A Step-by-Step Guide to Going Public via Reverse Takeover (RTO) – Part 1

Sep 28, 2024 | Capital Markets, Going Public, Reverse Takeovers (RTOs)

Reverse Takeovers

For Founders and CEOs considering taking their companies public via a reverse takeover (RTO), understanding the process is crucial for a smooth transition. RTOs provide a faster, more cost-effective path to public markets compared to an initial public offering (IPO), but they come with their own set of challenges and procedural steps. In this guide, we’ll cover the initial stages of an RTO, starting from drafting the Letter of Intent (LOI), if applicable, to executing the Definitive Agreement (DA). This guide condenses the extensive legal and regulatory requirements to help you understand the essentials.  

Disclaimer: This article is for informational purposes only and should not be considered legal or financial advice. Please consult with your legal counsel and financial advisors before pursuing any transaction, including a reverse takeover (RTO).

  1. Drafting the Letter of Intent (LOI)

Transactions sometimes skip the LOI stage and go directly into the definitive agreement (DA) stage. Note that LOI’s can be binding, or non-binding agreements based on the circumstances of both companies and the transaction. The LOI outlines the basic terms of the transaction between your company (the “Target Company”) and the publicly traded entity (the “Listed Issuer”). The LOI typically covers key areas such as the structure of the deal, the valuation of your company, information about your company, and preliminary due diligence requirements. As a CEO, the LOI serves as a roadmap for negotiations and sets the tone for the entire transaction.

Action Items:

  • Ensure that the LOI outlines key financial and operational terms.
  • Involve legal counsel early to ensure that the LOI covers all necessary elements without being overly restrictive.
  1. Evaluating Exchange Listing Requirements

One of the critical considerations during an RTO is whether your company meets the listing requirements of the exchange where the resulting issuer will be listed, such as the Canadian Securities Exchange (CSE) or the Toronto Venture Exchange (TSXV). The requirements include both quantitative measures (such as revenue and asset thresholds) and qualitative standards (such as corporate governance practices). It is essential to confirm that your company, after the merger, will satisfy these criteria.

Action Items:

  • Work with advisors to review exchange requirements and ensure compliance.
  • Assess capital requirements to ensure adequate capital to carry out stated business plan objectives per exchange requirements.
  • Plan for any operational changes required to meet these criteria before the RTO closes.
  1. Board Resolutions and Approvals

Once the LOI is drafted and reviewed, both the board of directors of the Listed Issuer and the Target Company must approve it. Board resolutions formalize these approvals and authorize the next steps in the process. It is important in ensuring your board fully understands the implications of the RTO.

Action Items:

  • Schedule board meetings for timely approval of the LOI.
  • Clearly communicate the benefits and risks to your board to ensure informed decision-making.
  1. Press Release and Public Disclosure

After the LOI is executed, both companies must prepare a press release announcing the proposed transaction. This press release, which is subject to review by IIROC (Investment Industry Regulatory Organization of Canada), will be filed on the System for Electronic Document Analysis and Retrieval (SEDAR) for public access. Transparency is critical in this stage to maintain regulatory compliance and public trust. To view an example of a press release announcing entering into a binding LOI from one of our previous transactions, click here.

Action Items:

  • Prepare the press release with legal counsel to ensure regulatory compliance.
  • Submit the press release to IIROC for review before dissemination.
  1. Structure and Business Plan Confirmation

At this stage, you’ll need to confirm the structure of the transaction, the most common being a three-cornered amalgamation (where both companies are merged, and shareholders receive shares in the newly formed entity). Additionally, the Target Company must provide an updated business plan, including detailed financial forecasts and descriptions of management, operations, and industry outlook. This ensures the market understands how the new entity will operate post-transaction.

Action Items:

  • Confirm the deal structure with your legal and financial advisors.
  • Ensure that your business plan is detailed and updated to reflect the post-merger outlook.
  1. Retain auditor

Obtaining an experienced auditor early in the RTO process is crucial for both the Issuer and Target Company to ensure a timely and successful transaction in compliance with regulatory standards. Your auditor will help prepare accurate financial statements and verify that all information is in line with securities legislation.

By engaging a qualified auditor early in the RTO process, you minimize the risk of delays and ensure that your financial statements are prepared according to the highest standards.

