In a previous blog post we talked about taking a private company public through an initial public offering (“IPO”). For companies looking for alternative methods to go public they should consider what is commonly known as a “reverse take-over” or “RTO” transaction.
What is an RTO?
An RTO occurs when an existing public company acquires a private company, with the result that following the transaction the owners of the private company become the majority owners of the public company. The existing public company is typically a “shell” company with no active operations or assets but still maintains its listing status and reporting issuer status or a “Capital Pool Company” (“CPC”).
RTO VS IPO
The IPO process in Canada generally takes several months to complete. In a volatile junior equity market, as has been the case for the past several months, that timing impacts the ability to successfully complete the offering.
With RTO’s, the market risk exposure is generally not as significant as the time to complete the transaction is shorter. In addition, RTO’s are less costly to complete for a number of reasons including, but not limited to:
- not having to prepare a prospectus but rather a prospectus level disclosure document
- dealing with a single regulator (the listing exchange) as opposed to both the exchange and provincial securities commission
- no requirement for an investment bank to be engaged as a sponsor.
There is also the possibility that the existing public company may have cash in its treasury, qualified directors and relationships with investment dealers and investors – all of which could be leveraged into the new business.
The key drawback to completing an RTO is that the private company shareholders will be diluted by the shareholdings of the shell company shareholders. Limiting the impact of this situation generally requires strong planning on the part of the private company senior management team.
What’s involved with an RTO?
When completing a RTO a company must perform extensive due diligence and prepare the necessary disclosure documents for the transaction. A few of the steps involved in the RTO process include:
- Identifying and completing due diligence on a target shell company or CPC
- Determining an agreeable stock ratio and whether financing will be required
- Preparation of a Filing Statement or Management Information Circular to prospectus level disclosure
- Preparation of financial statements for inclusion in the Filing Statement of Management Information Circular
- Selection of board and management team of the resulting issuer
- Approval from the respective stock exchange and in certain circumstances from the shareholders of the shell company
- Closing RTO, receiving final approval and issuing common shares of the new issuer.
The length of the process depends on a number of factors, the most impactful being the time required by regulators to review the materials and the receptiveness of the market to any proposed financings.
Maintaining accurate and timely reports can greatly reduce the time an exchange takes to review financial statements. If the private company has its accounting and business records organized and up to date it is reasonable to expect that the RTO will complete as soon as three months from date of transaction commencement.
What is a CPC?
A CPC is a public shell company listed on the TSX Venture Exchange (“TSX-V”). A CPC is very limited in terms of what it can do and primarily uses its cash on hand to evaluate potential businesses or assets that it would acquire in a qualifying transaction, which must be completed within 24 months of listing. This program provides smaller businesses with alternative access to capital markets that they otherwise would not have.
Similar to an RTO, shareholders of the private company become shareholders of the CPC and the shares of the CPC continue to be traded on the TSX-V once the qualifying transaction is completed. There are many benefits to taking the CPC route when going public, including the fact that recently incorporated CPC’s have little history and this greatly reduces due diligence costs.
Upon becoming public, companies have access to greater resources at their disposals and often have opportunities to expand into foreign countries. In our next blogpost, we will talk about the key challenges of managing foreign operations.