ARTICLE
24 January 2025

Going Public In Canada

GL
Goodmans LLP

Contributor

Goodmans is internationally recognized as one of Canada’s pre-eminent business law firms. Based in Toronto, the firm has market-leading expertise in M&A, corporate and transaction finance, private equity, real estate, tax, restructuring, litigation, intellectual property and other business-related specialties.
The firm has extensive experience assisting companies in going public, as well as market-leading expertise in a variety of specific industry sectors. Our team prides itself in being Canada's leading advisor to IPO issuers.
Canada Corporate/Commercial Law

About Goodmans IPO Practice

Goodmans is internationally recognized as one of Canada's top capital markets law firms.

The firm has extensive experience assisting companies in going public, as well as market-leading expertise in a variety of specific industry sectors. Our team prides itself in being Canada's leading advisor to IPO issuers.

Goodmans has played a central role in developing Canada's domestic and cross-border IPO market across a wide range of industries, from natural resources, energy and infrastructure to real estate, financials and technology.

We are well known for our focus, creativity and skill in IPO structuring and execution, and have been a key advisor on many of Canada's IPO "firsts", including the first domestic REIT, the first domestic business trust, the first cross-border REIT, the first cross-border business trust, the first cross-border income securities offering, the first cross-border high dividend common share offering, and the first US REIT IPO in the world by a non-U.S. entity.

We are consistently ranked among Canada's leading lawyers by the major legal guides, including Lexpert, American Lawyer, Chambers, Euromoney, Law Business Research, Practical Law Company and Best Lawyers.

For more information on how Goodmans LLP can help you, visit us at www.goodmans.ca or contact any member of our Capital Markets Group.

Introduction

Going Public in Canada was developed by Goodmans LLP to provide a practical overview of the initial public offering ("IPO") process. The information in this guide is limited to the laws and guidance applicable to the Province of Ontario, although similar laws and guidance generally apply to the other provinces and territories of Canada. This guide provides general information only and should not be relied on as legal advice.

An IPO can be a complex process that involves multiple decisions and alternatives at each stage which influence the conduct of the parties and shape the nature of the process. Careful consideration of the path to be taken, and preparation for the tasks to be undertaken at each stage, can significantly streamline the "going public" process.

This guide outlines the essential elements of the IPO process in Canada and answers key questions faced by issuers considering going public, including:

  • Why should an issuer consider going public?
  • What must be done in preparation for an IPO?
  • How does the going public process work?
  • Who are the key parties involved in an IPO process?
  • Where should an issuer go public (i.e., which jurisdiction(s) and on which exchange)?
  • When will the process be completed (i.e., typical IPO timeline)?
  • What are the principal ongoing disclosure and reporting obligations for public companies?

There are many different avenues to becoming a public company in Canada. This guide focuses on the most widely used and traditional method of going public: through a prospectus filing and stock exchange listing. This guide refers to "companies" for convenience, but issuers may take a variety of forms (e.g., trusts or limited partnerships in addition to corporations). This guide does not address requirements for investment funds.

The Decision to Go Public

Going public is an intensive and complex process that often involves significant changes to virtually every facet of the company's operations. Before proceeding with an IPO, the company should evaluate whether it is well-positioned to issue securities successfully to the public and seriously consider the implications of becoming a public company

Reasons to Go Public

Businesses and their owners can enjoy many potential benefits and opportunities by accessing the public capital markets in Canada. These advantages may include:

Access to Capital

One of the principal benefits of "going public" is the net cash proceeds of the offering, which may be used by the company to further its business objectives. This may include acquiring other businesses, research and development, adding to and/or modernizing facilities and assets, repaying debt and financing working capital requirements.

Liquidity for Existing Shareholders

Being public provides a company's shareholders with access to an active secondary market, enhancing the liquidity and value of their investment. At the time of the IPO, existing shareholders may have the opportunity to liquidate some, or all of their interest in the company. Additionally, the existence of a secondary market (or "aftermarket") for the company's securities post-IPO may provide a means for shareholders to liquidate their investment at a later time. In some cases, however, escrow and/or resale restrictions imposed by securities regulators and/or lock-up requirements imposed by the underwriters may limit an existing shareholder's ability to liquidate their holdings. See "Escrow and Resale Restrictions" and "Lock-Up Requirements and Escrow / Resale Restrictions".

Enhanced Future Financing Options

Once a public market for a company's securities is established, that company will generally have ready access to a broader range of financing alternatives, including additional equity issuances, convertible debt and rights offerings to existing shareholders and others. An expanded equity base may also improve the debt-to-equity ratio, permitting the company to raise additional debt, often on more favourable terms.

Improved Ability to Complete Mergers and Acquisitions

Subject to certain statutory restrictions, public companies enjoy the ability to issue liquid securities with a publicly quoted market value instead of paying a negotiated cash or share value in acquisitions. This may enhance their ability to complete strategic mergers and acquisitions. Further, vendors who wish to sell in exchange for securities to obtain a tax-free rollover, generally prefer to receive liquid securities.

