Your Guide to Going Public
What is Going Public?
Going public generally means raising money for a business (an “issuer”) by selling shares of that issuer to the general public and becoming a reporting issuer. Many issuers decide to go public when they need additional capital for growth and they don’t have sufficient financing available from the personal resources of the principals, their family and business associates or from financial institutions. Issuers that become reporting issuers may also seek a listing on a stock exchange to provide liquidity for their existing shareholders.
Canadian and foreign issuers have made British Columbia an important venture capital market. The TSX Venture Exchange (TSXV) and the Canadian Securities Exchange (CSE) are the two primary venture exchanges in Canada and they serve as the primary listing venues for many venture issuers.
The Decision to Go Public
Before deciding to go public, an issuer should obtain expert financial and legal advice in order to determine whether it is at an appropriate stage of development to benefit from public financing. When an issuer goes public, it becomes a reporting issuer. As discussed later, a reporting issuer assumes costs and obligations that may outweigh the advantages of going public. The decision and the timing to go public are important strategic considerations that should be made in the context of a well-developed business plan.
The Role of the BC Securities Commission
The mandate of the BCSC is to regulate securities markets in the province. It fulfills this mandate by:
- administering the Securities Act, Rules and related legislation and policies
- ensuring investors have timely and complete information to help them make informed investment decisions
- investigating and taking appropriate action against individuals and issuers involved in fraud, misconduct and market manipulation, and
- providing an efficient structure for the public formation of capital in the province.
The Commission Proper is responsible for the establishment of policy under the Securities Act and Securities Rules, and acts as an administrative tribunal to adjudicate enforcement cases brought forward by staff and review regulatory decisions made by BCSC staff, exchanges or in certain cases, self-regulatory organizations.
The executive director, as chief administrative officer, is responsible for the day-to-day administration of securities legislation and policies.
Requirements of the Securities Act
Any issuer selling securities, including an issuer going public, must meet requirements set out in the Securities Act, the Securities Regulations, the Securities Rules and all relevant national, multilateral or local instruments. The issuer must also comply with the corporate legislation in the jurisdiction in which it is incorporated or other relevant legislation if it is a partnership or a business trust.
Many of these requirements are of a legal or technical nature. As a result, an issuer may wish to consult a lawyer and an accountant who practices in the securities area. These professionals can advise on the application of the legislation and policies to the issuer’s particular circumstances.
If the issuer plans to sell securities in other provinces or countries, the issuer must also follow the laws of those jurisdictions. Those laws may be considerably different from those in British Columbia.
Types of Issuers
There are two basic types of issuers: private issuers and reporting issuers. The latter are commonly referred to as public companies.
A private issuer is one that has not become a reporting issuer.
A reporting issuer is most commonly one that has issued securities under a prospectus in British Columbia or has otherwise become listed on a recognized stock exchange.
Both private and reporting issuers must comply with certain statutory reporting requirements. Requirements that apply to a reporting issuer are much more extensive and ensure that shareholders and interested investors have timely and relevant information on which to base investment decisions. Some of these requirements are described later.
The Process of Going Public
Once an issuer makes a decision to become a reporting issuer and to go public, the issuer should retain a lawyer specializing in securities law. The lawyer can help the issuer comply with the applicable statutes, regulations and policies.
There are various ways that an issuer can become a reporting issuer and go public including:
- an initial public offering via a prospectus
- a reverse-takeover transaction involving an existing public issuer
- a direct listing on a recognized stock exchange
- others, such as an arrangement with an existing public company, a non-offering prospectus or a qualifying transaction with a capital pool company listed on the TSXV
For simplicity, we will focus on an issuer considering becoming a reporting issuer and going public through an initial public offering via a prospectus.
The issuer will work with its lawyer to prepare a prospectus, which is a detailed document that accompanies a public offering of securities. The prospectus must describe the issuer, its business, capitalization, future plans and how proceeds from the sale of shares under the prospectus will be spent. It must also include historical financial statements of the issuer.
Each prospectus is an individually written, finely-tailored document. It must provide full, true and plain disclosure of all materials facts relating to the securities to be issued, and it must comply with all relevant requirements.
The lawyer prepares the prospectus based on information provided by the issuer and its advisors. For example:
- accountants provide audit reports, which an issuer attaches to its financial statements
- underwriters or agents advise on the structuring of the offering as well as sell shares under the prospectus. They are also required to make certain inquiries about the issuer, a process known as due diligence, and sign the prospectus.
