PANEL: "IPO, SPAC or Reverse Merger and At-The-Market, Registered Direct Offerings or a PIPE?"

Overview of IPO Process

Regular way IPO is a public offering of Securities with an underwriter with a listing of those Securities on a stock exchange
There are two types of IPOs: best efforts and firm commitment
In a best efforts IPO, the underwriter will use their best efforts to place the securities directly with investors
In a firm commitment, the underwriter will pre-sell accompany securities and then will purchase the Securities directly from the company and resell them
Companies are often confused about bridge financings as well, but bridge financing is not guaranteed even if it is in the engagement agreement

"IPO regular way is a public offering of Securities with an underwriter with a listing of those Securities on a stock exchange."

The Current IPO Market

Regular way IPO is still the most prevalent way to go public today
The stock market has been extremely volatile over the last 18 months, but experts are now saying that the IPO window is opening after the IPO winter
A company needs to be flexible during the process

"As you all know the stock market has been extremely volatile over the last 18 months but experts are now saying that the IPO window is opening after the IPO winter."

Common Issues with IPOs

Companies are often confused about engagement agreement and underwriting agreement
Bridge financing is a private offering of Securities to raise a bit of capital for the company so it can see its way through the process
A bridge financing may take the form of convertible debt that is convertible into the Securities of the IPO, but debt can be an issue because it counts against shareholders’ equity for the stock exchange requirements
Companies need to be flexible during the process once they've filed their documents with the SEC before launching the IPO

"Bridge financing is not guaranteed even if it is in your engagement agreement."

"Companies need to be flexible during the process once you've filed your documents with the SEC before you launched the IPO, which is called going effective."

The Role of the Underwriter

In a best efforts IPO, you get what you get and the underwriter will use their best efforts to place your securities directly with investors
In a firm commitment, the underwriter will pre-sell the company securities and then will purchase the securities directly from the company and resell them
The underwriting agreement is what you sign immediately before you go effective, whereby the underwriter agrees to purchase the Securities
The underwriter may ask the company to go through some gyrations during the process such as adding one or more warrants as a sweetener to entice investors to the deal

"In a best efforts IPO, you get what you get, the underwriter will use their best efforts to place your securities directly with investors."

"The underwriting agreement is what you sign immediately before you go effective, whereby the underwriter agrees to purchase the Securities."

Dilution happens when more shares are being issued, and this affects the overall ownership of the company
Decreasing the offering amount often comes as a shock to people, but it is due to market conditions and lowering the price per share
When you file with the SEC, there’s a range for the price and often things lately have been tending to go towards the Lower Side of the range

Going public through IPOs

Going public through IPOs (Initial Public Offerings) is still considered the holy grail for small companies.
Once a company goes public through an IPO, it will have options and currency in the form of stock.
Both NASDAQ and NYSE American have a policy to review the proposed distribution before allowing the listing.
NASDAQ has gone full force with this policy, while NYSE American has not, so some companies choose to list on the NYSE American instead of NASDAQ.

"An IPO regular way on a firm commitment basis is still considered to be the Holy Grail to go public for small companies and that's because no one knows market conditions in real time better than the underwriters. They will guide the company through the time the best time to launch the IPO."

Listing requirements for NASDAQ and NYSE American

NASDAQ requires $15 million of free trading public float, while NYSE American requires $10 million.
If a company's offerings are cut back to $10 million, then it will not meet the requirement for the listing.
A company that wants to list its securities on NASDAQ requires 300 shareholders, while a company that wants to list on NYSE American requires 400 shareholders.

"NASDAQ requires 15 million dollars of free trading public float, meaning non-affiliated shares. Typically, offerings will come out at 15 million, but then if they're cut back to say 10 million, well now you only have 10 million dollars of Market flow, you're not going to meet the requirement for the listing, so we have to come up with five million dollars worth of freely tradable shares."

Advice for companies seeking an IPO

Companies should have enough money to get through the process since an IPO process can take several months, and they have to maintain their regular expenses.
Companies should have some shareholders help out the underwriters. If a company has some shareholders it could register, it would help meet the requirement for the exchanges.
Companies should be flexible when the underwriter calls and says, "Hey, we need you to do a reverse stock split." That's what they need to do.
Companies should be prepared, with their books and records in order and specifically have a plan before going public, which will save them time and money.

