Going public in a cannabis IPO is a complicated process that will require a significant investment in time, capital, and resources to execute successfully. Performing an IPO can take 6 months to a year, depending on the state of your business and market conditions. In the following we’ll provide a quick primer on several of the key stages you’ll need to plan for and undertake if you’re planning to go public in a cannabis IPO on the CSE, NEO or another Canadian stock exchange.
Preparing financial statements for a cannabis IPO
Audited financial statements are one of the key disclosure documents you’ll need to go public. If you aren’t currently working with an audit firm, you’ll need to identify and engage an experienced cannabis auditor capable of preparing financial documentation in accordance with IFRS standards.
It is essential to plan well ahead of time to ensure this step can be completed so it does not hold up other processes. The audit process will typically take at least several weeks.
We highly recommend that you begin operating as a public company well before the issuance. Your financial team should be able to close the books every month, and generate the reports and documentation of a public company at least one quarter before actually going public. This way there will be no surprises that could adversely effect your stock price or investor confidence once the public spotlight is on you.
Public disclosure documents
The preparation of disclosure documents is a requirements of going public and will require input from a number of parties. The intention of disclosure documents is to ensure that potential investors receive transparent communication of all material facts related to the securities you plan to issue. As such, disclosure documents must present a clear view of both the positive and negative factors underlying your company and the securities it will offer.
The process of drafting disclosure documents will be detailed and time-consuming. It is recommended that you prepare internal and external teams well in advance of commencing drafting.
Some of the activities that require disclosure documents include:
- Changes in share ownership
- Changes in corporate structure
- Major acquisitions or dispositions
- Changes in capital structure
- Borrowing of a significant amount of funds
- Public or private sale of securities
- Development of new products
- New or lost significant contracts
- Firm evidence of increases or decreases in near-term earnings prospects
- Changes in capital investment plans or corporate objectives
- Significant changes in management
- Significant litigation
- Major disputes with labor, contractors or suppliers
- Default of financing or other agreements
It is essential that disclosure documents contain a “full, true and plain disclosure of all material facts relating to the securities offered.” All participants share a responsibility for accuracy in the drafting and filing of disclosure documents. If auditors discover a misrepresentation, your company, its management and directors, the underwriters, and legal counsel could face civil liability and penalties.
The preliminary prospectus for a cannabis IPO
Your preliminary prospectus will contain all of the disclosures that will appear in the final prospectus, except for details about the price and number of shares issued. And other material facts that change, or are requested, during the review process.
The purpose of the preliminary prospectus is two-fold. First, it will provide securities regulators with an opportunity to review the disclosures in the prospectus before sales begin. Secondly, it will also act as a sales document your underwriters will use when approaching potential investors and assessing interest.
Roles and responsibilities
The drafting process for the preliminary prospectus is extremely important and may take several weeks to complete. Your legal counsel will have a central role in the drafting process. They will help structure the prospectus and write several sections. Members of your leadership team – CEO, CFO, COO, et al. – will craft the business description and source key financial and non-financial data. Your investor relations leader will help shape the document’s tone and content.
Whereas, your team of underwriters will determine the details and descriptions of the securities. They may also provide attachments, schedules, or amendments, which provide general industry information. Your audit firm will help prepare necessary historical financial statements and disclosures.
Drafting the preliminary prospectus
The first step in drafting the prospectus is generally to establish a working group and assign responsibility to individuals for gathering information and preparing parts of the prospectus. In the initial meeting, you’ll reinforce and convey the strategic goals. Moreover, the future direction of your company, as established in your business plan. In this way all responsible parties will align while engaging in the drafting process.
After completing the initial draft of the preliminary prospectus, be sure to circulate it among leadership for final review. Expect several rounds of revisions before finalizing the document.
Filing the preliminary prospectus
When all parties agree the preliminary prospectus is complete, you’ll then prepare a certificate – signed by your CEO, CFO, and two directors who represent the board – and file it alongside the prospectus. The underwriters will also prepare and file a certificate. Your auditors will submit historical financial statements and other communications. Although these are not typically signed until the final prospectus is filed. The auditor may be required to submit a status report documenting their work to date, alongside the preliminary prospectus.
After drafting the preliminary prospectus, file it with the securities regulators in the provinces and territories where you plan to become an issuer. If filing a prospectus in Québec, be sure to translate the document into French ahead of time.
Other important documents
In addition to preparing financial statements and other essential disclosures, your experienced cannabis auditor will likely prepare and file several important letters during the process of your cannabis IPO. These may include:
Advice Letter: Details the extent of the auditor’s efforts in filing the prospectus.
Letter of Understanding: Outlines auditor’s role in due diligence proceedings to underwriters.
Consent Letter: Confirms auditor’s role in developing the prospectus. Generally, signed when the final prospectus is filed.
Final thoughts on cannabis IPOs
Your team will be essential to the success of any public cannabis transaction. Your auditor, legal representation, underwriters and investor relations team must all work together to efficiently and effectively plan your cannabis IPO. We can help on both sides of the border and have the necessary insights to guide you along the way. If you’re considering a cannabis IPO, reach out to us for a consultation or call 1-800-674-9050.