Canada: Focus on Technology, September 2006 - Technology Initial Public Offerings - Part 1

Last Updated: October 10 2006

FMC is one of Canada’s largest and most experienced law firms in the area of securities transactions, both public and private, in a broad range of industries. Our areas of expertise include IPOs and new issues, income trust conversions and other reorganizations and restructurings, take-over bids (both "hostile" and "friendly", on "offence" and "defence"), counselling boards of directors and senior management, and due diligence and other investigative processes. With six offices across Canada, we have significant depth in all major Canadian business centres including Toronto, Ottawa, Montreal, Calgary, Edmonton and Vancouver, as well as a representative office in New York.

FMC represents many of Canada’s most promising pre-IPO technology companies. We take a systematic approach to preparing private companies for IPO readiness. The purpose of this guide is to provide Canadian technology companies with an overview of the IPO process and critical factors to consider prior to going public. Part 1 of this overview covers five areas:

  • Advantages and disadvantages of going public
  • Assessing IPO readiness
  • IPO planning
  • Deciding which market: TSX, Nasdaq, AIM
  • Identification of Underwriter and Pricing

Part 2 contains an overview of the process for a Canadian IPO on the TSX.

FMC’s Securities and Corporate Finance group represents issuers and underwriters on all types of Canadian and global securities offerings. We have the depth to service the requirements of public companies at every stage of growth, and are consistently ranked as one of the top 50 law firms worldwide for M&A transactions (Global Securities Information Inc.). FMC knows, understands and is committed to the IPO market:

  • FMC has acted on the IPOs of issuers that have grown to become some of Canada’s most recognizable public companies, including Cogeco Cable, Mitec Telecom and Enbridge Income Fund.
  • In September 2005, FMC acted for the underwriters in the $2.5 billion sale by the Canadian government of its stake in Petro- Canada, the largest public share offering in Canada’s history.
  • In December 2005, FMC represented the underwriters in a $400 million IPO by Addax Petroleum, the year’s largest Canadian common share IPO and Canada’s third deal of this size since late 2000.
  • FMC’s recent IPO experience spans a wide range of industries, including two significant IPOs in 2006 - the $700 million IPO by Teranet Income Fund and the $200 million IPO of CMP 2006 Resource Limited Partnership.
  • In the technology sector, FMC has been involved in many of Canada’s recent technology IPOs, including the 2005 $141 million IPO of Miranda Technologies Inc., Coley Pharmaceutical’s U.S.$120 million Nasdaq IPO, the 2004 IPO and TSX-listing of Dexit Inc. and the 2004 IPOs of Methylgene and Stem Cell Therapeutics.

FMC has the IPO experience, industry knowledge, broad range of services, and profile with the underwriting community necessary to make your IPO a success. We understand that an IPO is a critical turning point for any company, and that it is imperative that your legal counsel is client-focused and interested in doing your deal. We welcome any questions emerging from this guide. Please get in touch by calling one of the regional contacts listed on the last page.



The decision to go public will fundamentally alter the course of a company. Management and investors must be careful to ensure that the decision to go public is made for the right reasons and at the right time.


Raising Capital

The most obvious benefit of going public is the ability to raise funds to finance the company’s operations. Shares issued from treasury through the public markets can often be sold at a higher price than would be available through a private placement. This can allow the company to raise a greater level of funds with less dilution to shareholders. Funds may be used for purposes such as acquisitions of other businesses and/or complementary technology, acquisition or modernization of facilities, repayment of debt or working capital.

Liquidity for Investors

As part of an IPO, it is usually possible to sell some of the shares belonging to founding and principal shareholders. This is called a "secondary offering". Following the IPO, listing on a stock exchange or market greatly facilitates the trading of a company’s shares (subject to applicable escrow conditions, lock-up agreements and hold periods). However, if an offering is too small, the resulting "thin float" will sometimes render the liquidity somewhat illusory. Therefore, as discussed below under "Assessing IPO Readiness", there can be a real disadvantage to a premature IPO.

Employee Incentives

Particularly in the technology sector, employees and prospective employees expect the opportunity to participate in stock option and share purchase plans established by their employer. Equity compensation plans administered by public companies are particularly attractive because they provide employees with a liquid benefit, often with certain tax advantages.

