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Going Public: 3 IPO Alternatives

Published:

April 20, 2022

Author(s):

• Julie Robinson

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If you’ve reached the stage in your financing lifecycle where you’re ready to take your company public, you might think you’ve only got one route: an initial public offering (IPO). An IPO is the traditional method of going public, and it’s a good route for an established, successful private company in need of additional cash flow – but it often isn’t ideal for a small or relatively new company, or one that’s fully financed.

An IPO is where a private company offers its equity securities to the public for the first time. In Canada, the equity securities are issued under a prospectus filed with the applicable securities regulatory authorities. Theoretically, the IPO process seems relatively straightforward:

• The company wishing to complete the IPO engages an underwriter(s) to market the securities to the public.
• The company, working with its underwriters, files a preliminary prospectus with securities regulators, and also files a listing application with a stock exchange and meets its minimum listing requirements.
• The underwriter uses the marketing process, often conducted through “road shows”, and its own due diligence on the company to finalize the terms of the offering (price, size, and so on), following which the company files a final, long form prospectus.
• Upon closing of the offering, the company’s securities become listed for trading on the exchange.

In practice, however, an IPO is typically an expensive process, reducing the proceeds the company realizes from the offering.

The cost/benefit trade-offs of an IPO means it’s not a good fit for every company seeking to go public. But you do have options. Here’s a look at three alternative routes to the traditional IPO to go public.

1. Non-Offering Prospectus (NOP)

A non-offering prospectus can be an attractive option where the company has sufficient funds to carry out its business plan for a year or more after going public, and already has a capital structure that meets the listing requirements of the exchange on which it intends to list.

Process. An NOP is a direct listing that involves a company going public and being listed on an exchange, but without selling securities through an underwriter. Like a prospectus in an IPO, an NOP requires all the information and financial statements for a long form prospectus and sign-off by both the securities regulators and the applicable stock exchange.

Pros. The key advantages of going public via an NOP are:

• Management Focus. Without an offering, the company and its management team can devote less time to marketing and selling to potential investors, and more time to growing its business.

• Fewer Contingencies. It can be less risky than other alternative routes to go public that are contingent on obtaining shareholder approval, such as a reverse takeover (RTO) or a transaction with a special purpose acquisition company (SPAC) or capital pool company (CPC).

Cons. The key disadvantages of going public via an NOP include:

• Regulatory Review. As in an IPO, the securities regulator will scrutinize the prospectus while the intended stock exchange will review the company against its listing requirements, so the company can expect to budget additional time and cost to satisfy two sets of regulators.

• No Incremental Cash. Although shareholders will have the benefit of increased liquidity for their shares once the company is listed, the NOP will not directly generate additional cash for the company, leaving it to cover the costs of going public from its existing funds.

2. Special Purpose Acquisition Companies (SPAC) & Capital Pool Companies (CPC)

Several stock exchanges have programs that permit a “shell” company (a SPAC or CPC) with no business or assets formed by a sponsor group, usually comprised of a team of high-profile investors and industry leaders, to complete an IPO and become listed on the exchange. The sole purpose of both a SPAC and a CPC is to raise investment capital through its IPO and complete a transaction acquiring an existing business (the “target”), indirectly taking that target public. While SPACs and CPCs are similar, there are key differences. In particular, SPACs are much larger than CPCs and therefore involve more stringent investor protections in the form of regulatory requirements.

Process. Both SPACs and CPCs involve a two-step process:

• IPO. The SPAC or CPC undertakes an IPO, modified to meet the relevant stock exchange’s SPAC or CPC program requirements, including a minimum amount that must be raised in the IPO.

• Qualifying Acquisition. After it’s listed, the SPAC or CPC uses its pool of cash to identify and review assets or businesses with a view to completing a qualifying acquisition of a target before the deadline set by the exchange.

Once the SPAC or CPC has completed its qualifying acquisition (which must meet the exchange’s listing requirements), the exchange treats it as a regular listed company.

Pros. The key advantages of going public through a SPAC or CPC are:

• Clean History. A SPAC or CPC transaction provides access to a clean shell with no operational history and no potential liabilities associated with past operational activities.

• Expertise. SPACs and CPCs typically have an existing management team (the sponsors) with valuable industry expertise and connections to which the target will gain access.

• Time & Cost. A SPAC or CPC is often a less expensive and more efficient process to go public than an IPO, while giving the target access to funds the SPAC or CPC previously raised.

Cons. The disadvantages of going public through a SPAC or CPC include:

• Sponsor Expectations. The SPAC or CPC’s original sponsor team and the target’s owners could have different visions for the target business following the qualifying acquisition, causing conflict that can trickle down through the organization.

• Investor Loyalty. Many SPAC and CPC investors invest based on the perceived strength of the sponsor team, long before the ultimate target is identified. As a result, the target might not enjoy long-term loyalty from those investors once the qualifying acquisition is complete, increasing the target’s investor relations costs.

3. Reverse Takeover (RTO) 

A reverse takeover is another option to bypass the traditional IPO process. An RTO is most attractive for companies that don’t have an immediate need for significant additional capital.

Process. Through an RTO, a private company goes public by being acquired by a “dormant” shell company (a public company that no longer conducts business and holds no or few assets) that is usually already listed on a stock exchange. There are different transaction structures used to achieve an RTO. Typically, however, the private company becomes a wholly-owned subsidiary of the public company and the private company’s shareholders receive shares of the public company, resulting in a change of control of the public company. Following the RTO, the public company remains listed on its stock exchange or, if not listed before the RTO, applies to become listed in conjunction with the closing of the RTO.

Pros. Some of the key advantages of going public via an RTO include:

• Target Autonomy. The management team of the shell company, unlike the sponsor team of a SPAC or CPC, may have limited industry expertise and is therefore unlikely to expect meaningful participation in the company’s operations post-RTO.

• Exchange Review. The disclosure document for the RTO transaction isn’t subject to review by securities regulators in the same way as a prospectus, so the company can focus its efforts on the stock exchange’s review.

Cons. The key disadvantages of going public via an RTO include:

• Inherited Liabilities. RTOs are potentially more risky than SPACs and CPCs (or direct going-public avenues such as IPOs or NOPs) because the dormant shell company used in an RTO could have covert debt or other obligations. Consequently, an essential element of the RTO process is conducting comprehensive due diligence, which entails both time and expense.
• Capital. While it’s customary to raise funds through a private placement financing in connection with an RTO, the amount raised is usually much less than that raised in an IPO.

Please contact your McInnes Cooper lawyer or any member of our Emerging & High Growth Companies Team @ McInnes Cooper to discuss the best route to take your company public.

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