The ins and outs of going public

For junior miners looking to go public, TMX Group’s (X-T) presentation on going public in Toronto in November offered some helpful advice.

The afternoon’s discussion was carried by six capital market experts who all agreed that one of the first things a company considering going public should dwell on is if they really want to go public.

“It’s like having a baby,” Paul De Luca, an associate with Bennett Jones, said of going public. “There’s no going back. Often, it’s more expensive to go back to private than it is to go public in the first place.”

If an executive team is serious about listing, they have to be clear on how their management team will invoke the confidence of the investment community.

To gain that confidence, the team will have to draw up a cohesive financial plan that matches up with the current state of the economy. Additionally, they need to ensure that the plan is understandable.

“You should think about communication,” Mario Di Pietro, an executive director at CIBC, said. “You have to sit with the management team and think about where they want to be and how to communicate that vision to shareholders.”

Once a decision to list is made, timing the event is crucial.

The panel agreed that the best time is when a capital market opportunity aligns itself with the business momentum of a given company. If revenue growth is good and the company is a leader in a given market; all that is left is for the overall market to be favouring the company’s particular sector.

Such capital market opportunities are considered “micro windows” which may open for only a brief period.

The secret, the panel said, is to make sure your company is prepared for such openings, and the best way to do that is to operate like a publicly run company while you are still private.

So the decision is made, and the window is deemed to be open. What exchange should a company choose?

“If your business is worth $500 million or less, then the TSX is perfect. Getting access to the Nasdaq is more costly and more intense than the TSX,” Di Pietro said.

That intensity has to do with onerous regulations that are required in the U.S. where it can take six months to clear registration. For the TSX and the Venture exchange the entire process, from start to finish can take as little as three months.

As for overseas, panel member Simion Candrea, an associate with Jennings Capital, cautioned about listing on London’s Alternative Investment Market. Candrea said while the listing process in London is relatively hassle-free, he has seen cases where newly listed resource companies appear on the board with good support only to have liquidity evaporate shortly thereafter.

For resource companies, such risk is minimized in Toronto, which is a global leader in resource equity research and investment.

Another advantage to the Toronto Stock Exchange is its proximity to markets like New York and Boston.

Indeed the TSX’s reputation for resource stocks has drawn in a considerable amount of foreign dollars, with roughly half of its trading action coming from outside of Canada. The U.S. ranks no. 1 on the list of foreign investors, followed by the U.K. and China.

If the decision is made that Toronto is indeed the place to list, then the key requirement needed is three years of financial statements. That’s provided that your firm has been in operation for three or more years — if it hasn’t, then a company would provide whatever audited financial statements it has available.

Of course a dual listing is also a possibility. Di Pietro remarks that the strategy makes more sense for a company with a market cap over $500 million. The benefit in such a scenario is that the Canadian market could absorb some volatility and stabilize the share price.

But what about all those juniors for whom a $500-million market cap is still many years away? While a dual listing may be out of the question, which is the best exchange, the TSX “big board” or the TSX Venture?

The panel said that for companies with a market cap of $50 million and under, the Venture is the place to be.

One of the advantages of the Venture is that it is cheaper thanks to its not having the same rigid corporate governance requirements that the big board has. For example, the big board demands a minimum number of three independent members of the audit committees while the Venture exchange doesn’t.

The Venture also has less legal requirements and gives companies more time to file quarterly and annual reports.

It all adds up to the TSX being roughly one and a half to two times more costly than the Venture exchange.

That said, just how much should a company looking to list on the TSX Venture Exchange expect to shell out?

While costs are specific to each firm, a general range of cost for listing on the Venture exchange is as follows: $7,500-$40,000 for the initial listing fee; $5,000-$90,000 in annual sustaining fees; $75,000- $500,000 in accounting and audit fees; $75,000 and up for legal fees; and up to 12% of the value of the initial public offering (IPO) in underwriter commission fees.

Other fees that can come into play but are often not considered in the early planning stages include French translations, geological reports, printing costs, valuation reports, director and officer liability insurance, investor relations costs and securities commission fees.

There are other methods for getting a company listed, however. One of the more popular ones is a reverse takeover of a shell company.

The panel’s consensus was that while a reverse takeover can be a quicker way to get listed, it also comes with its own unique challenges that shouldn’t be overlooked.

With a reverse takeover, the company still needs to issue a prospectus, which is costly and time consuming. Other factors to be considered are negotiations with the current management of the shell company, and any liabilities that that the shell company is trying to hide, but would be inherited by the acquirer.

Also the possibility of losing original shareholders should be accounted for.

Another item on the mind of any management team looking to go public is how the pricing of the company’s stock will be done.

The panel reminded the audience that with an IPO there will generally be a discount to the firm’s value because it doesn’t yet have a trading record.

But while the bank will advise management on what it believes to be the right price, at the end of the day it is management that has the final say on pricing.

The panel went on to highlight some other keys to having a successful IPO.

Di Pietro recommended that companies keep options held by management to below 15% of all outstanding shares. If the number is higher than that, the market will discount the firm’s share price because of too much overhang. And while 15% is the cap, Di Pietro suggested that the number should be below 10%.

If a company has options that are greater than 15%, Di Pietro said encouraging and even helping people to exercise their options if they are in the money.

Another tip was for companies already listed that are looking to broaden their shareholder base.

The simple answer is to get analyst coverage, but how does a company go about doing it?

According to the panel, much of it has to do with who is involved with a company’s IPO.

Generally the underwriting of an IPO will be done by two firms, a lead and a co-lead. But beneath those two firms there should be a syndicate of firms partaking, whose role it is to offer market support.

If the offering is in the $50-million range, there should be about five dealers in the syndicate. If it is a large offering, in the upwards of a billion dollars, then a firm should have a dozen or so in the syndicate.

Each member of the syndicate will have research departments and now, because they are part of the initial offering, they will have an incentive to follow a company’s story
and see if they deem it is worth covering.

One last word of advice came from Di Pietro, who said a company considering listing has to make sure there are enough competent people beneath the CEO and CFO to run the company for the three months that it takes to go public.

“Because the CEO and CFO will have no time,” he said.