To get listed on the Canadian Securities Exchange (CSE), formerly known as CNSX, a company must meet a number of key listing requirements including:
- status as a reporting issuer in good standing;
- a minimum of $100,000 working capital (or $50,000 and recent history as a listed company, or demonstrable revenues); and
- a minimum of 150 public securityholders who each hold at least one board lot of shares.
1. Reporting Issuer Status
A company can become a reporting issuer either by filing a prospectus or by merging with an existing reporting issuer.
The traditional approach to going public is to file a prospectus with the applicable securities regulator(s). The filing can be in the form of either an offering prospectus or a non-offering prospectus.
(a) Offering Prospectus
An offering prospectus enables a company to raise funds via an agent (stock broker), create a shareholder base and become a reporting issuer. Typically an agent will charge corporate finance fees ($25,000 to $50,000 or more), agent’s commissions (6% to 8%+ of the IPO financing), broker warrants, administration fees, and legal fees (which could be $25,000 or more) to pay the agent’s lawyer to review the work done by the company’s lawyer.
(b) Non-Offering Prospectus
If a company is able to raise funds on its own, then it can use a non-offering prospectus to become a reporting issuer, which can easily save $50,000 or more in agent’s fees and expenses. A non-offering prospectus is often used to qualify the shares underlying special warrants so that these shares are free-trading once the prospectus has been receipted.
Merger with a Reporting Issuer
Many companies have listed on CSE by merging with a reporting issuer. The reporting issuer is usually a listed company, but it may also be an unlisted reporting issuer or a new company that has been created pursuant to a plan of arrangement.
(a) Reverse Take Over of a Listed or Unlisted Reporting Issuer
Under a reverse takeover, a reporting issuer issues a significant number of shares to acquire a project or a company that holds a project. At closing, the owners of the project typically end up holding a majority of the shares of the reporting issuer, which now owns the project. Often, a financing is closed at the same time. The resulting issuer files CSE listing documents, pays the listing fees and, provided that all listing requirements are met, the shares resume or commence trading.
(b) Plan of Arrangement
Under a plan of arrangement a reporting issuer, such as a listed company, establishes a subsidiary company and enters into an agreement with a private company that wishes to go public on the CSE. Pursuant to the plan of arrangement, the shares of the subsidiary are distributed to the shareholders of the reporting issuer and the subsidiary inherits the reporting issuer status of the parent company.
An initial court application is made to obtain an interim order for the plan of arrangement. A comprehensive information circular and proxy materials are then sent to the shareholders of the reporting issuer and a shareholder meeting is held to approve the terms of the plan of arrangement. After the meeting, another court application is made where the results of the shareholder meeting are reported and a final order is obtained to approve the transaction.
The shares of the former subsidiary are free of trading restrictions and are distributed to the shareholders of the reporting issuer (the parent company), who end up owning, pro-rata, the shares of the former subsidiary and continue to hold their shares in the reporting issuer. The former subsidiary then files its listing application with the CSE.
2. Working Capital
In order to meet the CSE working capital requirements, the company can raise money in reliance on applicable prospectus exemptions. The exemptions vary from jurisdiction to jurisdiction, but include exemptions available for:
- officers, directors and founders of the company;
- close relatives, friends and business associates of an insider; and
- accredited investors.
Another exemption, that’s available right across Canada (other than Ontario), is the offering memorandum exemption. An offering memorandum is a document that discloses statutorily mandated information including summaries of the company’s business, management’s experience and the securities offered, the risk factors and audited financial statements. Provided that certain conditions are met, the offering memorandum exemption enables companies to raise money from investors and build its shareholder base. The conditions include the requirement that each investor receives a copy of the offering memorandum and signs a risk acknowledgment form, and that the company files a report of exempt distribution.
3. Minimum Shareholder Base
There are a few alternatives one can use to meet the requirement of having a minimum of 150 public securityholders:
(a) The company can merge with or be acquired by an existing company that has at least 150 public securityholders. For example, this can occur as part of a reverse takeover of a public company.
(b) An agent can be retained to bring in the shareholder base as part of an initial public offering.
(c) A company can use an offering memorandum (other than in Ontario) to raise any amount of money from any number of investors. Although less expensive than retaining an agent, it can be a time consuming and cumbersome process to sign up 150 public securityholders.
(d) Another approach is to allow a company that already has a large shareholder base to acquire a share position, either via a private placement or from an existing shareholder. Once the shares of the company that’s going public are free of trading restrictions (such as after a prospectus receipt has been issued or after a plan of arrangement has been completed) then the company with the shareholder base declares a stock dividend on those shares and distributes them, pro-rata, to all of its shareholders. This immediately gives the company that’s going public the shareholder base it needs to get listed.
This summary is intended to provide general comment only and should not be relied upon as legal advice. For more information, contact Genesis Law Corporation at 1-604-669-8843 x22 or info @ genesislaw.ca.