Prestige & Customer/Supplier Relationships

There is often a greater level of prestige and stability associated with a public company, which can be important to customers and suppliers. Following an IPO, listed companies usually receive closer attention from the financial press, which also increases the company’s level of public recognition.

Facilitate Mergers & Acquisitions

Private companies often lack the resources to acquire new technology or complementary businesses that are necessary to survive in the fast-moving technology sector. Going public can provide a means to raise necessary funds to enter the mergers and acquisitions market. In addition, the exchange of a public company’s shares for shares or assets of a target can be very attractive to the target and/or its shareholders.



In addition to underwriters’ commissions which typically range from 5% to 10% of the gross proceeds, the company will incur significant legal, accounting, printing, filing and listing expenses. The expenses of a Canadian-only offering on the TSX will typically range from $750,000 to $1,250,000 for a mid-size offering by a technology company, and will be incurred regardless of whether the offering is successful. Depending on the degree of complexity and pre-offering restructuring, costs may be even higher. The costs associated with a U.S.-only or cross-border offering are considerably greater. In addition, ongoing legal and accounting expenses will be higher for a public company.


Public companies have many masters to please – including institutional shareholders, rating agencies, securities regulators and stock exchanges. Public companies are also under constant pressure to meet or exceed analysts’ and industry revenue and profit expectations. Financial forecasting by management must be thorough, precise and conservative. Missing a quarterly earnings target can cause the company’s stock price to drop dramatically. Missing targets for more than one quarter, particularly early after an IPO, can result in loss of analyst coverage.


Public companies are subject to detailed ongoing reporting requirements with respect to corporate governance and disclosure of financial and other material information. For a public company listed on a North American stock exchange, management must be prepared to adhere to strict three-month and annual reporting cycles that will consume significant time and resources.

Regulatory/Enforcement Environment

In the U.S., massive corporate governance failures have resulted in the Public Company Accounting Reform and Investors Protection Act of 2002 ("Sarbanes-Oxley") and a tightly restricted regulatory environment for U.S. public companies. The Securities Exchange Commission (SEC) and other U.S. regulators have also adopted an aggressive approach to enforcement proceedings, which may in turn increase the risk of civil liability. In addition to greatly increasing the cost of operating a public company, liability concerns created by these developments have put a chill on U.S. public markets, particularly the IPO market. Canadian regulators have also adopted reforms, mainly in the area of financial and accounting requirements and disclosures, that are at least in part inspired by Sarbanes-Oxley. While Canadian regulations are generally less onerous than Sarbanes-Oxley, these recent measures have increased the compliance burden for Canadian public companies. Rightly or wrongly, the North American regulatory/ enforcement environment has caused many companies to take IPO plans off the table, or driven companies to markets (such as AIM) that are perceived to be more lightly regulated.

Shareholder Liability

The securities litigation environment in the U.S. is currently fairly hostile to public companies, with settlement values at an all-time high and increased likelihood of class action litigation. Although actions by shareholders are less common in Canada than in the United States, the risk of suits from minority and other shareholders against Canadian public companies is growing. Until recently, statutory liability in Ontario was limited to disclosures made in a prospectus, offering memorandum or circular. On December 31, 2005 new legislation came into effect in Ontario making reporting issuers statutorily liable for all misleading disclosures, whether in the context of a formal prospectus or continuous disclosure filings (such as financial statements and press releases). Whether these developments in Ontario will push Canada closer to a U.S.-style litigation environment remains to be seen.

Dilution/Vulnerability to Take-overs

The ability of pre-IPO shareholders to control the company will be diluted by the voting rights of new shares that are offered for sale to the public. As a related point, public companies are also vulnerable to hostile take-over bids. Taking the company public will have the effect of creating a market value, and if the resulting market value is low (either through a thin float or disappointing results), the company may be particularly vulnerable. Therefore, to the extent that a board is considering either an IPO or an M&A as an exit event, deciding on an IPO that is "too early" or not properly executed can significantly reduce the potential value of a company.


Once it has been determined that the interests of the company and its shareholders would be best served by an IPO, it is necessary to determine whether the company is ready to go public. Although there is no set formula to predict whether a company will be successful in the public market, a list of some of the key matters to be considered follows.

