The Initial Public Offerings Law Review: Canada
For domestic and foreign companies that are considering going public, Canada offers numerous benefits, including one of the world's most resilient financial systems and largest equity capital markets, a vibrant institutional and retail investor base with a strong investment culture, a modern securities regulatory framework and stock exchanges focused on serving both emerging and well-established issuers.
Despite the challenging conditions resulting from the covid-19 pandemic, in 2020 Canada experienced one of its biggest years for initial public offerings (IPOs) since 2014, with issuers raising more than C$6 billion in 17 IPOs exceeding C$25 million in size. In the first half of 2021, 36 IPOs exceeding C$25 million and with aggregate proceeds exceeding C$7 billion were announced (versus four IPOs announced in each of the first half of 2019 and first half of 2020).
Many companies that go public in Canada list their securities on one of the country's two principal exchanges: the Toronto Stock Exchange (TSX) or the TSX Venture Exchange (TSXV). A company can obtain a stock exchange listing via IPO, a reverse takeover (i.e., an acquisition of a listed company) or a direct listing (e.g., where it is already listed on another exchange). A company can also obtain a listing through the TSXV's capital pool company programme or the TSX's special purpose acquisition corporation programme. This chapter focuses primarily on IPOs, as well as options for foreign companies interested in a dual listing on a Canadian exchange.
To carry out an IPO in Canada, a company must file a prospectus and other documents with the securities regulator in each province and territory where it wishes to distribute the offered securities. In general, a company planning an IPO will also apply to list its securities on a stock exchange.
Although there is no national securities regulatory authority in Canada, the 10 provincial and three territorial regulators work together through the Canadian Securities Administrators (CSA) to coordinate and harmonise many requirements and regulatory processes. CSA members have also developed national electronic filing systems2 and often coordinate compliance and enforcement activities.
Most securities commissions in Canada operate under a passport system, so compliance with the principal regulator's rules and decisions constitutes deemed compliance with the requirements of all other participating jurisdictions. Ontario, however, does not participate in the passport regime. If a securities commission outside Ontario is the principal regulator, and the prospectus has also been filed in Ontario, the principal regulator will coordinate its review with that of the Ontario Securities Commission (OSC), and the company may have to deal separately with two securities commissions. (This usually does not result in delays or substantive issues.)
i Main stock exchanges
TMX Group Limited (TMX) operates the TSX and TSXV. The TSX gives companies with strong performance track records and management teams with experience in public markets access to a dynamic market operated by a leading global stock exchange. The TSX also operates TSX Sandbox, which is a programme to help new applicants that have high-growth potential but that do not meet traditional listing criteria.
The TSXV is one of the world's leading public venture capital markets for emerging and development-stage companies. The TSXV has a flexible, two-tiered system with tailored listing and corporate governance requirements for smaller-cap companies, which are usually seeking to raise between C$2 million and C$20 million.
More than 225 foreign companies are listed on either the TSX or TSXV, and more than 280 companies are dual-listed on either the TSX or TSXV, as well as an international exchange. The TSX and TSXV are particularly attractive to companies in the mining, energy and financial services sectors. Increasingly, they are also the market choice globally for small to mid-cap companies in the technology, life sciences, and cleantech or renewable energy sectors.
The Canadian Securities Exchange (CSE) and the NEO Exchange (NEO) also offer listings. The CSE's roster of emerging companies operates in a wide range of industries, including mining, oil and gas, technology, life sciences, cannabis, psychedelics and plant protein. NEO focuses on senior public companies and investment products.
The remainder of this section focuses on the listing requirements and process for TSX and TSXV applicants – Canada's two primary listing venues.
ii Overview of listing requirements
A company seeking to list on either the TSX or TSXV must submit a listing application to demonstrate that it meets specified minimum financial, distribution and other requirements. It must also enter into a listing agreement with the relevant exchange, committing it to comply with the exchange's requirements on an ongoing basis.
The exchanges have original listing requirements for companies depending on their sector, including mineral exploration and mining, oil and gas, industrial and general, research and development, technology, and investment funds and structured products. Most companies are further divided into two tiers, based on their development stage, historical financial performance, and financial resources. More established companies are referred to as exempt (TSX) or Tier 1 (TSXV), and less established companies are referred to as non-exempt (TSX) or Tier 2 (TSXV).