Enhanced Corporate Image

A well-managed public offering can enhance a company's public image and visibility through press coverage and ongoing public disclosures. Public companies can enjoy broader corporate opportunities, greater ability to attract and maintain quality management and improved market awareness of their name and products or services. The company's enhanced public profile may also attract and facilitate dealings with customers, suppliers and other stakeholders who prefer to do business with established entities. Rigorous disclosure requirements applicable to public companies may also provide investors, customers and suppliers with more complete and reliable information compared to private companies.

Broader Employee Incentive Compensation Alternatives

A public market for a company's securities facilitates compensation of employees, management and directors through share-based compensation arrangements such as stock option plans, share purchase plans and long-term incentive plans by providing a clear measure of corporate growth and liquidity for incentive plan participants. In general, equity incentives of public companies are more attractive because the public market values shares independently, improving their marketability. Equity-based compensation aligns employee and shareholder interests and can increase a company's ability to attract and retain talent. A company preparing for an IPO may retain a compensation consultant to assist with the design and implementation of a "public company style" compensation plan that takes into account, among other things, current market practices and considerations and the company's various compensation objectives.

Other Considerations

Management and business owners must also consider the risks, drawbacks and ongoing obligations of going public. Though impacts can often be minimized through advanced planning, some of these include:

Loss of Confidentiality

Both the process of going public and subsequent rigorous ongoing continuous disclosure requirements lead to a loss of confidentiality. The company's prospectus and continuous disclosure documents will publish previously confidential information about the company, including its financial condition, competitive position and compensation paid to senior executives.

Loss of Control

Depending on the percentage of equity sold to the public, existing shareholders may risk losing control of their company. Existing shareholders may mitigate this by exchanging their current shareholdings into a new class of multiple-voting shares and offering a separate class of "restricted" shares with less than 50% of the voting power to the public. However, such structures may face resistance from institutional investors. These are addressed further under the heading "Preparing to Go Public – Reorganization of the Business".

If the post-IPO company has a broad shareholder base with no large shareholders, the company may also become susceptible to hostile take-over bids and proxy fights. Structural protections such as a shareholder rights plan can be implemented, but may face scrutiny, criticism and challenges from shareholders, proxy advisory firms and other corporate watchdogs.

Administrative Burden of Complying with Continuous Disclosure and Other Obligations

Following completion of the offering, management must devote a substantial amount of time to ongoing continuous disclosure and reporting obligations. In addition, procedural requirements and other limitations may be imposed in connection with certain transactions, such as relatedparty transactions, following a public offering.

Dealing with Ongoing Shareholder Expectations and Engagement

Many public investors focus on a company's short term financial performance because of the direct impact of current performance on the company's share price. Management is invariably influenced by this focus on "quarter-to-quarter" results, which may affect their ability to make decisions in the company's best interests and conflict with the company's long-term goals. From a corporate governance perspective, public companies, through their management and directors, are expected to engage directly with shareholders on an ongoing basis.

Initial and Ongoing Expenses

The upfront expenses of an initial public offering are significant (see "Expenses of an Initial Public Offering"). Additionally, ongoing costs of annual, quarterly and continuous disclosure reporting will lead to higher administrative costs, including professional fees for accounting and legal advice, as well as insurance and translation (if the securities are distributed in Québec), stock exchange fees, transfer agent fees and other expenses. Many companies also require additional staff to ensure compliance with their ongoing obligations, including additional accounting, internal audit and investor relations personnel.

Loss of Certain Tax Advantages

The decision to go public, like most significant business decisions, involves a number of tax considerations. There are certain tax advantages applicable to "Canadian-controlled private corporations" and "private corporations", such as the small business deduction, capital dividends and refundable taxes, that become unavailable after a company goes public.

Liability Regime

Securities and corporate legislation impose significant obligations, penalties and personal liability, including fines, on directors and officers who breach their fiduciary duties to the company. Investors have the right to sue a Canadian public company and its directors and officers for making misrepresentations about the company or failing to make required timely disclosure. These lawsuits may take the form of class action suits, which can be very costly to defend and distract management from running the business effectively. While directors and officers must fulfil their fiduciary duties, adherence to good corporate governance practices and policies, together with corporate indemnities and directors' and officers' liability insurance, can contribute significantly to mitigating the risks associated with serving as a director or officer of a public company.

Lock-Up Requirements and Escrow / Resale Restrictions

Underwriters typically require the company, its directors, officers and employees and significant shareholders (sometimes expanded to capture all shareholders) to agree to "lock-up" their shares for a certain period of time following closing of the IPO (usually 180 days but this time period may vary). Accordingly, such persons are prohibited from trading or monetizing the company's securities during the lock-up period without prior consent from the underwriters. The primary purpose of this lock-up mechanism is to avoid the negative optics and potential downward pressure on the company's share price that may result from the sale of securities by persons close to the company shortly following the offering.

Securities legislation also imposes certain restrictions on the ability of controlling shareholders to resell their shares and a restriction on all original shareholders from selling their shares for a period of time after the offering is completed. See "Escrow and Resale Restrictions".