Size of the Company

Companies with consistently strong historical financial performance have traditionally been the most popular among underwriters and investors. However, past financial performance may be less important for technology companies where "prospects" can be influential. Underwriters typically establish minimum benchmarks for revenue, earnings and growth, which vary depending on the company’s sector and the exchange proposed for the IPO (see Section 4 below). Underwriters will also look at market size opportunity, product margins, and the long term direction of the company. It should be noted that at least historically, IPOs of smaller companies tend to be undervalued and smaller companies have a greater chance of under performing after the IPO.

Size of the Offering

Although there is no minimum deal size as such, the significant costs of conducting an IPO dictate that there be a practical minimum offering size to justify the process. A company must therefore be satisfied that it will be able to attract the level of external interest necessary for its minimum deal size requirements. In addition, many underwriters have a minimum offering size, often in the range of $20-40 million for the TSX and U.S.$40 million for Nasdaq.

Future Growth

Companies considering an IPO should be able to demonstrate prospects for future growth, both in terms of financial performance (revenue growth and earnings growth), and product development and acceptance. In the highly competitive technology sector, for example, it is imperative that companies can demonstrate an ability to continue marketing and developing products that will maintain and increase their market share. While some companies have successfully completed IPOs based on a single product, long term success in the public market will depend on the steady demand for that product unless the company is able to identify and service new needs.


Another critical component of a successful public company is a strong and experienced management team. In addition to attending to business growth and development concerns, management must also be able to deal effectively with public shareholders, external analysts and the financial press. In the current regulatory environment, it is also important to have a finance department that can support compliance requirements. Management must demonstrate these characteristics during the early stages of a proposed IPO in order to attract the attention of underwriters. Many emerging companies are surprised at the importance attributed by underwriters to a strong management team. Companies will generally not be able to successfully complete an IPO based on technology or products alone.


Finally, and most important, when considering a company’s readiness for the public market, it is critical that a "window of opportunity" be identified that is expected to coincide with the closing of the IPO. As you consider going public, these and other factors should be discussed with your professional advisors.


There are steps that management can take at an early stage that will greatly facilitate a successful IPO. These include the following:

Corporate Governance

The expectations placed on public companies when it comes to corporate governance have never been higher. Public companies must comply with compulsory corporate governance requirements imposed by securities regulators and stock exchanges. In addition, "best practices" are mandated by associations and proxy services that represent pension funds and other institutional investors. Companies with shares listed in more than one jurisdiction will have multiple sets of detailed (and occasionally conflicting) guidelines to satisfy. While detailed recommendations on corporate governance are beyond the scope of this article, pre-IPO companies can benefit by focusing compliance efforts on two principal areas: board composition and board committees.

(A) Board Composition – Independent Directors

At least a majority of the directors of a public company should be independent directors. Nasdaq in fact requires a majority of the board to be independent to meet original listing requirements, and the Canadian Securities Administrators’ corporate governance guidelines mandate that a majority of the board and the chair be independent. While AIM does not specifically require independent directors, the Nominated Advisor, sometimes referred to as a "Nomad", will generally recommend a mix of independent and executive directors. In addition, the Quoted Companies Alliance, which represents the interests of AIM companies in the U.K., has published detailed recommendations on board composition which include, among other things, a recommendation that AIM companies have at least two independent directors.

Many venture capital backed companies have boards dominated by investor representatives, and therefore numerous board changes will be necessary to prepare for an IPO. Ample time will be necessary to recruit appropriate candidates to act as independent directors. While "marquee" directors with extensive public company experience are sought after, beware of candidates who may spread themselves too thin by serving on many boards. Once an appropriate candidate is secured, the new director should be provided with a formal orientation program to familiarize him or her with the company’s management, operations, policies and codes of conduct.

(B) Board Committees

A company anticipating an IPO should carefully examine the composition and effectiveness of its board committees, particularly the audit committee. Recent changes to Canadian securities regulations require all Canadian public companies to have an audit committee comprised of at least three independent, financially literate directors. U.S. rules are similar, with Nasdaq requiring companies to have an audit committee comprised of at least three independent directors, all of whom meet basic financial literacy requirements and at least one of whom meets a higher threshold of financial expertise.