Alternative routes to going public

Private companies mergin into public companies through SPACs, reverse mergers, and other M&A transactions.
Some companies can't raise capital through traditional IPO methods.
Companies can go public through cash and common stock.
Advantages include valuation at announcement and a shorter timeline for M&A deals.
Disadvantages include still subject to market volatility and undervaluation.

"Alternatives that we're seeing with respect to M&A's being an alternative route for companies that otherwise can't raise capital in the traditional markets."

Andrea's observations in the capital market space

IPOs in process are taking longer than before.
Observing more bridges to IPOs that are more expensive, which is taxing on clients.
Resurgence of reverse mergers with clients seeking alternative routes to going public.
Reverse mergers give a private company access to transparency and liquidity that investors want.
Challenges include market volatility and undervaluation.

"I'm really seeing a resurgence of, at least once or twice a week, no exaggeration, a former client or a new prospective client is calling about what their options might be to take that shortcut to going public without exploring the IPO."

"Resurgence of [reverse mergers] at least once or twice a week, no exaggeration, a former client or a new prospective client is calling about what their options might be to take that shortcut to going public without exploring the IPO."

Going public options

Before choosing a going public option, companies must understand how much equity they will be giving up.
Companies should weigh the pros and cons of each going public option.
A reverse merger may be a shortcut to becoming a NASDAQ-listed company, but companies must be cautious of the risks involved.
Taking the time to go public through an IPO or direct listing may allow companies to keep the lion's share of their stock.
Going public via direct listing involves raising capital privately, following securities laws, filing a registration statement, and registering shares.
After going public, companies can uplist when they're ready.

"When we're looking at that as an option, is to really understand how much equity they're likely going to be giving up for that shortcut to be a NASDAQ listed company when if they were only just a little more patient maybe three to four months they could keep the Lion's Share of their stock in an IPO or even in a direct listing where they raise Capital privately follow the Securities laws file a registration statement perhaps do a financing either before and register those shares or after a form 10 and register shares and then go through the 15c to 11 process and up list when they're ready."

Risks of reverse mergers

A reverse merger into an OTC markets shell company may be attractive to some companies, but it comes with risks.
Companies must conduct proper due diligence before merging with an OTC markets shell company.
Some OTC markets shells may have undisclosed liabilities or may have failed to file necessary forms.
If a private company merges with an OTC markets shell company that failed to file a form 15 to withdraw from reporting, it may cost the private company hundreds of thousands of dollars to make up missed filings.
The SEC does not waive missed filings, and it may be necessary to make up all of those missed filings even if the shell is current.

"The challenge with the reverse merger into the OTC markets shell which is sometimes most attractive and I say unfortunately no disrespect to the OTC markets entities but what often happens with an issuer that's excited about that as an opportunity is something has presented itself that it's such a great deal they can't pass it up like it's only a hundred thousand it's only 250 000 to get into this public company and the issuer may not have taken the time to do proper due diligence and these companies that have been public for a while sometimes have hair sometimes they have undisclosed liabilities and often a simple thing like having an attorney take a look at well what is there have they ever been reporting have they failed to file this I've seen more than a handful of times a shell is on OTC markets used to report and five years ago when they ceased reporting they failed to file a form 15 to withdraw from reporting while they're current that's the only way form 15 works if you want to alleviate the responsibility of reporting and not have to make up those filings if you come back to life and become reporting again the sad reality is if a private company merged into a bargain shell that went about their ceasing of reporting without following the rules it might cost this this company hundreds of thousands of dollars no exaggeration to make up all of those missed filings and the SEC is not wavering on that."

Direct listings

Direct listings involve going public by having financial statements audited and having a team that can get the company through the process.
Companies that go public through direct listings can preserve a lot of equity.
Direct listings are a good alternative for private companies that are exploring ways to go public.

"I think direct listings is just worth another another plug I don't think we spoke much about that some of the prior uh panelists maybe brought up that possibility of that as an alternative I encourage those of you who are private companies and exploring ways to go public that you consider that as an alternative if you have your financial statements audited you just need a team around you that can get you through the process and you'll preserve an awful lot of equity as opposed to some of these other methods."

