Canada: To Be Or Not To Be A Public Company

Last Updated: September 6 2000

By Neil J.F. Steenberg

Volume 3:3 July 2000

The following is a brief discussion of the going public process which is derived from a more extensive and specific case study. It is addressed specifically to emerging technology enterprises which form a major part of our business and technology practice. For management of these businesses and for the Gowlings team working with them, the going public process has been compelling, demanding (almost to the point of being all consuming) and always exciting.

The Issues

This paper will examine and analyse various issues and challenges common to the financing of technology-driven enterprises. These issues include,

  • the decision to "go public";
  • contrasting the two most common methods of going public - i.e., the reverse takeover ("RTO") and the fully marketed initial public offering ("IPO");;
  • preparation for the process; and ;
  • miscellaneous challenges facing the new public company.

Going Public - Not For The Faint Of Heart

A large proportion of the new and emerging technology companies with which we deal are ‘concept' enterprises owned and operated by one or more owner/entrepreneurs whose principal skills relate to creating or marketing their own technology. Only a few of these owner/entrepreneurs have had experience with public companies or the process of becoming one. On the other hand, they have been bombarded with media stories and, possibly, with proposals from enterprising promoters or investment dealers which they think might make them overnight billionaires through going public. As we all know, however, it takes months or even years of hard work and preparation to become an overnight success.

The challenge for professional advisors assisting these owner entrepreneurs with the decision to go public has 3 aspects:

  • assessing whether going public is appropriate for their venture at all;
  • assuring that they are ready to go public; and
  • educating them as to the process.

The decision as to whether or not to go public is usually based on many factors some of which may be personal to the owner/entrepreneur. Serious consideration must be given as to whether the technology business itself has sufficient growth prospects to sustain long term investor interest after the company has become publicly traded. The technology company should have the prospect of expansion into new and exciting product lines and new markets which if successful will provide revenue and profit growth which in turn will support higher share prices. Without this, investors will not buy the shares. When share values languish, it becomes difficult for the company to achieve many of the original objectives of going public. Development of a realistic and well-developed business plan is critical at this stage. Some of the factors to be considered include:

  1. Equity Vs. Debt Financing Conventional debt financing has been difficult to obtain for enterprises where there are few tangible assets and no cash flow for collateral and where the products or services being developed are frequently at the concept stage, unproven commercially and at times incomprehensible to traditional lenders. This has the effect of driving entrepreneurs towards the public equity markets. This situation appears to be changing, however, as the financial services industry adapts to service the New Economy.
  2. Liquidity Going public provides readily determinable market value for the owner/entrepreneur's stake in the enterprise and subject to securities law and escrow restrictions a means of cashing in some of such value. In early stage situations, however, many owner/entrepreneurs appear more interested in seeing their projects through to fulfilment.
  3. Public Forum In many instances, becoming a publicly traded company provides an enhanced public presence for an enterprise and access to a larger audience of potential investors and potential consumers of the enterprise's products and services. This in turn enables the enterprise to promote brand awareness and sales. The business environment for high technology enterprises is characterized by rapid change due to a constant stream of technological advances which receive a great deal of media attention. This climate can create a high level of volatility in the investing community based on perceptions as to whether the enterprise continues to be competitive and whether it will be capable of maintaining or accelerating its growth. The technology company's need to properly manage this level of visibility is acute since each step in the development of its business and the execution of its business strategy is exposed to public scrutiny and comment. More than once, the management of such companies have viewed themselves as living in a fish bowl.
  4. Employee Reward The recruitment and retention of skilled employees is one of the greatest challenges for the technology company especially in its early development stage. The demand for these workers is high and it is a fiercely competitive sellers' market. The financial means to pay high salaries and bonuses are often not adequate and the typical employee is looking to share in the upside growth of the business through a results-based reward system. Stock option plans, stock purchase plans and stock appreciation rights are essential to attract and motivate the technology company's work force. They are expected by the participants in this market. Without a public market for the company's shares neither the company nor the employees can readily determine the value of such incentive-driven compensation schemes. Without a public market the company cannot shift the cost of such plans on to the investing public and must itself provide liquidity for them.

The Process

Once the owner/entrepreneur has decided to take his or her enterprise into the domain of public companies the next question becomes choosing which of the two usual methods to be followed - the fully marketed IPO underwritten by one or more investment dealers or the RTO. For the purposes of this paper, a "reverse takeover" means a transaction or series of transactions whereby the owner/entrepreneur of a private, closely held enterprise transfers ownership of the enterprise to a public company for a significant equity position in the public company resulting in the acquisition of control of the public company by the owner/entrepreneur. The pre-existing shareholders of the public company retain a minority position in the ongoing company. The IPO involves the creation of a detailed marketing presentation and the preparation and filing of a preliminary prospectus. This is generally followed by extensive marketing which is stage managed by the underwriter and takes several weeks. The prospectus is then finalized, cleared through the regulators and receipted such that the shares are legally qualified for sale to the public. The shares are sold to retail and institutional investors with the goal of achieving a wide enough distribution to meet stock exchange listing requirements and to establish liquidity for the shares in the market place. The offering is usually completed within 6 weeks of final qualification of the shares.

The choice between IPO and RTO can be complex and should be made only after a thorough consideration of the relative advantages and disadvantages of both.