Other recommended board committees include a compensation committee and a corporate governance committee. The compensation committee is responsible for reviewing executive and board compensation, including equity incentives. Prior to the IPO, the compensation committee should focus on ensuring that all incentives are in line with prevailing market conditions. The corporate governance committee should be mandated to seek board nominees and periodically review corporate governance practices. All committees should have written charters and be comprised of independent directors.

Prepare for Due Diligence

Underwriter due diligence will focus on the company’s business, industry, products/services, customers, suppliers, growth strategy and projections, material contracts, intellectual property and human resources. Due diligence will include a detailed review of the company’s financial statements and accounting policies.

Well in advance of the IPO, it can be useful to review a typical form of underwriter’s due diligence checklist. Identify any record-keeping deficiencies that may prevent the company from responding quickly and comprehensively to due diligence requests. This process often highlights the need for a more organized approach to record-keeping. In some cases, it becomes apparent that the company needs to hire in-house legal counsel and/or a dedicated contract administrator to help maintain its records.

Minute Books/Capitalization

As part of the due diligence process, underwriters’ counsel will review your minute books in great detail. You should ensure that your minute books are kept up to date and you should be particularly careful that options and shares are properly issued. It will cost you much more in fees and "impression" to have to clean up your minute books than it will to take good care of them in the first instance.

Note that the due diligence review by underwriters’ counsel will include an assessment of whether securities were offered and sold in compliance with applicable securities laws. If the company’s previous securities issuances are found to infringe securities laws, rectification measures up to and including a rescission offer may be required.

Establish Public Communications Policy

Steps should also be taken to ensure that the company’s news releases, web-site and public communications do not contain financial projections or forecasts, overreaching statements, or other commentary that may be seen as "priming" the market. A formal public communications policy should be established with the assistance of legal counsel, and strictly adhered to, in the months leading up to an IPO.

Lock-Up Agreements

Ideally, underwriters like to see that all of the company’s directors, officers and significant pre-IPO investors are subject to contractual post-IPO "lock-up" agreements, pursuant to which these shareholders agree not to sell or otherwise dispose of their shares for at least 180 days after an IPO. It is much easier to obtain the agreement of shareholders to a lock-up when shares are first issued (although an underwriter may also require shareholders to sign its own form of lock-up agreement). Shareholders agreements, equity compensation plans, warrants and other convertible securities should therefore contain appropriate lock-up provisions from the outset.

Secondary Offerings and Registration Rights

It is common in Canada for an IPO to include a "secondary offering": that is, a portion of the shares sold in the IPO will be previously issued shares held by principal investors or other holders. Underwriters will often be concerned that the secondary component of the IPO not be unduly large relative to the treasury component. The company’s investors, on the other hand, may exert pressure for a significant secondary offering. Rights to participate in a secondary offering may be included in a registration rights agreement negotiated in the course of earlier rounds of financing. While these agreements usually provide that underwriters can bar a secondary offering on an IPO, in some cases investors are provided with an absolute right to "piggyback" on an IPO without regard to underwriter cut-back. If so, it may be necessary to negotiate waivers of registration rights from investors prior to an IPO. We recommend that management determine at the outset roughly the number of shares which existing shareholders wish to sell as part of the IPO, so that an appropriate allocation can be settled in the underwriters’ engagement letter.

D&O Insurance

Directors of public companies are exposed to risks, such as shareholder class actions, that are not commonly encountered by directors of private companies. For this reason, additional directors and officers insurance coverage will almost always be desirable. Sufficient lead time should be given to obtain competing quotes from the company’s insurance broker, and to process detailed director and officer questionnaires that will be required by the insurer. D&O upgrades should not be deferred until the company is already public, since the risk of class action lawsuits is often greatest in the period immediately following the IPO.

Changes to Capital Structure

Ideally, the capital structure of a company that goes public should be simple and transparent to investors and regulators. A number of steps may be recommended to simplify the company’s capital structure prior to an IPO:

