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Mike Volker

IPO, RTO, CTO, or NPO: Which Way to Go?

By: Mike Volker, Tel:(604)644-1926, Fax:(604)925-5006

Email: mike@risktaker.com

For many years, I've been "promoting" the VSE as a link to venture capital for technology companies hoping, of course, that the VSE will view technology companies as the mining and resource plays of today.

If you like the idea of minimal equity dilution, future liquidity, follow-on financing, incentive stock options, publicity, maintaining control, etc., then the VSE may be for you! To become a "public company", i.e. a company which has its shares traded on a recognized stock exchange such as the VSE, you have a few paths you can take. The two most common routes are the IPO (Initial Public Offering) and the RTO (Reverse Take-Over).

In an IPO, a company offers a sale of new shares to the public through the services of an underwriter (i.e. stock broker) using an Offering Memorandum or Prospectus. The prospectus is a full disclosure document in which you bare all and warn investors that even though you will do your best to make them a fortune, they may also lose their entire investment. This document is well scrutinized and must be approved by both the BC Securities Commission and the Stock Exchange with the Commission having the upper hand. Upon approval of said document and subsequent to the distribution of securities under same, a Company then has its shares "listed" for trading by the general public. In summary, the IPO simultaneously allows a firm to raise cash (this is why a sponsoring broker is absolutely necessary) and gain listed status. An IPO is not cheap. Count on at least three months and many delightful (and expensive) meetings with lawyers, accountants, brokers, consultants, and regulatory officials. For a VSE IPO, budget at least $75,000 in addition to your underwriter's fees. A major chunk of this will go to an independent consultant (i.e. "expert") to provide an objective assessment of your products and sales potential to give comfort to those who need it. (Actually, I believe that companies, and the investing public, would be better served if there was less emphasis on the technology or product and more on the people behind it. Products don't sell; people do!). For a small, emerging company seeking to raise one or two million dollars, the red tape and expense involved is, unfortunately, a major deterrent to doing an IPO. Brokers feel the same way. When they assess the time and effort it takes to generate fee income from an IPO, they are better off working on a secondary financing or a merger/acqusition deal. We are missing an opportunity here! A junior technology company IPO should be as easy to do as a junior resource exploration deal.

An RTO (Reverse Take-Over) allows you to take a short-cut in going public. All you need to do is to find an already public company which has fallen on hard times such as a mining company which is inactive with virtually no assets or liabilities. Its real asset is its listing status. Let's say that MP Resources Inc., an inactive mining "shell", has 10 million shares issued. It can be "taken over" by your Company, Supertech Inc., (fictional names) by issuing, for example, 90 million new treasury shares. The shareholders of Supertech now effectively own 90% of MP Resources and hence now control MP. This is often referred to as a "back-door" listing because you can escape some of the red-tape associated with an IPO. The VSE (which is self-regulated) and not the Commission (which is a government body) typically calls the shots with RTOs. Some well known companies first went public this way: Magna Automotive (TSE), International Semitech (TSE), and MotionWorks (VSE). This will get you a listing, but it will not necessarily get you any capital. However, once your stock is trading, you can attract new investors more easily by offering them liquidity and you can sell new shares through private placements or public offerings, e.g. via an "Exchange Offering Prospectus" which is not quite as rigorous as an IPO-style prospectus. An RTO, although not as clean as an IPO, is generally cheaper and faster (this advantage is disappearing, however). Some companies, such as Magna, initially went public only because they had a broad shareholder base (mostly employees) and founder Frank Stronach wanted to have a market for his stockholders. One really must question the validity of the RTO process. Why not simplify IPOs instead?

Less popular, at least for start-up companies, is the CTO (Corporate Take Over). If you can't go public on your own via an IPO or RTO, you can always give up control to another listed Company (but you may have to be a little more mature to be of interest to a suitor) with which there may exist other synergies. In this case, you and your co-owners will swap your privately held shares for newly issued listed shares such that the issuing company will end up controlling at least 51% of your Company. This may be the least expensive and fastest way for you to go public, get new capital as well as new partners. For example, MacDonald Dettwiler & Associates was the subject of a failed CTO attempt by Spar Aerospace in the early 90's. They're not easy deals to consummate!

Each of these going public routes has its fans. Regardless of the road you take, it helps to have a good business proposition with good people behind it. So, if you can't get your company on the ticker through one of these common avenues, you'll simply have to settle for the NPO (Non-Public Option) for now!

Copyright 1992, 1997 Michael C. Volker
Email:mike@risktaker.com - Comments and suggestions will be appreciated!

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