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- SEGMENT 1: GOING PUBLIC
- Introduction to Going Public
- General Rule- Securities Act, 25 and 33
RULE: No person shall engage in or hold themselves out as engaging in the business of trading in a security, without being registered, and if a trade constitutes a distribution, without preparing a prospectus (Section 25 and 53, Ontario Securities Act).
s.25 deals with not being able to engage in business of trading securities unless REGISTERED s.53 deals with not being able to issue securities without a prospectus
- How Companies Go About Raising Capital
3 Ways: 1) Borrow, 2) Go Public (IPO – segment 1), 3) Private Placement of Securities (segment 3)
- Borrow: Can go to an FI and borrow it, but might be expensive, might not be able to get it
- Go Public (IPO): first segment of course
- Private Placement of Securities: third segment
- Why Go Public?
- If a client wants to take a private company public, if you’re worth anything as a lawyer, then you won’t just take instructions, but provide advice and guidance.
- Lots of advantages/disadvantages of going public, have to address those with your client.
Ex. Four Seasons Hotels
- Used to be a private company, decided it wanted to be a public one for very bad reasons
- Went public and was a miserable public company. So miserable that it ultimately decided it had to go private again
- A few years later, went public again for the right reasons, then it became what it is today – one of the finest hotel companies in the world (then went private again but only b/c paid lots of $)
Advantages: 1) Raising Capital, 2) Future Growth, 3) Employee Incentives, 4) Enhanced corporate image, 5) Acquisitions, 6) Shareholder Liquidity
- Raising Capital: In the primary offering the principle reason to go public is to raise capital to meet the company’s growth and operating objectives
- Future Growth: An equity offering allows the company to:
- Borrow additional capital on more favorable terms
- Issue additional equity on the market
- Raise future capital from current shareholders via rights offerings
- Employee Incentives: Can use stock options as compensation when your public (more attractive to employees b/c stocks become more liquid and provides independent valuation mechanism)
- Enhanced Corporate Image: Increased public profile (become better known to customers, suppliers and other stakeholders)
- Acquisitions: Cash generated by going public may enable a company to undertake successful M&A. Can expand using stock as a form of currency without depleting cash or taking on debt.
- Shareholder Liquidity: Instead of holding shares subject to the escrow requirements and control block sale restrictions, public investors enjoy increased liquidity allowing for easy diversification by selling parts of the company (constant indication of value due to share price)
- Potential Disadvantages (and to how to mitigate the risk)
Disadv: 1) Loss of confidentiality, 2) Reduced flexibility, 3) Managing share prices, 4) Reduced control, 5) Loss of tax advantages, 6) High costs of going public (initial costs of IPO and ongoing cont disclosure requirements)
- Loss of Confidentiality: Significant disclosure (prospectus) and continuing disclosure requirements may prejudice the companies’ position as the information is available to all competitors
- Reduced Flexibility: Owner-manager undertakes a responsibility to the public, which imposes fiduciary duties. There is lost flexibility as approval from outside directors is needed to make certain decisions
- Ex. Need a shareholder meeting in order to approve a large acquisition which takes 60 days, thus, the opportunity may be lost to a faster moving private company.
- Managing Share Prices: Public companies are scrutinized on a quarter by quarter basis, this creates an incentive to manage share prices in a way that can compromises long term profitability.
- Reduced Control: A public offering may dilute the owners control to the point that they lose controlling power of the company which may open the company to unfriendly takeover bids.
- Loss of Tax Advantages: Public companies are not entitled to small business deduction and other tax advantages
- High Cost of Going Public
- Initial costs: underwriter’s commission (5-7% of gross offering proceeds), non-commission costs (1-3% of gross offering, which includes: prof fees of lawyers, accountants etc., listing fees, promotional expense, printing, translation in QC)
- Green Shoe (over-allot the issue by granting the right to buy more of the issue for a set period.
- Broker warrants (right to buy at a set price for a year): This rights provide the underwriters with a continued stake, but also have a dampening effect on the market.
- Ongoing costs: continuing disclosure requirements, manage the board, accounting and lawyers fees that make up governance, filings of material changes
- Why do we regulate public offerings (3 objectives)
- Protection of Investing Public, 2) Ensuring the Efficient Operation of Canadian Capital Markets, 3) Increasing/ Maintaining Confidence in Public Markets & the People who Operate in Them
Why do we think it’s so important to regulate public offerings vs. letting the market take care of itself?
- Objectives of regulation: Everything in the Securities Act (SA) is designed to deal with one of three objectives (can be conflicting, have to balance)
- Protection of Investing Public: Impose a lot of rules to make sure these people are protected
- Make sure Markets Work – efficient operation: rules to ensure the system works
- There is no point having a market if nobody plays by the rules.
- Can’t just protect the investing public b/c there is nothing to protect if no one is investing (need to balance these goals)
- Increasing/Maintaining Confidence in Public Capital markets and People who Operate in Them:
Neither of the above two points matter if there’s no confidence in it.
Everything we talk about will come down to one of those three objectives*exam
**and remember methods used to achieve the objectives (Securities Act is just a bunch of rules that play into one or more of these three objectives).
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