosing all relevant information about the PrivateCo's business and the RTO issuer.

Disclosure
Requirements (see also "General Disclosure obligations for IPOs, SPACs, CPCs and RTOs")
  • Preliminary Prospectus and Final Prospectus.
  • RMT merger agreement between PrivateCo and listed issuer (SPAC, CPC or RTO issuer) (i.e., share acquisition, plan of arrangement, amalgamation, etc.).
  • Information circular (if shareholder approval required), which would include prospectus level disclosure.
  • Non-offering prospectus or IPO prospectus in respect of the QA.
  • Information circular (if shareholder approval required) and/or filing statement, which would include prospectus level disclosure.
  • Information circular (if shareholder approval required) and/or filing statement, which would include prospectus level disclosure.

Reviewing Authorities
  • Securities commissions (for preliminary and final prospectus).
  • Primarily stock exchanges (subject to limitations imposed by securities commissions under applicable securities laws and review by securities commissions of a non-offering prospectus or an IPO prospectus of a SPAC).

Sponsorship
  • Sponsorship may be required.

Due Diligence/
Contingent
Liabilities
  • Extensive diligence is required to provide disclosure of all material facts in prospectus.
  • Liabilities and litigation risks that existed while private continue through the going public event.
  • Diligence of SPAC shell limited given SPAC has no operating business (and limited litigation risk).
  • Fulsome diligence must be completed by SPAC on target PrivateCo.
  • Diligence of CPC shell limited given CPC has no operating business (and limited litigation risk).
  • Fulsome diligence must be completed by CPC on target PrivateCo.
  • Fulsome diligence must be conducted on both the PrivateCo and the RTO issuer.
  • PrivateCo will need to consider any existing RTO issuer liabilities, including litigation.

Director, Management
and Employee
Matters
  • Success of the going public transaction is partly dependent on the creation of market goodwill (which is typically enhanced by the involvement of directors/senior management with capital market experience and industry experts).
  • Directors and management of the new or resulting issuer are subject to review and approval by applicable securities commissions and exchanges (and each new director/senior management must file a "personal information form".
  • Management and employee teams stay consistent following the IPO.
  • PrivateCo may need to add additional members with experience in public companies to their boards and management teams to comply with applicable securities laws and exchange requirements.
  • Management of the resulting issuer is primarily comprised of PrivateCo management but may include experienced management from the SPAC.
  • Ability to expand/ diversify PrivateCo's management by involving sponsors in management of the business.
  • SPAC sponsors often represented on board of resulting issuer.
  • Management of the resulting issuer is primarily comprised of PrivateCo management but may include experienced management from the CPC.
  • Ability to expand/ diversify PrivateCo's management by involving sponsors in management of the business.
  • CPC founders often represented on board of resulting issuer.
  • Management of the resulting issuer is primarily comprised of PrivateCo but may include experienced management from the RTO issuer.
  • PrivateCo may need to add additional members with experience in public companies to their boards and management teams to comply with applicable securities laws and exchange requirements.
  • Special consideration must be given to treatment of legacy employees of RTO issuer (i.e.,termination issues), and transition of legacy personnel to new board and management.

Other
  • Non-Canadian PrivateCos may have supplemental requirements imposed upon them in going public transactions by the applicable stock exchange.
  • PrivateCos that have their principal business or operating assets in emerging markets will need to comply with additional securities laws disclosure requirements and may also be subject to additional stock exchange requirements.
  • PrivateCos that have material assets in other jurisdictions may be subject to additional due diligence.

1 From preliminary prospectus drafting to close of IPO.
2 From Letter of Intent between SPAC shell and PrivateCo to closing of QA.
3 From Letter of Intent between CPC shell and PrivateCo to closing of QT.
4 From Letter of Intent between RTO issuer and PrivateCo to closing of RTO. Although a RTO can be completed in 3 to 4 months, the process more often takes up to 6 months.
5 Costs include legal advisors (for PrivateCo and, if applicable, the listed issuer), auditors, financial advisors/underwriters, sponsors, other industry experts (oil and gas, mining), exchange listing fees, securities filings, transfer agent, roadshow costs, investor relations fees, printing and mailing, director and officer liability insurance.

The going public process is complex and involves many considerations in addition to a decision as to the route to the public markets, including when a business should go public, the applicable securities laws and stock exchange listing requirements applicable to a going public transaction, business considerations (i.e., management, the needs of the business, including the financial requirements of the business, etc.), whether a financing / marketing is necessary to complete a going public transaction, and ongoing securities and stock exchange listing requirements once public. It is important that a PrivateCo engages and consults with legal counsel, professional auditors and financial advisors early in the go public process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.