Going public in a cannabis IPO is a complicated process that will require a significant investment in time, capital, and resources to execute successfully. In the following we’ll provide a quick primer on the due diligence and regulatory review stages of going public in a cannabis IPO on the CSE, NEO or another Canadian stock exchange.
Don’t miss the first installment of this series, which focused on Preparation and Documentation
The basics of pre-IPO due diligence
Before executing an IPO, extensive due diligence will be performed by the underwriters to assess the market viability of your cannabis company. The information gained during the due diligence process will be used build the securities prospectus, which provides key information to investors.
Areas reviewed during the due diligence process include:
- Financial health
- Tax liability
- Legal status
- Operational effectiveness
- Environmental review
- Information technology
- Human capital
The objective of the pre-IPO due diligence process is to assess the long-term viability of your company’s business model and the disbursement capacity of the company. The investigations focus on market and competitive analysis and assessing opportunities and risks in the commercial and regulatory environments. They underwriters will ultimately use this information to arrive at an appropriate price of securities, and also protect themselves from liability associated with the prospectus.
What is involved in IPO due diligence procedures?
Expect that the due diligence process will be demanding. Underwriters’ legal counsel will closely examine your company’s financial and business information, conduct discussions with senior management, inspect operating facilities and associated assets, and review contracts and other agreements.
Leadership should be prepared to respond to inquiries that include:
- Business and operational performance.
- Industry trends and competition
- Revenue and sales
- Customer relationships
- Accounting policies
- Effectiveness of internal controls
Your auditor will also participate in the due diligence process, providing status updates to the underwriters and commentary on whether they expect to issue an Advice Letter with the final prospectus.
IPO due diligence roles and responsibilities
The extent of the due diligence review for your cannabis IPO will depend on the nature of your company’s operations, comparable risk profile, and the jurisdictions where the securities will be sold. Common elements of IPO due diligence include:
- Underwriters’ legal team will provide a comprehensive due diligence check list. Your team will be responsible for producing the documents, and preparing a data room, in response.
- Your audit provider will prepare and deliver a comfort letter to the underwriters containing assurances about the accuracy of financial information contained in the provided documents.
- Your underwriters’ legal team will conduct interviews with your company’s management, auditor firm, and potentially customers, suppliers, alliance partners, or other third parties.
- Your executive leadership team, directors, and select other principal security holders will be asked to complete a questionnaire
- The underwriters’ legal team will conduct financial and business due diligence, which may include, review of budgets, projections, historical financial information or competitive conditions, or site visits to your facilities
For your team, the most labor-intensive aspect of the due diligence process will be collecting and preparing the relevant materials in response to the due diligence check list and back-up requests. To streamline this process, we recommend creating a digital data room and closely tracking and controlling access.
Best practices for preparing for IPO due diligence
We always recommend cannabis companies take extensive steps to prepare for due diligence before officially starting the IPO process. This will save considerable time and stress to avoid racing deadlines and potentially making mistakes or delaying other key processes.
Steps to prepare for the due diligence process include:
- Designate a single point of contact to lead the document collection and preparation process
- Request the IPO due diligence check list as early as possible so you can begin organizing documentation and materials in advance
- Catalog reports and all other sources for data you’ll want to include in the registration statement and prospectus
- Collaborate with your audit provider to ensure the company’s financials will meet the Canadian Public Accountability Board’s financial statement requirements.
- Pre-emptively prepare documentation around topics you know you’ll need to represent, including, significant acquisitions, financial statements for subsidiaries, and tax and regulatory compliance.
In many IPOs, the due diligence process is the most onerous and time-consuming phase of the IPO. Despite the discomfort of this close examination, the verified data that makes it into your prospectus and registration statement is absolutely essential to securing a healthy valuation.
To get a head-start on IPO due diligence, consult with an experienced IPO advisory firm like GreenGrowth CPAs. Our team of expert accountants and auditors can provide valuable guidance throughout the process to save time, money, and headaches.
To get started, schedule a consultation with our team or call 1-800-674-9050