Companies that apply to the TSX under the criteria for non-exempt issuers must generally be sponsored by a participating organisation (i.e., a member organisation that has been granted access to the TSX's trading systems), which will conduct a due diligence review of the applicant to ensure it meets the listing requirements and provide written comments to the TSX as part of the application process. The TSX may require certain issuers applying to list under the criteria for exempt issuers to have sponsorship as well. Like the TSX, the TSXV may require applicant companies to be sponsored.
In deciding whether to accept an original listing application, the relevant exchange will evaluate a company based on criteria relating to factors such as:
- the adequacy of the company's working capital and financial resources to carry out its work programme or business plan;
- its net tangible assets, revenue or availability of arm's-length financing;
- whether the company has a significant interest in the business or primary asset used to carry on its business;
- its history of operations; and
- whether the company will have, post-IPO, an adequate market capitalisation with a sufficient number of public shareholders.
Resource sector issuers are generally expected to provide a geological or technical report regarding their activities (or, for TSXV applicants, recommendation of the company's work programme).
Since the TSXV is generally made up of emerging companies, its listing requirements are aimed more towards management experience than a company's products and services. Companies that list initially on the TSXV can graduate to the TSX once they meet the TSX's listing requirements, and benefit from a streamlined application process and reduced listing fees.
iii Overview of law and regulations
Canadian securities legislation comprises provincial and territorial statutes, regulations and rules, as well as regulatory instruments and forms adopted by CSA members. Policy statements contain important guidance but do not have the force of law.
National Instrument 41-101 General Prospectus Requirements (NI 41-101) sets out harmonised and comprehensive prospectus requirements for all public companies, including investment funds other than mutual funds.3 NI 41-101 is supplemented by requirements in other regulatory instruments, such as National Instrument 43-101 Standards of Disclosure for Mineral Projects, National Instrument 51-101 Standards of Disclosure for Oil and Gas Activities and National Instrument 51-102 Continuous Disclosure Obligations, which includes requirements regarding forward-looking information, such as projections and forecasts.
Pursuant to NI 41-101 and other relevant instruments, a company planning an IPO will prepare and publicly file with securities regulators a preliminary prospectus and a final prospectus to qualify its public offering of securities. The company also must also:
- publicly file certain other documents (e.g., material contracts and financial statements); and
- provide certain other information, such as personal information forms for directors, executive officers and promoters, on a confidential basis to the securities regulators.
Disclosure in the prospectus must satisfy plain language requirements and cover topics such as:
- the company's business, industry, markets in which it operates and competitive environment;
- its capital structure;
- the net proceeds it expects to receive from the IPO and principal purposes (with approximate amounts) for which it expects to use those proceeds;
- financial information (in most IPOs, three years' historical annual financial statements and financial statements for the most recent quarter in comparative presentation format will be required, together with management's discussion and analysis of those financial statements);4
- its directors, officers and principal security holders;
- its corporate governance practices;
- director and executive compensation;
- recent acquisitions and dispositions;
- material transactions in the previous three years where management or related persons had an interest;
- risk factors associated with the business or the offered securities;
- legal proceedings; and
- if applicable, sector-specific disclosure requirements for companies engaged in mining, oil or gas activities.
Annual financial statements included in a prospectus must be audited by a qualified, independent auditor and accompanied by an auditor's report without reservation. Unaudited interim financial statements included in a prospectus must be reviewed by an independent auditor.
The specific disclosure requirements described above are supplemented by general obligations to ensure that the prospectus contains 'full, true and plain disclosure' of all material facts relating to the securities being offered and does not contain any misrepresentations. A misrepresentation means:
- an untrue statement of a material fact; or
- an omission to state a material fact that is required to be stated or that is necessary to make a statement not misleading in light of the circumstances in which it was made.
In relation to securities being issued or proposed to be issued, a material fact is a fact that significantly affects, or would reasonably be expected to have a significant effect on, the market price or value of the company's securities. Materiality is also considered on the basis of whether information would be important to a reasonable investor making an investment decision. Canadian securities laws do not establish any financial thresholds or benchmarks for market-price impact to determine whether a particular fact is material.