  1. Speed: Generally speaking, the RTO is a faster process. Typically the process can be completed within 2˝ to 3 months after the business deal with the public company target is struck. Within this time frame, a special shareholders meeting of the target company is convened to obtain required shareholder approval and a detailed management proxy circular containing prospectus level disclosure prepared and mailed to shareholders and filed with the regulators. In the case of the IPO, the underwriter selection process, prospectus drafting, marketing presentations and completion of the distribution generally takes 3 to 4 months;
  2. Cost: The RTO is frequently perceived as being much cheaper than the IPO because there are no underwriter's fees (usually 7% to 8% plus 10% compensation options); there are no marketing costs (all of which would be paid by the issuer in addition to underwriting fees); and printing and professional costs are significantly less. The hidden cost of the RTO is found in the size of the minority position retained by the former shareholders of the RTO target company. In one case, for example, shareholders of the RTO target retained 720,000 or 7.5% of the new public enterprise. Within 2 years, the benefit of 20/20 hindsight revealed the hidden cost of the RTO at share prices prevailing a short 2 years later to be in excess of $7.0 million;
  3. Size: Most Canadian investment dealers will not consider assuming the risk of an IPO unless the technology company is sufficiently advanced in its development to support a pre-money valuation which justifies a minimum size for the IPO. This minimum size for an IPO varies from between $10 and $30 million which should represent between 20% and 30% of the enterprise's issued shares after the IPO is complete. Many early stage technology companies cannot demonstrate the necessary valuations to fit within these parameters. Thresholds in the United States are perceived to be higher still. In these circumstances, the RTO may be the only option for some early stage technology companies to go public.
  4. Use Of Management Resources: Generally, an IPO consumes significantly more of management's time and resources due to the lengthy prospectus drafting, due diligence and marketing process involved.
  5. Need For Future Financing: A significant disadvantage of the RTO process is that after spending the time and money to go public through this process there is no new injection of capital for the new public enterprise unless a private placement is completed simultaneously. Companies in the highly competitive and rapidly changing technology industry require large amounts of capital to support the necessary research and development to stay competitive and continue to grow. Therefore, the technology company which has become publicly traded by way of an RTO will often find itself having to seek additional capital fairly soon after completion of the RTO. The existence of a widely distributed, public market for its shares, will assist the new public technology company to obtain required financing.
  6. Managing The Aftermarket: In many instances the newly created public technology company which has completed an RTO, faces a significant minority of its shareholders who are holding shares in what had been prior to the RTO, a failed business. These shareholders frequently want to cash out their investment as soon as they can thus exerting downward pressure on the company's stock price. In the case of an IPO, the new shareholders have invested specifically in the technology company after being educated by the prospectus and the underwriters and not in a predecessor business which may have operated in an entirely different sector (eg. mineral exploration). The challenge for the technology company is to quickly educate this group to persuade them to be active investors or to interest other potential investors to buy up the disaffected minority's shares.

Preparing For The Process

Having made the decision to go public and having decided as between an RTO and an IPO on how to get there, the technology enterprise needs to be fully prepared for the process. Some of this preparation needs to begin long before the going public process itself is launched. One of the more important early decisions is to retain proper advisors who can provide specific advice and expertise to prepare the company and its management team for the process. Such advice can be provided by traditional accounting and law firms, although many companies select a financial advisor with specific corporate finance expertise. Specific areas to be addressed during the preparation process include:

  1. Audited financial statements must be in existence for at least the most recently completed financial year and for the 2 previous financial years to meet the disclosure requirement of applicable securities law. These also evidence the fact that appropriate financial controls are in place.
  2. All appropriate legal protection for the technology company's intellectual property must be in place because these property rights are often mission critical and form the core of the company's assets and the basis of its value. This protection is achieved from the combination of patents, trademarks, trade secrets, copyrights, non-disclosure and confidentiality agreements which is appropriate in the specific circumstances of the technology company. It must be remembered in this regard that full, true and plain disclosure of all material facts about the enterprise's business, assets and financial situation must be made in the course of the going public process which could expose intellectual property assets to risks of appropriation by competitors in the absence of available legal protections.
  3. Appropriate management resources and human capital must be in place to meet the time demands not only of the going public process (especially in the case of an IPO) but also of the continuous and timely disclosure requirement to which the company will become subject. Investor relations is an essential management responsibility that is virtually non-existent for the non-public company. Many emerging technology companies initially underestimate the magnitude of these management responsibilities but have since been successful in addressing them through recruiting in-house legal counsel and investor relations professionals.
  4. Another aspect of human capital to be addressed is to ensure that all employees and independent contractors with access to confidential and proprietary information be bound by proper non-disclosure agreements. In addition, employees and independent contractors involved in the research and development of the company's technology or the creation of new intellectual property assets must assign all rights they may have to such intellectual property to the company in writing.
  5. In the case of an IPO, in particular, the technology company should spend sufficient time to select a lead underwriter to market the company's offering. Several underwriters should be invited to make presentations to the company and its advisers as to why they should be selected. The relationship with an underwriter continues well after the completion of the offering and is very important in providing market support and ongoing research coverage.

Finally, the prospective public company should have in place and be following a comprehensive strategic plan for the development of its business. This ensures that future public disclosures may be placed in the appropriate context. It also underscores the company's ongoing growth prospects.

All of these preparatory steps will assist greatly in the due diligence review that must be conducted prior to going public.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Events from this Firm
8 Nov 2016, Seminar, Ottawa, Canada

The prospect of an internal investigation raises many thorny issues. This presentation will canvass some of the potential triggering events, and discuss how to structure an investigation, retain forensic assistance and manage the inevitable ethical issues that will arise.

22 Nov 2016, Seminar, Ottawa, Canada

From the boardroom to the shop floor, effective organizations recognize the value of having a diverse workplace. This presentation will explore effective strategies to promote diversity, defeat bias and encourage a broader community outlook.

7 Dec 2016, Seminar, Ottawa, Canada

Staying local but going global presents its challenges. Gowling WLG lawyers offer an international roundtable on doing business in the U.K., France, Germany, China and Russia. This three-hour session will videoconference in lawyers from around the world to discuss business and intellectual property hurdles.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.