  • Special share classes that had been designed to meet specific financial and estate planning objectives of founders should generally be eliminated.
  • For venture capital-backed companies, outstanding preferred shares should be converted into common shares – this may require negotiation with investors if the conversion is not automatic. "Exchangeable share" and other special tax structures that are common among venture capital-backed Canadian-based technology companies may need to be collapsed.
  • It may be necessary to increase the number of authorized common shares. The authorized capital should be sufficient not only for the purpose of the IPO, but to accommodate future equity offerings, issuances of shares to finance acquisitions, and increases to equity compensation pools.
  • It may be desirable to put a class of "blank cheque" preferred shares in place. The terms of "blank cheque" preferred shares can be fixed by the directors without obtaining shareholder approval, and as such these shares provide the company with greater flexibility to effect equity financings.
  • Since the optimal public offering price is between $10 and $20 per share, a stock split or reverse split may be necessary to get the company’s common share price in the appropriate range. Note that the minimum bid price for shares to be listed on Nasdaq is U.S.$5.00.
  • If possible, the company’s corporate organization chart should be cleaned up. This may involve buying out minority interests in subsidiaries or consolidating subsidiaries.

While these steps are usually effective immediately prior to or on the closing of the IPO, planning to implement these changes can take several months, particularly if it is necessary to hold a shareholder meeting to obtain applicable consents.

Other Changes to Constating Documents and By-laws

Certain other changes to the company’s constating documents or by-laws may be necessary or recommended, as follows:

  • The articles of many Canadian companies contain so-called "private company" restrictions, including restrictions on the transfer of shares, which must be removed prior to an IPO.
  • The company’s by-laws will generally have to be amended or replaced to contain provisions appropriate to a public company, such as reducing quorum requirements for a meeting of shareholders.
  • Management of U.S. incorporated companies may consider including provisions in the company’s charter intended to encourage fair treatment of shareholders and to defend against hostile takeover attempts. (For Canadian companies, it is more common to address these concerns by implementing a shareholder rights plan.)
  • Provisions providing for indemnification of directors and officers are usually contained in a company’s charter (for U.S. companies) or by-laws (for Canadian companies). These provisions should be reviewed and if necessary updated prior to the IPO.

Any such changes should be approved or ratified by the shareholders prior to the IPO, which may require a shareholders meeting.

Identify Third Party Consents

Credit agreements may contain restrictive covenants that require the lender’s consent for a public equity offering and/or a change of control. Lease documents should also be checked for similar clauses.

Auditors/Financial Statements

Auditors should be kept apprised of the company’s IPO plans, and should work with management to address any accounting practices that depart from industry norms. The company will generally require audited financial statements for three to five years before going public. In addition, if there is a significant stub period going into an IPO, the underwriters may also require interim financial statements for the stub period to be audited. In the months leading up to the IPO, this may limit the company’s ability to acquire significant subsidiaries with unaudited financial statements.

Equity Compensation Plans

Amendments will generally be necessary to stock option and restricted stock plans in order to make the plans suitable for a public company. The company may wish to use the IPO as an opportunity to increase the pool of shares available for equity incentives. The company may also wish to consider introducing new incentive plans, such as a share purchase plan, in conjunction with the IPO. Shareholder approval of existing, amended or new plans may be required.

Related Party Transactions

Since the independence of board members and the decision-making ability of management is seen to be compromised by financial ties with the company, it is desirable to cleanse the company of so-called "related party" transactions involving a director or officer prior to an IPO. Transactions of this type can include any commercial arrangements involving a director or officer, a family member of a director or officer, or a company controlled by a director or officer and/or his or her family members.

Some of the most common related party transactions involve loans or other credit arrangements between the company and a director or officer. Sarbanes-Oxley strictly prohibits companies that are public in the U.S. from extending personal loans, including share purchase loans and option exercise loans, to executive officers and directors subject only to very limited exemptions. Any share purchase loan or other loan granted to executive officers or directors, or loans granted for their benefit (for example, to family members of an executive officer or director), would need to be paid off before a company attempts an IPO (i.e., before filing a registration statement with the SEC) in the United States or a cross-listed Canadian/U.S. IPO. In Ontario, there is no specific prohibition against a public company extending credit to a director or executive officer. However, the acceptance of a loan by a director may impair that director’s independence under Canadian securities law and TSX regulations. Ideally, any loan arrangement entered into between a company and its directors or executive officers should provide that loans are repaid prior to an IPO.

Control Issues

If there is concern that the company may be exposed to a hostile take-over bid, it may be possible to implement defensive measures, such as a shareholder rights plan. Some of these measures are easier to design and implement before the company goes public. It should be noted that defensive measures should not be intended to prevent an acquisition, but rather to give the board of the target more control over the timing and procedure of an unsolicited take-over bid.