Securities regulators will refuse to issue a receipt for a prospectus that does not appear to comply with these general obligations or that does not comply in a material respect with any other applicable requirements. They will also refuse to issue a receipt in certain other circumstances, including if they determine that:
- the proceeds from the offering payable to the issuer combined with its other resources are insufficient to accomplish the stated purposes of the offering;
- the issuer cannot reasonably be expected to be financially responsible in the conduct of its business owing to its financial condition or the condition of any of its officers, directors, promoters or control persons (key persons);
- the issuer's business may not be conducted with integrity and in the security holder's best interests because of the past conduct of the issuer or any of its key persons; or
- a person or company that has prepared or certified any part of the prospectus is not acceptable to the regulator.
The offering process
i General overview of the IPO process
Before a company starts to prepare materials for an IPO, it should discuss with its advisers whether any changes should be implemented to its corporate, capital or management structures. It may be advisable to complete a corporate reorganisation before the IPO (e.g., create a holding company to serve as the IPO vehicle and parent of the existing business).
Companies often simplify or otherwise reorganise their capital structure before or concurrently with an IPO. For example, some companies might want to reserve control rights for their founding investors through the use of dual-class share structures, with founders holding multiple voting shares, and public investors receiving subordinate voting shares. Alternatively, founders might hold voting shares, and the public will be offered non-voting shares. Companies with these structures may be subject to greater scrutiny by institutional investors, but if a compelling tax or business reason exists and can be explained clearly, such a dual-class structure may be appropriate. Companies should be aware, however, that the TSX and TSXV will require listed companies to have 'coat-tail' provisions for those shares, so that holders of subordinate or non-voting common equity can participate equally with holders of superior voting shares in any takeover bid.
If preferred shares have previously been issued, the company's articles or a shareholder's agreement may require the preferred shares to be converted into common equity upon the IPO.
The company should have an experienced management team, with appropriate compensation arrangements in place. The company should also be looking for suitable, independent director candidates who will be well-regarded by investors and bring to the company complementary skills and diversity that will contribute to effective management and governance. Among other things, the company should ensure that it will have at least three directors who meet the independence and financial literacy requirements in National Instrument 52-110 Audit Committees.
The relevant exchange and the securities regulators will require personal information forms to be submitted in respect of directors, officers, promoters and significant shareholders so the company should ensure that comprehensive background searches are conducted, in compliance with privacy laws, of the relevant individuals. The company should also obtain adequate liability insurance from a reputable insurer for the company's directors and officers.
A company should review its material agreements to determine whether any third-party consents are needed to complete the IPO, name the third party in the prospectus or disclose the contract to underwriters and their counsel as part of the due diligence process.
IPO timeline and process
Companies should expect it to take at least 12 weeks to prepare and complete an IPO in Canada, not including the preparatory work described above.
The company must implement procedures to restrict contact with the media throughout the IPO process. Publicity that intentionally or unintentionally conditions the market for the company's securities or promotes public interest in the company is prohibited until the preliminary prospectus becomes publicly available. After the preliminary prospectus is filed, the public should not be given any information other than what is contained in the preliminary prospectus.
Companies are permitted, however, to 'test the waters' for a potential IPO by having registered dealers (underwriters) contact accredited investors5 on a confidential basis to solicit expressions of interest. These activities must cease for a cooling-off period of 15 days before the preliminary prospectus is publicly filed. The company and underwriters must keep records of which investors were contacted and obtain written confirmations from them that they will keep the information about the offering confidential. Owing to potential selective disclosure and insider trading concerns, testing the waters is not permitted in public offerings by companies that are already Canadian reporting issuers, that are already public in a foreign jurisdiction or that are subsidiaries of a public company if the proposed IPO is material to the parent.
The CSA's confidential pre-filing process for preliminary prospectuses gives issuers more flexibility and certainty in their capital-raising plans.6 This process enables a company to receive and respond to the principal regulator's initial comments on its near-final draft preliminary prospectus before it is publicly filed. Confidential pre-filings are recommended, particularly if there are novel or complex securities law considerations or a greater risk of regulatory scrutiny.
During the waiting period between the public filing of the preliminary prospectus and the filing of the final prospectus, the securities regulators will review and comment on the preliminary prospectus, while the company and its underwriters will market the IPO to potential investors. For companies that have not confidentially pre-filed their preliminary prospectus, it typically takes at least one month to resolve all the regulators' comments. Once this process is complete, the company may file the final prospectus. Upon receiving a receipt from the regulators for that prospectus, the company can complete its IPO, typically between five and seven days later.
