Once you’ve decided your cannabis business is ready to go public, another major decision looms: how will you go public? Currently, there are three paths to becoming a public company, an IPO (Initial Public Offering), RTO (Reverse Takeover), or being acquired by a SPAC (Special Purpose Acquisition Company). In the following we’ll examine the details and pros and cons of the first two options (and address SPACs in a later article).
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, including institutional investors and retail 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.
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 of your company in acquiring the shell company, and 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.
|Time to Market||6 months-1 year: Longer lead-up time and more extensive review by regulators.||✓||Can be executed successfully in a manner of weeks or months.|
|Stock Dilution||✓||You have greater control on the amount and percentage of stocks issued to public investors.||You are likely to give up a large percentage to the shell company’s owners|
|Liabilities||✓||You have a fresh start with no pre-existing liabilities.||You may have to manage previous liabilities from shell company, including outstanding debt or legal issues.|
|Due Diligence||You undergo much more extensive due diligence which is time and cost-extensive. However, this may translate to greater market confidence and a higher valuation and stock price.||✓||You save time and money with significantly less regulatory and underwriting due diligence. However, questions may linger about operational and financial health.|
|Stigma||✓||An IPO is a widely celebrated achievement that earns investing community press and accolades when executed well, bringing positive attention to your business (but negative attention if you fail).||✓||There has been a lingering negative stigma around RTOs in mainstream industries, but this is less so the case in cannabis.|
|Costs||The amount of marketing, due diligence, financial and operational preparation for an IPO can be very costly. This can be counterbalanced by the increased levels of capital available.||✓||The primary cost of the RTO will be acquiring the shell company. These costs have risen in recent years as RTOs have become more popular.|
|Influence of External Factors||The success of an IPO can be largely determined by outside factors. Many IPOs are halted because market conditions are not favorable.||✓||An RTO is much less influenced by outside factors and have a greater likelihood of successful completion.|
|Capital Potential||✓||IPOs commonly raise significant amounts of capital in the initial issuance.||In an RTO, you miss out on the initial raise but you’re faster to market in trading public shares.|
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.
GreenGrowth CPAs is a boutique cannabis accounting firm with real-life experience preparing cannabis companies to go public, and executing optimal IPOs and RTOs. We are licensed to serve as auditors on both sides of the border and ease your entry into public markets. If you’re ready to start considering a go-public transaction, schedule a consultation with our team here or give us a call at 1-800-674-9050.