Initial Public Offerings in the Junior Mining Sector
February 1, 2017
A rebound in the performance of mining stocks has revived interest in the going-public process among junior mining companies. There are a number of ways to go public in Canada. The purpose of this blog post is to highlight some preliminary matters to consider in connection with the initial public offering (IPO) of a junior mining company and listing on Tier 2 of the TSX Venture Exchange (TSX-V) or the Canadian Securities Exchange (CSE). If you’d like information regarding listing on other stock exchanges, or other ways to go public, please contact us.
The key TSX-V listing requirements for a Tier 2 mining company are as follows:
- Significant interest in a qualifying property or, at the discretion of the TSX-V, a right to earn a significant interest in the qualifying property
- Sufficient evidence of no less than $100,000 of approved exploration expenditures on the qualifying property in the prior three years
- Work program with an initial phase of no less than $200,000, as recommended in a geological report
- (i) Adequate working capital and financial resources to carry out the stated work program or execute business plan for 12 months following listing and (ii) $100,000 in unallocated funds
- Geological report recommending completion of work program
- Management, including board of directors, should have adequate experience and technical expertise relevant to the junior mining company’s business and industry as well as adequate public company experience
- (i) Public float of 500,000 shares, (ii) 200 public shareholders each holding a board lot and having no resale restrictions on their shares and (iii) 20% of issued and outstanding shares in the hands of public shareholders
- Sponsor report may be required, although many junior companies conducting an IPO will qualify for an exemption
The key CSE listing requirements for a mineral resource company are as follows:
- Reporting issuer in a jurisdiction in Canada (other than solely as a result of certain policies or transactions). Note that a junior mining company will become a reporting issuer upon obtaining a receipt for its prospectus in connection with the IPO
- Title to a property that is prospective for minerals, or the means and ability to acquire an interest in the property upon completion of specific objectives or milestones within a defined period
- At least $75,000 in qualifying exploration expenditures must have been incurred on the property in the prior three years
- Work program with an initial phase of no less than $100,000, as recommended in a technical report
- (i) Financial resources to carry out the stated work program or achieve stated objectives for 12 months following listing and (ii) a minimum of $200,000 in working capital
- Public float (i) of 500,000 freely tradeable shares and consisting of at least 150 public holders holding at least a board lot and (ii) constituting at least 10% of the issued and outstanding shares
In appropriate circumstances, the stock exchanges are amenable to applications to waive certain of the listing requirements. If it is anticipated that such a waiver will be required, it is advisable to discuss with your legal counsel and/or staff at the applicable stock exchange early in the process.
The Canadian Securities Administrators (CSA) have issued a bulletin addressing share structure and related public interest issues in the context of an IPO. When a securities commission reviews an IPO by a company with a share structure that the commission considers contrary to public interest, it may refuse to issue a receipt for the prospectus. Such refusal would effectively halt the IPO. The CSA have stated that these public interest concerns may be raised in the following circumstances: (i) share structures in which the founders have paid a nominal amount for a large block of shares relative to the IPO price; and (ii) transactions in which IPO investors are to contribute an amount of capital that will be significantly disproportionate to their equity interest on completion of the IPO.
Other factors the CSA will consider when evaluating acceptable share structures include (i) the amount of time, effort and resources spent by the founders developing the business and whether this represents a realization of business development efforts or otherwise demonstrates value; (ii) the amount of cash invested by the founders and the length of time it has been actively used as part of the company’s capital structure and development of its business; and (iii) the presence of significant convertible securities, which includes options, outstanding at exercise prices lower than the IPO price.
In addition, the junior mining company’s capital structure must be acceptable to the applicable stock exchange:
- The TSX-V has discretion to refuse an application for listing if a company’s capital structure appears to be excessively dilutive or otherwise imbalanced. Note that if a company has issued shares at an effective price of less than $0.05 per share prior the IPO, the TSX-V may request additional information from the company. The TSX-V will apply guidelines contained in bulletins it publishes from time to time in making any decision on the suitability of the company’s capital structure. The TSX-V will also consider, if applicable, the company’s history of operations, its listing category, its ownership of, or interest in, an asset or assets of determinable value, and the amount of any arm’s length transaction financing undertaken by the company, and associated with its listing, before making any decision on capital structure, adequacy and acceptability
- Mineral resource companies seeking listing on the CSE may not sell securities pursuant to an IPO for less than $0.10. For companies not yet generating revenue from business activity, the CSE will not consider an application where builder shares (generally, shares issued at less than $0.02 or to related persons in certain circumstances) have been issued for less than $0.005 in the previous 18 month period. Under CSE policies, the ratio of shares in the company must not exceed one builder share for every three non-builder shares. In certain circumstances, the CSE will accept alternative proposed capital structures
It is often prudent for companies and their legal counsel to consult with the applicable securities commission and/or stock exchange staff on the acceptability of a proposed capital structure prior to filing a prospectus or submitting a listing application.