Securities legislation in certain Canadian jurisdictions gives investors the right to withdraw from an agreement to purchase securities. This right may be exercised within two business days of the investor receiving a prospectus and any amendment. After this right of withdrawal expires, the investor is legally bound to complete its purchase, conditional on the closing of the IPO.
National Instrument 44-103 Post-Receipt Pricing permits an issuer to omit pricing and related information from its prospectus until it receives the regulators' receipt for the final prospectus. At that point, the IPO is priced, and the final prospectus is supplemented with the missing information and delivered to prospective investors, who then have two days to withdraw from any agreement to purchase the securities. Companies completing a cross-border Canada-US IPO often use the post-receipt pricing procedure since it synchronises the regulatory timing and pricing practices of the Canadian IPO with the US IPO.
ii Pitfalls and considerations
A company that wishes to publicly offer securities in Québec must ensure that the prospectus and any documents incorporated into it by reference are written in French, or in both French and English. Translating these documents makes filing in Québec more expensive than filing elsewhere in Canada. Nonetheless, the general view is that those costs are outweighed by the benefits of accessing prospective investors in Québec, which has Canada's second-largest population.
To align the interests of a company's principals with those of new investors, Canadian securities regulators or the relevant listing exchange may require a company and its principals to enter into escrow agreements that restrict the principals' ability to sell certain securities they acquired before the IPO for a period following the IPO.7 Escrow generally isn't required for companies classified by the TSX as exempt issuers or that have a post-IPO market capitalisation of at least C$100 million.
Failure to comply with disclosure requirements in Canadian securities legislation, either in connection with the IPO or after the company goes public, will expose the company, its directors, officers and certain other people to potential offence liability (including fines and imprisonment), administrative penalties and statutory civil liability.
Companies should also be aware that although legislation in certain Canadian provinces and territories includes defences to liability for forward-looking information included in certain prospectuses, those defences are not available for IPO prospectuses. Accordingly, companies conducting an IPO should consider carefully what forward-looking information is to be provided, its reliability and the specific rules governing that information.
iii Considerations for foreign issuers
Companies organised anywhere in the world may raise capital in Canada if they satisfy the relevant securities regulatory and listing requirements. A Canadian operating office or headquarters is not required, but the company must submit to the jurisdiction of Canada's courts and administrative tribunals and appoint an agent within Canada for service of process.
Neither Canadian securities legislation nor the TSX or TSXV's listing requirements require any members of management or the board of directors to be Canadian residents. The exchanges, however, strongly prefer that the company have at least one director with public company experience in North American markets. They also encourage foreign companies to have an investor relations contact, director or officer based in Canada and to designate an individual in Canada who can answer North American investor, analyst and regulatory queries.
Under the Multijurisdictional Disclosure System (MJDS) adopted by Canadian and US securities regulators, an existing US public company can, in effect, launch a Canadian IPO on the basis of its US filings and a US prospectus, with supplemental information to comply with Canadian prospectus requirements. Companies that have been reporting with the US Securities and Exchange Commission (SEC) for at least one year can take advantage of the MJDS if they have a public float of at least US $75 million, are offering investment grade securities or are offering securities guaranteed by their MJDS-eligible parent.8
A foreign public company seeking a second listing on the TSX can use as its principal listing document a US annual report on Form 10-K or Form 20-K, or a similar document or form from another jurisdiction if the document contains information comparable to the information included in a Canadian reporting issuer's annual information form (AIF).9 The TSX or TSXV may require foreign companies (other than those incorporated in Australia, the United Kingdom and certain US states, such as Delaware) to provide information about shareholder protections and rights in their home jurisdiction and may further require foreign companies to adopt certain provisions prior to listing.
A company that completes an IPO in Canada becomes a reporting issuer subject to various ongoing disclosure and other requirements under Canadian securities legislation, as well as the relevant exchange's requirements. Venture issuers, which are typically reporting issuers with securities listed on one or more junior markets in Canada (including the TSXV) or elsewhere are subject to less onerous reporting requirements in some circumstances. Companies incorporated in Canada must also comply with the governance and other requirements in the relevant corporate statute.10 Examples of these post-IPO obligations are briefly described below, with a focus on non-venture issuers.
i Annual and periodic disclosure requirements
- Audited, annual financial statements are due within 90 days of fiscal year-end.