Going public can raise the stakes on outstanding litigation. If possible, it is best to resolve outstanding disputes before the IPO process begins in earnest.

Cheap Stock

Companies should be aware that the issuance of shares during the months leading up to an IPO may be subject to close scrutiny by regulators. In certain cases, the SEC has concluded that shares issued within this window are priced at less than fair market value and should attract a deemed dividend charge. Share issuances to existing investors and others with whom the company has a commercial relationship during this time period will attract close review.

Tax Considerations

If an AIM-only offering is proposed, changes to the corporate structure of a Canadian company may be required for Canadian tax reasons. AIM is not a "prescribed stock exchange" for the purposes of the Income Tax Act (Canada) (the "ITA"). This means that the shares of a Canadian-incorporated company are "taxable Canadian property" for the purposes of the ITA, and that shareholders not resident in Canada will be subject to Canadian capital gains tax when the shares are traded (unless a treaty exemption is available). Non-resident shareholders will also be required to obtain a clearance certificate from Canada Revenue Agency prior to disposing of the shares, a process which can involve delays and some frustration. It may be desirable to reorganize the company as a mutual fund corporation for the purposes of ITA in order to avoid this treatment. Mutual fund status will only be available so long as the company is not maintained primarily for the benefit of non-residents of Canada. This may limit the size of the offering on AIM and/or affect the liquidity of the company’s Canadian investors. Other alternatives include "reconstituting" the company outside Canada.

Securities Law Considerations

Many Canadian-based companies are in fact incorporated in the U.S. Management is sometimes surprised to discover that an IPO may subject a U.S.-incorporated company to the U.S. securities regime applicable to public companies (including Sarbanes-Oxley requirements), even if the IPO is conducted outside of the U.S. (for example, a TSX or AIM offering). Specifically, for a U.S.-incorporated company, the threshold for compliance with the U.S. securities regime applicable to public companies is 500 shareholders worldwide, regardless of where the company has listed its shares. For a company incorporated outside of the U.S., it may be possible to qualify as a "foreign private issuer", and if so, an exemption from certain U.S. reporting requirements may be available. In any event, if a company incorporated outside of the U.S. has 300 or more U.S. shareholders, then such company will be subject to certain U.S. reporting requirements.


For Canadian technology companies, the choice of which exchange or exchanges to list on is not always obvious. The table below summarizes the principal advantages and disadvantages of Nasdaq, TSX and the London AIM, which in our experience are the chief exchanges favoured by boards of Canadian-based VC- backed technology companies.






For many Canadian technology companies, a Nasdaq IPO is seen as the "gold standard". From the perspective of customers and suppliers, a Nasdaq IPO can also provide a Canadian company with profile and validation in the U.S. market.

The TSX can represent a "middle ground" between Nasdaq and AIM. The average market capitalization of TSX-listed companies is less than Nasdaq and greater than AIM. Like Nasdaq, the TSX offers a level of prestige as Canada’s senior securities exchange. Like AIM, the TSX provides a friendly environment for emerging growth companies.

As of December 2005, approximately 30 Canadian companies had been admitted to AIM, most operating within the oil and gas and mining sectors. However, interest in AIM among Canadian technology companies is on an upswing. AIM is the London market for growth companies and is operated by the London Stock Exchange. As a junior market, AIM may not yet be perceived as operating at the same level as Nasdaq or the TSX. Some companies and investors see AIM as a financing event only, as opposed to a profile-raising opportunity.

Access to Capital

Of the three exchanges, Nasdaq offers the greatest potential for a broad investor base and higher trading volume, and ultimately, increased value and liquidity. On the other hand, Nasdaq is dominated by larger-cap companies, with companies with market capitalization greater than U.S.$250 million accounting for over 95% of Nasdaq’s value. As a result, smaller companies can be stranded on the Nasdaq with no analyst coverage and/or thinly traded stock.

As Canada’s preeminent domestic market, the TSX potentially offers a high level of liquidity for mid-cap companies as well as a balance of institutional and retail investors.

AIM is focused on the institutional investor market. AIM’s largest investors include Fidelity, Merrill Lynch and Goldman Sachs, giving issuers access to significant North American institutional investors while remaining outside the burdensome U.S. regulatory regime.

