Area of Law: Business Law
Answer # 239
Initial Public Offerings (IPOs)Region: Ontario Answer # 239
An Initial Public Offering, referred to as an IPO, occurs when securities of an “issuer” (a person or company) are distributed to the public for the first time. The Ontario Securities Act defines a “distribution” as, among other things, the sale of securities that have not been previously offered for sale. An issuer generally sells securities to raise funds for investment and growth. The broad definition of “security” in the Act includes debt obligations (such as bonds and debentures) and equity (such as shares in a corporation).
An issuer that has less than 50 shareholders and that restricts the right to transfer its shares may qualify as a private company. Private companies are exempt from many of the regulations in the Securities Act. However, the securities of a private company may not be distributed to the public. Securities regulations are designed to protect the investing public by ensuring that adequate information is provided about available securities. An issuer that wishes to offer securities to the public must go through the process of an IPO.
An IPO provides the benefit of access to the public investment markets. However, there are significant drawbacks for going public, not the least of which is the cost of an IPO itself. Related drawbacks include reduced flexibility and control, because the interests of the security holders must be taken into account. Finally, public companies have continuous disclosure obligations which involve financial costs and loss of confidentiality.
The preliminary prospectus
The Ontario Securities Act states that no person or company may distribute a security unless a prospectus relating to the security has been filed with the Ontario Securities Commission (OSC). A prospectus is a comprehensive document which describes the securities and the issuer. An issuer must provide a prospectus to all people to whom the securities are distributed.
After an issuer has decided to go public, a preliminary prospectus must be prepared and filed with the OSC. The prospectus must provide “full, true and plain” disclosure of all material facts relating to the securities. This standard of disclosure is intended to protect the investing public, and there are many consequences for misrepresentations in a prospectus. Furthermore, additional methods of advertising the securities are strictly regulated. The idea is that the prospectus should be the principal document which describes the new securities.
The preliminary prospectus is similar to the final version except that the price of the securities need not be determined. The reason for this is that the market price of the securities could change by the time they are allowed to be sold to the public.
The waiting period
Once the preliminary prospectus has been filed with the OSC, there will be a waiting period of at least 10 days before the OSC will issue a receipt for the final prospectus. During the waiting period, the issuer is required to disclose new information that would reasonably be expected to have a significant effect on the market price or value of the securities. An issuer may advertise that a preliminary prospectus is available, and solicit expressions of interest, but the securities cannot be sold until a receipt for the final prospectus has been obtained from the OSC.
The OSC may refuse to issue a receipt for prospectus if it appears that it would not be in the public interest to do so. Grounds for such a refusal include an issuer’s failure to comply with securities regulations, insufficient resources, or past conduct of officers or directors which reasonably suggests that the business of the issuer will not be conducted with integrity.
Types of distribution
Once the OSC has provided a receipt for the final prospectus, the securities may be distributed to the public. There are several types of distribution. In a “direct issue,” an issuer sells its securities directly to the purchasers. More commonly, an issuer enters into an agreement with one or more underwriters who either purchase the securities or act as an agent. Underwriters re-sell the securities to the public at a price that is normally established immediately before the receipt for the final prospectus is obtained. Underwriters protect an issuer from fluctuations in the market price of the securities but they generally charge a commission of 5%—7% of the sale price.
IPO’s are a significant component of growing and expanding a business and require compliance with many securities regulations. If you are considering offering shares to the public, you should consult a lawyer.
Visit the Ontario Securities Commission for more information on IPOs and filing a prospectus.
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