- Interim financial statements are due within 45 days of each of the first three fiscal quarters.
- Management's discussion and analysis (MD&A) of financial results, capital resources, liquidity and known trends and uncertainties must accompany annual and interim financial statements. This is an area of substantial regulatory focus, with particular attention being paid recently to the use of non-GAAP or non-IFRS financial measures, disclosures about the impacts of the covid-19 pandemic, and material trends and risks, including matters related to the environment, cybersecurity and corporate social responsibility.
- An AIF, containing disclosure about the business comparable to that in a prospectus, is due within 90 days of fiscal year-end. Venture issuers are not required to file an AIF but some choose to do so, so that they can qualify to use the short-form prospectus system, which incorporates by reference the AIF and other disclosure documents.
- The financial statements, MD&A and AIF must be accompanied by certifications from the company's chief executive officer (CEO) and chief financial officer (CFO), stating that they have reviewed the filings, that the financial information fairly presents the company's financial condition, and that to their knowledge there are no material omissions or untrue statements of material facts. The certifications also must address the company's disclosure controls and procedures and, for non-venture issuers, the company's internal controls over financial reporting (ICFR). In contrast with US requirements, there is no requirement for an auditor attestation in respect of ICFR.
ii Event-related disclosure and notification requirements
Canadian securities legislation requires issuers to publicly disclose, immediately by press release, any material change in their business, operations or capital and file a material change report within 10 days. The TSX and TSXV have similar disclosure requirements, although the trigger focuses on previously undisclosed 'material information' (which may arise in the absence of a corporate development or other event). Disclosure can be temporarily delayed in limited circumstances (e.g., if immediate disclosure of a pending transaction could jeopardise completion of the deal on favourable terms). TSXV companies must pre-clear with TSXV news releases that contain material information about matters such as major transactions or future-oriented information.
Business acquisition reports must be filed with securities regulators within 75 days of a 'significant acquisition'.
TSX and TSXV-listed companies must notify their exchange of certain corporate events (e.g., declaration of dividends, changes in officers or directors and amendments to charter documents).
Exchange approval is required for any issuance of securities (other than unlisted, non-voting, non-participating securities and subject to certain exceptions for inter-listed securities).
iii Governance, shareholder meetings and shareholder approval requirements
Generally, apart from the audit committee requirements, Canadian securities laws do not mandate the adoption of specific corporate governance practices by companies. The CSA, however, has published guidance on what it considers to be good corporate governance and requires most reporting issuers, other than venture issuers and certain foreign issuers, to provide detailed disclosure at least once a year about their governance practices. As in many other jurisdictions, there is growing interest among regulators and investors regarding diversity in senior management and on boards.
Securities laws regulate the form and content of information circulars and proxies for shareholder meetings, as well as the way proxy solicitation is conducted. Extensive information about the compensation of directors, the CEO, the CFO and the three other most highly compensated executive officers must be included in information circulars for meetings where directors are elected or shareholders are considering compensation matters.
TSX companies (except controlled companies) must adopt policies providing that directors not elected by a majority of votes cast in an uncontested election are expected to resign.
The exchanges may require shareholder approval for certain transactions, such as issuances of securities that affect control of the company or present conflicts of interest.
iv Other requirements
Directors, key executives, significant shareholders and certain other persons are considered insiders and must disclose their holdings of, and transactions in, the issuer's securities.
Insiders and other persons in a 'special relationship' with a reporting issuer are prohibited from trading in the issuer's securities, or tipping or providing trading recommendations to other people when they have material, undisclosed information.
v Considerations for foreign issuers
Under National Instrument 71-102 Continuous Disclosure and Other Exemptions Relating to Foreign Issuers, non-Canadian issuers that meet certain criteria, including compliance with the securities laws in their own jurisdiction and their listing exchange's requirements, will satisfy many Canadian requirements relating to the matters described above. The TSX will not apply certain of its ongoing listing standards to a dual-listed company if the company is listed on a recognised exchange (e.g., the Australian Securities Exchange, the London Stock Exchange, Nasdaq, the New York Stock Exchange (NYSE) and NYSE Amex), provided that at least 75 per cent of the trading value and volume has occurred on the other exchange during the preceding six months.