Geographical Considerations

Arguably, Canadian-based or Canadian- incorporated companies can be at a disadvantage on Nasdaq. A company will be better received if its head office is located in the U.S. and if it is incorporated in a U.S. jurisdiction (preferably Delaware). While it is possible to reorganize a Canadian company in the U.S., it is a costly and time-consuming process with tax consequences for shareholders both inside and outside of Canada.

A company with its head office in Canada will have a "home base advantage" on the TSX, both in terms of obtaining analyst coverage and generating interest among Canadian retail and institutional investors.

One disadvantage of an AIM-only offering for Canadian-based technology companies is the geographic disconnect between North America and the U.K. (although given Canada’s size and geographic distances this is probably an issue with which Canadian companies are comfortable). All things being equal, investors will tend to favour companies based closer to them. Following an AIM IPO, consideration should be given to establishing a U.K. investor relations office and scheduling regular in-person meetings between North American management and U.K.-based investors.

Underwriter Revenue/Profit Expectations for IPO

The minimum benchmark for a Nasdaq IPO used by many underwriters is U.S.$15-20 million of quarterly revenues. A company should be profitable and demonstrate quarterly earnings growth before it attempts a Nasdaq IPO. On a practical level, a Nasdaq company needs to have a minimum of U.S.$500 million market capitalization in order to secure meaningful analyst coverage.

At a minimum, for a TSX IPO underwriters generally require in the range of $20 million in annual revenues, with a clear ramp to $40 million. As with Nasdaq, a company should be profitable before it attempts a TSX IPO..

Relatively good valuations can be obtained on AIM for companies that have strong revenues. AIM is a good option if the company is not ready for a Nasdaq or TSX offering.


A Nasdaq IPO can be completed in roughly three to five months from the date of the first formal organizational meeting between the company, the underwriters and their respective legal counsel.

A TSX IPO can be completed in approximately three months from the date of the first formal organization meeting between the company, the underwriters and their respective legal counsel. The TSX will generally render a decision regarding original listing within 60 days of receiving an application, and will try to accommodate the issuer’s schedule for closing a prospectus offering. Average time between the filing of the preliminary IPO prospectus to receipting of the final prospectus by Canadian securities regulators is 30-40 days.

AIM differs from Nasdaq and TSX in that the admission process is administered by a nominated advisor or "Nomad", rather than the exchange. An AIM IPO can be completed in approximately three to four months from the date of the appointment of a Nomad. While the Nomad is appointed by the issuer, it also has a duty to the London Stock Exchange to ensure the issuer complies with AIM rules. The Nomad continues in this role after the issuer is admitted to AIM. Any North American company contemplating an AIM offering needs to secure and build a relationship with a Nomad.

Regulatory Burden

All Nasdaq companies need to comply with Sarbanes-Oxley. The minimum recurring cost of the compliance measures required by Sarbanes-Oxley is estimated at U.S.$600K to $1 million per year. Costs can be much greater depending on the scale and complexity of the business.

The TSX offers an opportunity to participate in international capital markets without having to comply with Sarbanes-Oxley requirements. At the same time, the securities and stock exchange regulations applicable to TSX companies are more stringent than AIM requirements. For example, Canadian regulators have recently introduced CEO/CFO financial statement certification requirements, regulated certain aspects of internal controls, enhanced disclosure requirements for non-GAAP earnings measures, and introduced governance requirements for audit committees. For a company hoping to "graduate" to Nasdaq, a TSX listing may represent better preparation than AIM.

AIM offers an opportunity to participate in international capital markets, usually without having to comply with Sarbanes-Oxley requirements. Nomads have flexibility to tailor a corporate governance regime appropriate for the company; however, it should be noted that the due diligence process imposed by the Nomad will be rigorous. Changes to the practices of a North American company may be required to conform to U.K. corporate governance norms and the expectations of U.K. institutional investors. In particular, and by way of background, a company considering AIM admission should familiarize itself with the Combined Code published by the Financial Reporting Council (and in particular, provisions relating to financial reporting, accountability and directors remuneration), the Quoted Companies Alliance corporate governance principles for AIM companies, and the guidelines of the Association of British Insurers (ABI) (relating to, among other matters, limitations on new issues and share incentive plans).