When to Go Public

Timing is a critical factor in the success of any IPO. Poor timing may result in either a failed or delayed offering or a reduced price for the company's shares. The following are a number of factors to be considered in determining whether the time is right for a company to go public:

Size of the Company

To attract institutional investors and to provide for a liquid trading market after the company has gone public, the underwriters may insist that the company have a meaningful market value. In addition, some stock exchanges have minimum financial criteria for listing (see discussion below under "Canadian Stock Exchanges"). In some cases, the company may want to consider acquiring or merging with another company to achieve the necessary scale to go public (possibly using the proceeds of the IPO to complete the acquisition).

Financial Track Record

A company's recent financial performance generally has a significant impact on the success and pricing of the IPO. Generally, audited financial statements for the most recent three financial years, plus the most recently completed interim period are required in the prospectus, offering investors the opportunity to evaluate the financial health of the company.

Prevailing Market Conditions

If general prevailing market conditions are not favourable, a company could face the possibility of selling its shares at a lower price than desired, having a smaller than desired offering or aborting the offering altogether. The underwriters will play a critical role in assisting the company in determining the most favourable time for its public offering.

Canadian Stock Exchange

The two most well-known stock exchanges in Canada are the Toronto Stock Exchange ("TSX") and the TSX Venture Exchange ("TSX-V"), both owned and operated by TMX Group. As of November 2024, the TSX and TSX-V have a combined total market capitalization of over C$5 trillion.

The TSX is the senior exchange, with stricter listing requirements. The TSX-V is a market for venture capital issuers. The TSX-V is a tiered market, with the potential for issuers to graduate to the TSX. The TSX-V also operates TSX Sandbox, an initiative to give applicants that do not meet the TSX-V's traditional listing criteria the opportunity to participate in Canada's public company ecosystem.

A company's obligations are affected by the exchange on which its securities are listed, not only due to the differing requirements of the two exchanges (the TSX-V, given the nature of its smaller-cap issuer base, tends to exercise a greater oversight role) but also because regulatory requirements applicable to venture issuers are less stringent in certain respects, including the substance of and required time for making certain required disclosures, as well as certain governance requirements.

A company seeking to list on either exchange must meet specified minimum standards relating to financial performance and position, public distribution (shareholder base) and other matters. A company must file a listing application together with supporting information to demonstrate that the company can meet these minimum listing requirements and enter into a listing agreement with the TSX or TSX-V, as applicable, committing it to comply with ongoing exchange requirements. The application and supporting information typically includes:

  • personal information forms (completed by directors and officers and holders of 10% or more of the company's voting rights and disclosing personal details, including residential, employment and if applicable, litigation history);
  • a letter requesting conditional listing approval and providing other details, such as the company's requested ticker symbol (if not already reserved);
  • a copy of the preliminary prospectus;
  • stock option or equity incentive plan;
  • copies of material contracts; and
  • the appropriate listing fee.

The exchange also typically undertakes background searches on a company's officers and directors during the IPO.

Two other recognized stock exchanges on which issuers may wish to list in Canada are the Cboe Canada (formerly the NEO Exchange Inc.) ("Cboe") and the Canadian Securities Exchange ("CSE"). Cboe is a stock exchange for senior public companies and investment products that has been operating since 2015. The CSE is an entrepreneurial securities exchange that has been operating since 2003.

The following discussion regarding exchange listing requirements focuses on the TSX and TSX-V. Cboe's requirements are broadly similar to the TSX's requirements, while the CSE's requirements are generally less stringent than those of the TSX-V.

TSX Listing Requirements

For a listing on the TSX, the applicable minimum financial listing standards depend on two factors: (i) the category of the applicant company, and (ii) whether it is to be designated as an "exempt issuer" or a "non-exempt issuer."

Applicant companies are placed in one of three categories: Industrial (General), Mining, or Oil and Gas. For illustrative purposes, the listing standards presently applicable to Industrial (General) issuers (including technology issuers) on the TSX are set forth in the table attached as Appendix "A". Issuers designated as "exempt" are exempt from the requirements to give the stock exchange prior notice of material changes and to seek exchange approval for related party transactions which do not otherwise require approval.

Generally, a listed company must have at least one million freely tradable shares (shares held by non-insiders which are free of resale restrictions) with a minimum aggregate market value of C$4 million held by at least 300 public shareholders, each holding at least one "board lot." A "board lot" means 100 securities for securities that trade for C$1 or more; 500 securities if the securities trade between C$1 and 10 cents; or 1,000 securities if they trade under 10 cents. In addition, technology companies are required to have a minimum market value of at least C$50 million for the securities they intend to list.

The management of an applicant company is also an important factor in the consideration of a listing application. The stock exchange will consider the background and expertise of management relevant to the company's business and industry as well as adequate public company experience. TSX-listed companies are required to have at least two independent directors, a chief executive officer ("CEO"), a chief financial officer ("CFO") (who is not also the CEO) and a corporate secretary.

For non-exempt issuers, sponsorship by a Canadian registered dealer or affiliation with an established issuer on the TSX can play a significant role in determining the suitability of a company for listing.

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The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.

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