Cleantech small and medium-sized enterprises (SMEs) are spurring the shift to clean technology, with a goal of achieving net-zero emissions in Canada within the next 30 years. As such, they are looking to Canada's capital markets to grow their businesses and expand operations.
This shift, coupled with government initiatives and a surge of investor demand for sustainable technology, will likely create a wave of successful cleantech SMEs looking to go public in the near future. In this article, we discuss five key considerations for cleantech SMEs looking to go public in Canada.
1. Is a go public transaction right for your company?
Before starting on a go public path, it's important for any cleantech company to think about the advantages and the disadvantages of such a profound decision. Taking a company public has many advantages, such as:
- Easier access to capital;
- Providing a liquidity event for founders and initial shareholders;
- Providing a method of valuation for the company through the price of the company's shares on the market; and
- Providing an ability to use equity as compensation for management, and other transactions.
There are, however, some disadvantages too, namely:
- The initial and ongoing costs of taking a company public can be significant;
- There can be decreased flexibility for the founders, as they will have to report to more shareholders and comply with more regulations applicable to publicly-listed companies;
- There will be more pressure on management regarding performance and profits; and
- There is potential for civil liability for directors and officers if there is misrepresentation in any of the public disclosure documents of the company.
2. Which go public path is right for your company?
A cleantech company can look at the following paths to getting listed on a stock exchange:
- Completing an initial public offering ("IPO");
- Going public through filing a non-offering prospectus ("NOP");
- Completing a reverse takeover transaction ("RTO"); or
- Completing a transaction with a Capital Pool Company ("CPC") which is vehicle offered by the TSX Venture Exchange ("TSXV") or a Special Purpose Acquisition Corporation ("SPAC") which is a vehicle offered by the Toronto Stock Exchange ("TSX").
It's important to remember that a go public transaction can take three to six months to complete. The more prepared a company is, the smoother this process will likely be. To go public through any of the above paths, a cleantech company will have to prepare and file a listing application with its desired stock exchange, and demonstrate that it meets the initial listing requirements specific to a technology company (discussed below) for that particular stock exchange.
As part of the listing application, a prospectus containing detailed information about the company, its business and the securities being offered (if any) will also need to be filed. Preparing this document and getting it through the regulatory review by the applicable Canadian securities regulators can take a long time. This process will require assistance from the right advisors, including lawyers, accountants and, if the company is looking to complete an IPO, underwriters/investment bankers.
When completing a go public transaction through an IPO or an NOP, the prospectus will also have to be filed with, reviewed and cleared by the securities regulators in the relevant provincial/territorial jurisdictions. This step is required as the company seeking to go public is becoming a reporting issuer in these jurisdictions for the first time.
An IPO also involves marketing and selling the securities, which is done through underwriters or agents (the "Fund Raising Step"). The underwriters also conduct due diligence on the company, providing an extra layer of assurance for the investors. The Fund Raising Step also allows the company to ensure it has sufficient public distribution (discussed below) to meet the requirements of its desired stock exchange. The NOP path does not include the Fund Raising Step, and public distribution requirements will have to be addressed prior to filing a prospectus with the applicable securities regulators.
In an RTO, typically there is a publicly listed shell company (i.e. one that has previously completed an IPO or filed an NOP) which acquires the cleantech company, and as a result, the business of the cleantech company becomes its primary concern. A CPC or a SPAC is a shell company without a business that has completed an IPO and is listed on the TSXV or the TSX, respectively. Its sole purpose is to complete a qualifying transaction (i.e. an RTO) with a business looking to go public.
3. Initial listing requirements applicable to cleantech companies
Each stock exchange has its own initial listing requirements. For a cleantech company seeking a listing on the TSX or TSXV, these requirements are the same as technology companies. These requirements include, among others:
- Having a certain amount of assets or revenue, or a business plan showing likelihood of revenue in the near term;
- Having sufficient working capital and financial resources (funds for 12 to 18 months to be able to continue the business);
- History of operations or validation of business;
- Management and a board of directors that have relevant experience; and
- Meeting certain distribution, market capitalization and public float threshold requirements.
Distribution, market capitalization and public float requirements typically require the company to have a certain number of public shareholders that each hold a board lot (which is a number defined in relation to the issue price of the shares). As a group, the public shareholders hold at least a previously-specified percentage of the company's shares.
4. What financial statements are required?
Generally speaking, a cleantech company will require the following financial statements as part of its listing application:
- Audited annual financial statements for the past three years; and
- Reviewed (by auditors) interim financial statements for its last interim period.
In addition, the company will need to include annual and interim management's discussion and analysis (also prescribed by the Canadian securities regulators), containing information regarding the operations and financial results of the company. Audits and review engagements can take a long time, especially when they are being done for the first time. It is therefore important to get auditors involved in the process as soon as possible.
5. Plan for corporate governance
Before going public, a cleantech company should also consider the primary corporate governance matters applicable to public companies. All members of the board of directors and management will have to go through a background check. It is also a listing requirement of all stock exchanges that management and the board have adequate experience and technical expertise relevant to the listed company's industry (in this case, cleantech), as well as public company experience. Finally, a publicly-listed company requires:
- At least a CEO, a CFO and a corporate secretary (two of which can be held by one person); and
- A board of directors that includes at least two or three (depending on the stock exchange) independent directors that are financially literate to serve on its audit committee.