Key Documents + Requirements
A junior mining company will be required to file a prospectus including full, true and plain disclosure of all material facts relating to the securities offered in connection with an IPO. The company, its directors, CEO and CFO, underwriters and experts must certify that the prospectus does not contain a “misrepresentation”, which includes a failure to state a fact required to make a statement not misleading in the circumstances.
A prospectus filing triggers the requirement to file a current technical report. TSX-V and CSE policies also require the submission of a technical report in connection with applications for listing. Contents of the technical report are mandated by form requirements of National Instrument 43-101. For an IPO, technical reports must be prepared by or under the supervision of an independent “qualified person”.
Financial Statements and MD+A
Junior mining companies seeking to go public are required to prepare financial statements in accordance with International Financial Reporting Standards. The following financial statements are required in a prospectus:
- Audited annual financial statements generally consisting of:
- Comprehensive income, changes in equity and cash flows for the three most recently completed financial years (less than three years may be sufficient in certain circumstances)
- Financial position for the two most recently completed financial year
- Notes to the financial statements
- Auditor-reviewed interim financial statements for the most recent interim period, if any, ended subsequent to the most recent financial year in respect of which annual financial statements are included in the prospectus, and more than 45 days (in the context of a TSX-V listing, 60 days) before the date of the prospectus. These interim statements must generally include:
- Financial position as at the end of the interim period
- Comprehensive income, changes in equity and cash flows all for the year-to-date interim period and comparative financial information
- For interim periods other than the first interim period, comprehensive income for the three month period ending on the last day of the interim period and comparative financial information
- Notes to the financial statements
Junior mining companies are also required to prepare management’s discussion and analysis (MD+A) for each set of annual and interim financial statements included in the prospectus. MD+A will include “a narrative explanation through the eyes of management” of how the company has performed during the prior annual or interim period.
Keep in mind that if a company has effected a significant acquisition or disposition or intends to effect such a transaction in connection with its IPO, then additional financial statements may be required.
National Policy 58-201 (NP 58-201), contains recommendations of the CSA concerning public company corporate governance, including the composition of a company's board of directors. Under NP 58-201, a majority of a public company's board of directors, plus the chair of a public company's board (if appropriate), should be independent. If it is inappropriate for a company to have an independent director as Chair, then it should appoint an independent director as a lead director. This lead director should be the effective leader of the board. However, these are guidelines or best practices, and not strict rules in the context of most junior mining companies.
Under TSX-V policies, a company’s board of directors must consist of at least three directors, at least two of which are “independent” (using the test set out in National Instrument 52-110). Management must include, at a minimum, a CEO, a financially literate CFO and a corporate secretary (which can be the CEO or CFO). Management, directors and officers must have adequate experience and technical experience relevant to the junior mining company’s business and industry, and adequate reporting issuer experience in Canada or a similar jurisdiction.
CSE policies are less prescriptive on this point, and encourage companies to develop governance structures that are appropriate to their nature and circumstances.
Directors and senior management are generally required to submit personal information forms to the applicable stock exchange containing detailed information regarding their background. Stock exchanges and securities regulators will perform extensive background checks on members of a company’s board and senior management.
A junior mining company must have an audit committee comprised of at least three directors, the majority of whom are not officers, employees or control persons. An audit committee must have a written charter.
Securities regulators and stock exchanges generally require “principals” to place their shares and convertible securities in escrow for a period of time following an IPO. The purpose of this requirement is mostly to ensure that the market price is not depressed by early sales by insiders.
The escrow regime applies to certain principals, including:
- Directors and officers
- Promoters during the two years preceding an IPO
- Holders of more than 10% of the equity securities (if they have appointed or have the right to appoint a director or senior officer)
- Holders of more than 20% of the equity securities
- For purposes of the escrow regime, companies are subject to different release dates based on their classification as either “exempt issuers”, “established issuers” or “emerging issuers”. Generally, junior mining companies are deemed to be “emerging issuers” for purposes of the escrow policy.
In the case of “emerging issuers”, the usual case is a 36 month release schedule. There are provisions for early release on change of status, for example if the junior mining company graduates to the TSX.