Outlook and conclusion
In the past few years, the OSC has been pursuing regulatory burden reduction initiatives on its own and in cooperation with other CSA members. More changes are expected in the next few years as the Ontario government, the OSC, self-regulatory organisations and marketplaces address the recent recommendations of the government-sponsored Capital Markets Modernization Taskforce.11 Near-term initiatives include, among other things, proposed rules prescribing climate-related disclosures by public companies and publication of a consultation draft of a new Ontario Capital Markets Act to replace the Securities Act.
National Instrument 52-112 Non-GAAP and Other Financial Measures Disclosure is expected to come into force later in 2021. The new rules will govern how companies (other than investment funds or certain foreign issuers)12 present non-GAAP and other financial measures and ratios outside the financial statements in publicly available documents. For companies that are, or expect to become, public companies in Canada in 2021, the new rules will start to apply to documents filed for financial years ending on or after 15 October 2021. Companies that expect to go public in Canada in 2022 should plan to comply with the new rules effective as of 1 January 2022.
The CSA has published for comment proposed amendments to the continuous disclosure rules for non-investment fund reporting issuers. If adopted, the proposed rules will, among other things:
- consolidate the annual financial statements, MD&A and AIF, if any, into a single annual disclosure statement and consolidate the interim financial statements and interim MD&A into a single interim disclosure statement; and
- eliminate duplicative or overlapping requirements within those disclosure documents and eliminate certain requirements to disclose information that is readily available elsewhere.
The CSA has also requested feedback on a framework that would permit non-SEC venture issuers to report on a semi-annual, rather than quarterly, basis.
1 Scott R Cochlan, Robbie Leibel, Kevin M Morris and Rima Ramchandani are partners at Torys LLP.
2 The System for Electronic Document Analysis and Retrieval (SEDAR) is an online system whereby prospectuses and continuous disclosure documents (e.g., financial statements and proxy materials) can be filed with the various securities commissions and viewed by the public. The System for Electronic Disclosure by Insiders (SEDI) is an online system for the filing and public viewing of insider reports.
3 National Instrument 81-101 Mutual Fund Prospectus Disclosure governs conventional mutual fund prospectuses. Post-IPO, conventional mutual funds are subject to the operational requirements in National Instrument 81-102 Investment Funds.
4 Generally, financial statements must be prepared in accordance with International Financial Reporting Standards (IFRS). In some circumstances, financial statements prepared in accordance with US Generally Accepted Accounting Principles (US GAAP) will be acceptable.
5 Accredited investors are individuals and entities that meet certain criteria associated with financial sophistication.
6 See CSA Notice 43-310 Confidential Pre-File Review of Prospectuses.
7 See National Policy 46-201 Escrow for Initial Public Offerings. Generally, only equity securities and securities convertible into or exchangeable for equity securities are subject to escrow.
8 Similar procedures allow eligible Canadian reporting issuers to offer securities in the United States, based on documents prepared in accordance with Canadian requirements and reviewed by Canadian securities commissions.
9 A foreign public company seeking a second listing on the TSXV must complete Form 2B, which must generally contain prospectus-level disclosure, unless: (1) the issuer has been subject to continuous disclosure requirements in a foreign jurisdiction equivalent to those in Canada for at least one year; and (2) its continuous disclosure record is or will be made available on SEDAR. In determining whether prospectus-level disclosure or other additional disclosure is required, the TSXV will consider the regulatory framework of the foreign issuer's home market, the length of time the applicant has been trading, and whether the applicant has recently changed its business.
10 These requirements are outside the scope of this chapter.
11 See Capital Markets Modernization Taskforce: Final Report (January 2021) and OSC Notice 11-792 Statement of Priorities for Financial Year to end March 31, 2022.
12 The rules will not apply to SEC foreign issuers (i.e., non-investment company reporting issuers that are also subject to the US Securities and Exchange Commission's reporting regime). In addition, non-SEC foreign issuers with a limited connection to Canada and that are subject to the disclosure requirements of a designated foreign jurisdiction (such as Australia, Hong Kong, Japan, Mexico or the United Kingdom) will not be subject to the new rules.