Canada has a robust capital market, as well as a strength in funding growth ventures in emerging industries. Becoming a public company and getting listed on the Canadian Securities Exchange can give businesses more access to funding opportunities.
In Canada, the main exchanges are the Toronto Stock Exchange (TSX), Neo stock exchange (NEO), the TSX Venture Exchange (TSX-V), and the Canadian Securities Exchange (CSE).
Why go public in Canada?
In regards to the getting listed in the Cannabis industry, the Toronto Stock Exchange and the TSX Venture Exchange will only list companies if the activity is federally legal in the country where the headquarters are located.
Since the cannabis industry is not federally legal in the US, the best option for some cannabis entities is to go public on the Canadian Securities Exchange.
As of June 2022, there were 79 companies in the cannabis industry listed on the Canadian Securities Exchange. This represents almost ten percent of the total of listing companies (788 listing in total).
Advantages of Going Public in Canada
- Easier access to capital – Whether it be for specific projects or future growth, companies are able to access capital on more favorable conditions than private equity financing and without the interest costs of debt financing.
- Greater liquidity for existing and future shareholders – Shares will become easier to sell.
- Greater liquidity options for founders – Founders may sell some or all of their shares or use them as collateral for personal loans.
- Increased credibility – Due to greater transparency and visibility, public issuer status enhances corporate image which in turn assists in developing relationships with customers, suppliers and the community.
- Ability to use equity as compensation to management – Permits greater flexibility in compensation arrangements.
- Ability to use equity as compensation for purchases.
- Enhanced ability to borrow.
- Method of valuation through the market – Provides a more accurate assessment of the fair market value of the enterprise.
Methods of Going Public
Currently, there are two paths to becoming a public company:
IPO (Initial Public Offering)
RTO (Reverse Takeover)
Taking Your Cannabis Business Public in an IPO
In mainstream industries, the best known and most common path to going public is the IPO. In an IPO, a private company is owned in full by a small number of shareholders, typically the founder, early investors, and the leadership team. By going public, you convert the ownership shares of your company into public shares that can be purchased by public investors.
During the IPO, the value of shares are priced during the process of underwriting due diligence, where a team of legal and financial experts will value your operation. If your company is worth $300 million, and you issue 3,000,000 shares, each share will be worth $100.
Your original shareholders will continue to own many of these shares, and the big difference comes in the fact that these shares now have a real market value. The rest of the shares are then sold to public investors, which results in your company raising a significant amount of capital. This is one way to getting your cannabis business listed on the Canadian Securities Exchange.
Taking Your Cannabis Business Public in an RTO
Once considered a “back-door” path to going public, the RTO has gained significant credibility in recent years and has become the preferred option for many cannabis companies. In an RTO, instead of issuing an IPO (which can be very costly and time-consuming), you identify an already public company, purchase a controlling stake in that company, and effectively take over that listing.
This transaction is primarily possible due to the existence of “shell corporations” that currently exist on many exchanges. These are formerly operational companies that have little to no recent activity or assets. As a result of taking over a pre-existing listing, you skip over many of the regulatory requirements of an IPO.
Some of the downsides of the RTO is that you typically give up significant capital and/or shares in acquiring the shell company. You also do not necessarily raise the initial capital amount that comes with an IPO.
Weighing Advantages and Disadvantages of IPOs vs RTOs
IPOs and RTOs both have advantages and disadvantages and choosing the right path will largely depend on the operational and financial specifics, and long-term plans, of your cannabis company.
Other factors, like current timing, market conditions, and regulatory requirements can also have a major impact on your decision making. Following are some key considerations and commentary for both options.
Which path to going public is right for your cannabis business?
Both options for taking your cannabis company public are valid and the right choice will depend on you and your leadership team’s experience and long-term goals. Weighing all the pros and cons, determining the appropriate timing, and performing all the financial and operational up-keep is a very important process for both paths.
Working with experienced accounting, financial and legal teams is essential to securing the success of your go-public transaction.
To learn more about getting listed on the Canadian Securities Exchange, then contact our team of financial experts at GreenGrowth CPAs. We are here to help your cannabis venture through any level of the accounting, tax filing, or business cycle.
We employ several financial programs to assist the company with its fiscal responsibilities, including tax planning and compliance, outsourced CFO support, audit preparation, tax controversy support, and much more.
For recommendations and assistance with tax planning and accounting services, schedule a free consultation or contact us at 1-800-674-9050.