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Thursday, July 24, 2014

What are some of the regulations that come with being a public company?

By Jeremy Benson

Going public is a multi-step process that requires a lot of paperwork. This part of the process often attracts the most attention by companies considering going public – a major venture that is best done with the outside help of a company that is wise and experienced in the ways of bringing about a public offering.

As a quick reminder, remember there are usually five steps to launching an IPO.

IPO regulations
Launching an initial public offering often requires underwriting and planning

Starting preparation

Done a half-year before the filing date of the IPO prospectus, this stage includes creating or refreshing a business plan, choosing underwriters, reviewing accounting practices and other considerations.

Preliminary prospectus

The prospectus should be pushed through a number of drafts to work out any kinks and identify problem spots before the regulator would. Once this step is done, you can begin publicly marketing your IPO.

Review period

This waiting period occurs while the preliminary prospectus is being vetted by securities regulators. It usually takes at least a month, with any issues identified.

Final prospectus

Once any issues raised by regulators are addressed, you can file the final prospectus.

Closing date

This is when the action finally starts, with the listing confirmed securities are issued and trading then begins.

That’s all well and good, but many companies can forget that going public entails several new disclosure requirements. Remember, a public company has to open itself up more to the public!

The main idea here is that companies must report their financial information. This material will be made available to all investors, and the result is a level playing field for those deciding what shares to buy. The required documents will be available electronically through a website called SEDAR.

A public company will have to follow through and make the following information available to the public.

Public information financial reporting regulations
Public companies typically have multiple financial reporting requirements

Financial statements

Annual financial statements must be made on or before the 90th day following the end of a company’s most recently finished financial year. This document breaks down the company’s financial position (aka its balance sheet) covering its assets, liabilities and ownership equity. It also contains a statement on a firm’s comprehensive income, which includes income, expenses and profits. Finally, it will also have to contain a cash flow statement, detailing cash flow activities, especially investing and financing actions.

Interim financial statements must be made on or by the 45th day following the end of a quarter.

Interim statements, however, don’t need to have been audited, although it’s recommended that they do go through this level of vetting. Most public companies are required to have in place an official audit committee for this purpose.


Accompanying financial statements is the Management Discussion & Analysis (MD&A).

This is a clearly written explanation from company management on how it performed for the given financial period (the year or the quarter). More than just repeating the company’s financial performance, it should have a narrative that lays out the view of just how things went from those with their hands on the management levers.

The point is to provide information for investors so that they can gain an understanding of the company’s financial situation, any changes in its financial position and how its operations are performing. In other words, it is the context for the hard numbers that the financial statement contains.

However, though the MD&A accompanies a firm’s financial statements, it is considered separate to those statements. But just as financial statements must be approved by the board of directors, so too must the MD&A.

Forward-looking information

The public will be keen to study financial modelling and corporate growth strategies of the company in which they have made their investment. Publicly listed companies are encouraged to provide this information in their public disclosure. The forward-looking information is to lay out, on a reasonable basis, where the company sees itself going financially in the coming quarters and years. This means that any assumptions underpinning this best guess at future revenue must be clearly identified and explained.

Breakdown of executive compensation

Shareholders must be informed of how much some of a company’s executives are getting paid. All compensation for a CEO, CFO and three other top-paid executive officers must be disclosed when the compensation is north of $150,000. Compensation includes not only pay but also shares rewarded to them, along with any other options or perquisites.

Reporting material changes

If a company experiences a sudden shift in its business operation or capital that could be fairly expected to impact its share price, then this must be made public in a news release no fewer than 10 days after the change occurred. Even if this is the result of a decision by a company’s board – and not from the at-times wild swings of the economy – it still must be disclosed.

About the author: The author of the article is Jeremy Benson. He writes about finance, mortgage and Canadian law. Blogging is one among his greatest passions. Follow him on Twitter@jeremybenson19

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