Financial Statement Requirements: Preparing for Audit

One crucial aspect of the reverse takeover (RTO) process is ensuring that both the Issuer and Target Company have the necessary audited financial statements in place. These financial statements are essential for compliance with applicable securities legislation and will be required by regulatory authorities such as the exchange where the company plans to list.

Audited Financial Statements for the Issuer

The Issuer (the publicly listed company) must provide the following audited financial statements:

  • Past Three Years: Copies of all financial statements, including the auditor’s reports, for the preceding three years. These statements must be prepared and filed under applicable securities legislation, even if the Issuer was not previously subject to such laws.
  • Current Year: A copy of the financial statements for any completed interim period of the current fiscal year.

This audit is necessary to demonstrate the financial health of the Issuer and meet listing standards. Working with an experienced auditor will ensure that the statements meet the regulatory requirements.

Additional Requirements for Issuers Re-Qualifying After a Fundamental Change

If the Issuer is re-qualifying for listing following a fundamental change (such as an RTO), additional financial disclosures are required. These include:

  • Target Company Financials: The Issuer must provide the same level of detailed financial information for the Target Company, including:
    • Financial statements for the Target Company prepared in accordance with National Instrument 41-101 General Prospectus Requirements, as if the Target Company were the Issuer.
  • Pro-Forma Consolidated Financial Statements: Pro-forma financial statements are essential to provide a clear picture of the newly combined entity after the transaction. These should include:
    • Financial statements for the last full fiscal year of the Issuer.
    • Financial statements for any completed interim period of the current fiscal year, adjusted to reflect the impact of the RTO transaction.
  1. Competitor and Market Analysis

RTOs do not require a long-form prospectus but must disclose prospectus-level information about the company in a full, true, and clear manner. Identifying public competitors and peers, and reviewing their risk factors and business models, can help position your company more effectively. This, along with details about your company, its operations, the markets you serve, and other relevant information, is a critical part of the RTO process as we will address in following sections of this guide.

Action Items:

  • Perform a comprehensive competitor analysis.
  • Include this analysis in your public disclosures, ensuring transparency with investors, exchange and regulators.
  1. Due Diligence and Valuation

Due diligence is a critical part of the RTO process. The Listed Issuer will conduct a thorough review of your company, including financials, material contracts, intellectual property, and corporate governance documents. Additionally, a valuation of your company may be required for shareholder and director approvals, especially if your company’s shares are to be exchanged as part of the transaction.

Action Items:

  • Prepare all necessary documents, including corporate minute books and audited financials, for review by the Listed Issuer’s legal and accounting teams.
  • Consider obtaining a third-party valuation to support shareholder and director approvals.
  1. Execution of the Definitive Agreement (DA)

Once due diligence is completed and both parties are satisfied with the terms, the next step is drafting and executing the Definitive Agreement. This legally binding document outlines the final terms of the RTO and supersedes the LOI. The DA covers everything from the exchange of shares to governance of the resulting issuer. This agreement is typically also referred to as a definitive share exchange agreement. To view an example of a Definitive Share Exchange Agreement from one of our previous transactions, click here.  

Action Items:

  • Ensure your legal team thoroughly reviews the DA to safeguard your company’s interests.
  • Execute the DA promptly once approved by both boards.
  1. Final Disclosure and Public Filings

After the DA is signed, a press release announcing the execution must be prepared, reviewed, and filed. In addition, the Listed Issuer must file a Form 51-102F3 Material Change Report (MCR), which outlines the key terms of the transaction and any significant changes that may affect shareholders.

Action Items:

  • Prepare the final press release and file it on SEDAR.
  • File the MCR in accordance with regulatory timelines.

Conclusion

These tasks may seem daunting at first, but with proper planning and execution, the process can be highly efficient. For CEOs considering an RTO, the early stages—from drafting the LOI and obtaining an auditor to executing the Definitive Agreement and ensuring alignment with exchange requirements—are crucial in laying the foundation for a successful public listing. By understanding the steps involved and preparing your company accordingly, you can navigate this complex process smoothly. Be sure to have the right legal counsel, auditors, and advisors in place to guide you through each stage. With careful planning, an RTO can be a highly effective path to going public.

This is the first stage of the RTO process, which is arguably the most important. Stay tuned for the next blog post, where we will continue with the second stage of the RTO process.

Ready to take your company public?

Whether through a reverse takeover (RTO), direct listing, or IPO, Cyan Capital can help streamline the process and connect you with the right professionals and investors to ensure a successful listing.