Canadian IPO market overview

Speaker has acquired and sold over 600 companies
Canada had 21 IPOs in Q1, 2021, with 11 on the TSX Venture exchange, all of which were CPCs
CPCs are mini blank-check companies that do reverse mergers
In comparison to other exchanges, the TSX had only one listing, which raised CAD 150 million
Lucy scientific was the only Canadian company to list on NASDAQ and raised CAD 5.8 million
The Canadian IPO market is relatively small, with combined IPOs raising CAD 178 million in Q1, 2021

"We actually look at deals as being people, particularly early stage companies. The people are the most important part."

Betting on teams and people

Good people are an important factor in the success of a company
Every single life science company the speaker has taken public has pivoted
Regulators often forget the importance of good people in a company
Botox was developed in Vancouver to help children with eye problems

"Everything that we think we know about companies, you're talking about betting on teams and people." (1561)

Moving away from IPO market

The market is moving away from an IPO market
Moving towards a market where there is certainty
The VIX volatility index is used as a starting point
The VIX moving into the upper teens and hitting over 20 makes IPOs less likely to happen
Windows between 12 and 17 are considered stable markets

"In kind of looking at the trends, we're moving away from an IPO market moving to one where we have certainty."

Factors affecting IPOs

The occurrence of events like war, bank collapse, and other types of crises can impact the IPO market.
The COVID-19 pandemic has made the market uncertain, with high-interest rates and inflationary pressures affecting market stability.
The uncertainty of what's going to happen next has put a little bit of pale in the IPO market.

"I don't think this year is going to be a great year, not for IPOs."

Direct offerings and RTOS in Canada

Direct offerings and RTOS are favorable in Canada as they provide the issuers with certainty.
When issuers put their hands in an underwriter, they look at the market and the windows of opportunity to price the offering.
Direct offerings and RTOS have always been somewhat favorable in Canada.

True operating companies trading below their IPO price

Majority of the true operating companies are trading below their IPO price, which didn't do them any favors.
If you're a fund, you just got money in the bank and it's not going anywhere.
Once you're stuck in that position of "I got to do my listing, I can't get any more new money at these prices or I don't want to dilute myself," where do you go?

"Where do we leave it from there?"

Going public: IPO, NASDAQ, and government contracts

Going public is not a one-size-fits-all decision, and it depends on the company's goals and circumstances.
Some companies might want to go public to take advantage of government contracts that are only available for public companies.
Certain markets can be like a lottery, where the price of a company's shares can increase dramatically very quickly.
Going public in a different market than where the company is based might be necessary due to government regulations or other factors.
Taking a company public is not an easy process, and it requires careful consideration of the company's business model and future prospects.

"Going public is not one answer fits all...I start by asking why you want to go public."

Types of funding sources: IPO, SPAC, and reverse mergers

Reverse mergers, where a private company merges with a public one, and SPACs, special purpose acquisition companies, are becoming more popular funding sources.
However, they can be risky and expensive, and companies need to be careful when choosing these options.
IPOs, initial public offerings, are another funding source that might be a good choice for companies with strong business fundamentals and good management.
Each funding source has its own risks and benefits, and companies need to evaluate them carefully before making a decision.

"IPOs are still the most popular method of going public...there's a lot of regulatory issues and whatnot with SPACs and reverse mergers."

Small early stage companies and expensive funding sources

Small early stage companies that go public too quickly can suffer from expensive funding sources that offer capital with high discounts and volume-weighted averages.
These funding sources can be toxic and harmful to a company's stability and future.
Waiting to go public until the company is more established and has better access to capital might be a better option in the long run.

"There are funding sources that are very expensive and are extraordinarily harmful to a company's stability."

NASDAQ shell and litigation

There is no such thing as a NASDAQ shell, but it refers to a delinquent or deficient Aztec company that is ready for a transaction.
It is better to go for this option than to choose over the counter (OTC) super 8K difficulty and wait for six months or a year to be eligible for listing.
There has been an increase in SEC litigation in the last 18 months regarding toxic debt financing.
Companies need to plan ahead of time and get ahead of the litigation.
It is important for companies to start thinking about these things on an earlier time frame.
Companies need to get their IR program and market right.
The starting point is to figure out the IR program that they are going to do and put out regular information.
Companies need to have a compliant IR program and not do random promotion out there with all sorts of material wraps.
The stock wouldn't sell if there is no IR program.
Companies need to look at their market and talk to every fund manager possible to get their IR program right.

"There's definitely an increase in SEC litigation coming down around those types of toxic debt financing, not to call it that. I mean, that's not what they call it, but um, yeah. So I think what I'm sensing is a lot of that might be avoidable if companies are planning ahead of time, getting ahead of it, maybe starting to think about these things on an earlier timeframe."