Original Listing Requirements

Companies must satisfy all the requirements of at least one of three listing standards. Compared to the TSX or AIM, Nasdaq’s original listing requirements are relatively stringent, including a minimum public float requirement of U.S.$8 million.

Companies must satisfy all of the requirements of at least one of five listing standards (see Part 2 below). To list on the TSX, a company must have a public float with an aggregate market value of $4 million, or $10 million for issuers qualifying under Technology Company criteria.

AIM’s admission requirements are flexible, with no minimum market capitalization test or minimum public float requirements.


Underwriters’ discount and commission is typically 7% of the gross proceeds.

Legal, accounting, printing and other expenses are generally considerably higher than would apply to a TSX or AIM IPO.

Underwriters’ discount and commission typically range from 5-10% of the gross proceeds.

Placing commissions typically range from 3%-5% of the gross proceeds. Overall costs are typically 5%-10% of the gross proceeds.

Financial Reporting Cycle




Financial Statements – Accounting Standards

The company will need to prepare its audited financial statements in accordance with U.S. GAAP, or prepare U.S. GAAP reconciliations for financial statements prepared in accordance with Canadian GAAP.

Subject to certain exceptions, TSX companies must prepare and file financial statements in accordance with Canadian GAAP. Exceptions include "SEC issuers" (i.e., issuers with a class of securities registered under Section 12 of the United States Securities and Exchange Act of 1934, provided that the company is not an "investment company") and "foreign issuers" (i.e., a company incorporated under the laws of a jurisdiction outside of Canada, unless the company’s voting securities are owned by residents of Canada and either (i) the majority of the executive officers or directors are residents of Canada; (ii) more than 50% of the consolidated assets of the company are located in Canada; or (iii) the business of the company is administered principally in Canada).

Subject as mentioned below for financial years commencing on or after January 1, 2007, the London Stock Exchange will require AIM companies to comply with International Financial Reporting Standards. It is anticipated however that such reporting standards will not apply to companies reporting in Canadian or U.S. GAAP which will continue to be acceptable.

Escrow Requirements

Nasdaq does not generally impose an escrow requirement, although it is standard for underwriters to require contractual lock-ups from directors, officers and principal shareholders.

Canadian securities regulations and TSX rules may require certain shareholders to agree to an escrow arrangement for up to eighteen months after the IPO. Companies with post-IPO market capitalization in excess of $100 million are exempt from escrow requirements. See Part 2, "Escrow Requirements".

Where a company has not been independent and revenue generating for two years, directors, senior employees and/or related party shareholders may be required to enter into lock-up arrangements for a one-year period following the IPO. This requirement is now typically sought by Nomads in all AIM transactions.

Canadian resale Restrictions

If the company goes public on Nasdaq only, Canadian resident shareholders who do not acquire their shares in the open market may be captured by Canadian resale restrictions unless the company also becomes a "reporting issuer" (i.e., files a prospectus) in Canada. This will affect liquidity for those shareholders, although it may be possible to trade securities relying on private placement exemptions.

A TSX IPO will result in immediately freely tradable shares for Canadian resident shareholders, subject to any regulatory escrow requirement (see above) or underwriter lock-up.

If a Canadian incorporated company goes public on AIM only, Canadian resident shareholders who do not acquire their shares in the open market may be captured by Canadian resale restrictions unless the company also becomes a "reporting issuer" (i.e., files a prospectus) in Canada. This will affect liquidity for those shareholders, although it may be possible to trade securities relying on private placement exemptions.

Other Factors


As mentioned above, until such time as AIM is considered a "prescribed stock exchange" under the ITA, the non-resident shareholders of a Canadian corporation will be subject to Canadian capital gains tax. The current way to address this issue is to reconstitute the company as a "mutual fund corporation" which is costly and complex and also problematic where greater than 50% of the shares are owned by non-Canadians. In summary, the "common wisdom" is that Nasdaq offers the deepest pools of capital and greatest visibility, but is coupled with the most onerous regulatory regime; AIM is perhaps less "visible" than Nasdaq, less regulated and possibly less liquid. The availability of capital for young growing companies on AIM provides a definite "draw". The TSX falls somewhere between the two extremes.

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.

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This article is part of a series: Click Focus on Technology, September 2006 - Technology Initial Public Offerings - Part 2 for the next article.
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