- for mining issuers, engineers or geologists prepare a technical report, which assesses the issuer's mineral properties
Once completed, the issuer (usually through its legal counsel) electronically files the preliminary prospectus, supporting documents and applicable fees with the BCSC. When all the required documents are received, BCSC staff issue a preliminary receipt, which allows the issuer and its underwriters to solicit expressions of interest from potential investors.
After a thorough examination of the filed material, BCSC staff send a letter to the issuer commenting on the disclosure in the preliminary prospectus. Once all comments have been dealt with, the issuer electronically files a final prospectus and BCSC staff issue a receipt for it. It should be noted, however, that the executive director of the BCSC may refuse to issue a receipt for a prospectus if they consider the proposed offering to be prejudicial to the public interest.
With a final receipt in hand, the issuer becomes a reporting issuer, is considered a public company and may begin selling shares under the prospectus. As noted earlier, selling is generally handled by underwriters or agents. They have the necessary knowledge, experience and sales force to ensure a successful offering. Underwriters or agents are typically paid for their services by a commission on the shares sold. They may also receive options to acquire shares of the issuer at a future time.
Continuous Disclosure by Reporting Issuers
Being a reporting issuer carries a statutory obligation to maintain an accurate and up-to-date profile of the company on the public record. This concept is known as "continuous disclosure". Continuous disclosure involves keeping shareholders fully informed of the company's affairs, issuing news releases on a timely basis and making all required filings with the BCSC.
Reporting issuers must file the following materials:
- audited annual and unaudited interim financial statements
- quarterly "management discussion and analysis"
- insider reports (filed by insiders of the reporting issuer)
- information circulars and other material distributed in connection with a meeting of shareholders
- takeover bid materials
- reports of material changes in the affairs of the issuer
Details concerning the format and timing of the various reporting and filing requirements are set out in the relevant national, multilateral and local instruments.
Duties of Directors & Officers
Directors and officers have certain duties and are responsible to shareholders, employees, creditors, regulatory authorities and the general public. They must be honest, diligent, prudent and act in the best interests of the company. Directors and officers must avoid conflicts of interest with the company and, should a conflict arise, act in accordance with the requirements of the corporate legislation in the jurisdiction in which the issuer is incorporated.
Directors and officers may be held legally responsible for certain activities of the company even if they did not participate in, or have knowledge of, those activities. Directors who are not officers of the company or involved in the company's daily affairs are not relieved of those responsibilities. After directors and officers resign, they remain accountable for activities which took place during their term of office.
Simon Fraser University offers a course on organizing and managing a public company. The course includes information on directors' responsibilities.
Listing on a Stock Exchange
A reporting issuer may become listed on a stock exchange once it has received a receipt for its prospectus and met the minimum listing requirements of the exchange.
If an issuer intends to list on a stock exchange at the same time it becomes a reporting issuer, the issuer will need to obtain conditional listing approval from the exchange before the BCSC issues a final receipt for the issuer’s prospectus. The issuer’s shares will be listed for trading once the exchange's minimum listing requirements are satisfied.
Both the BCSC and exchanges have imposed certain requirements that must be met before a listing application will be accepted. An issuer should review all applicable legislation, securities commission policies and the bylaws, rules and policies of the stock exchange on which it intends to list.
The Regulatory Framework
The following is a summary of rules relating to reporting issuers in British Columbia:
- The Securities Act, Securities Regulation, Securities Rules and instruments regulate trading in securities within BC.
- National Instruments and Companion Policies are largely harmonized national rules and policies that apply to all areas of securities law including public offerings and continuous disclosure.
- Notices are issued to provide general information on Securities Commission activities and more detailed information on areas of current concern.
- The Business Corporations Act sets out the procedure for incorporating a company or registering an extra provincial company in British Columbia and the requirements that must be met by the company on an ongoing basis. More information can be obtained from the Registrar of Companies in Victoria; phone (250) 387-7848 or write to 940 Blanshard Street, Victoria, British Columbia V8W 3E6.
- Common law is the body of law arising from court decisions rather than legislation. Common law contains interpretations of such terms as "security" and "public" and sets out standards of conduct for directors and officers. Those involved in the securities filed should develop an understanding of applicable common law; the assistance of a lawyer is usually required.
- Stock exchange bylaws, rules and policies apply to all issuers listed on that stock exchange. Inquiries concerning venture market rules can be directed to the TSX Venture Exchange or the Canadian Securities Exchange