Alternative options for companies

Reg A is a way to build a shareholder base for a direct listing
General solicitation offering is a nice way to build a shareholder base
A direct listing can work for raising money from friends and family
50 is all the known shareholders needed to register underlying shares
300 shareholders would be fantastic for applying to list on NYSE, NASDAQ, or American
Reg A is a good preliminary step for a company to get used to a lower reporting
Broker dealers like direct listings where they're placing in Canada as they're doing special warrants
Liability for broker dealers is reduced with a Reg A
Companies can elect to become a reporting issuer under the 1934 act by filing a form 8A

"Reg A is a nice way to build a shareholder base for a direct listing"

Shareholder information for direct listings

NASDAQ now wants to know weeks before pricing information about shareholders
Due diligence done, customers known, and information on shareholders critical in a Reg A
Direct listings, where you're just raising money from friends and family, need registration information
50 is all the known shareholders needed to register underlying shares
Registering underlying shares or securities will get the shareholder base of known shareholders

"NASDAQ now wants to know weeks before pricing information about shareholders"

Steps to follow for direct listings

Make sure the registration statement clears comments
Coordinate efforts with OTC markets if that's going to be your first step where you're going to trade
If fortunate enough to do a broader offering where you can get 300 shareholders and you are a seasoned company that has all of those characteristics, you can apply to list on NYSE, American or NASDAQ
A direct listing can save a lot of money compared to an IPO or uplisting or reverse merger and uplist
Direct listings require coordination and making sure registration statement clears comments

"A direct listing can save a lot of money compared to an IPO or uplisting or reverse merger and uplist"

The importance of finding the right investors

It's important for companies to find investors who are interested in their product or service.
Finding the right investors involves understanding the target audience and where they are looking.
Comparing the process to being a cowboy in a punk bar, finding the right investors is about finding the right group of people who are looking for what you have to offer.

"How do they find the group that likes them? You know, we're it's kind of like if you're a cowboy and you go to a punk bar chances are pretty good you're not going to walk out or have very good experiences there so you're looking for where those experiences and where those people are looking for you."

Using bankruptcy code to create a class of free trading shares

There is a section under the bankruptcy code that allows private companies to create a class of free trading shares to pay off liabilities or raise capital.
This section is often overlooked and can be a useful tool for companies looking to start fresh or raise capital.
The creation of a class of free trading shares can be approved by a judge and can be part of the company's package moving forward.

"There's a section under the bankruptcy code that's really a beautiful thing that a lot of private companies are unaware of... it's the ability to create a class of free trading shares to pay off liabilities. You could also use it to raise capital... it's a clean slate and this way you don't have to be concerned about all those skeletons so to speak because from that point forward, you've got a shareholder base and a clean slate."

The advantages of court-ordered issuance of shares

The FCC has a clause that states any court-ordered issuance of shares is free trading.
This applies to mergers and acquisitions in Canada as well, where a plan of arrangement can require a court order.
Court-ordered issuance of shares has several advantages, including the ability to create more complicated deals involving exchangeable shares or tax structures.

"The FCC has a clause that essentially says any court-ordered issuance of shares is free trading... it's not necessarily as easy to have it recognized in the United States, especially if you're going to be doing it in Canada. What we do is we'll try to involve a court action in both jurisdictions."

The range of implied valuation for a public shell

The range of implied valuation for a public shell in the U.S varies widely, from all equity deals to $750,000.
Factors that can affect the value of a public shell include the size of the shareholder base, whether it's a Delaware or Nevada corporation, and whether it has any liabilities.
Companies are looking for public shells that are clean and have good fundamentals.

"It really ranges... the shareholder base is bigger if it's a Delaware or a Nevada corporation, if it has no liabilities and it's clean, if it has... there are a lot of things that companies are looking for specifically that they believe would make it more valuable."

Contacting qualified attorneys for going public

The panelists thank the audience and indicate that they are out of time.
They mention that if anyone wants to reach out to the qualified attorneys on the panel regarding going public or being involved in one of these transactions, they can contact them through email or their website.
Alternatively, the contact information may be available on the Planet MicroCap site.

"If you want to reach out to any of these very qualified attorneys you're thinking about going public or you want to be involved in one of these transactions, where can they contact you?"

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