New “confidential pre-file” process “set company up for success” says Goodmans lawyer
The newly created ability for Canadian companies to go public on a “confidential pre-file” basis should give added confidence to those wanting to launch an IPO during a time of potential market volatility, say the two lead lawyers acting on behalf of Dye & Durham in its successful debut on the Toronto Stock Exchange earlier this month.
Bill Gorman, a partner in the business law group with Goodmans LLP, said using outside counsel that already had some experience with the relatively new (in Canada) confidential filing process sanctioned by the Ontario Securities Commission was “definitely a plus” for Dye & Durham.
The advantage to the company was that, through a confidential filing, many of the comments that the OSC and TSX would typically make on an IPO were already addressed before the filing was made public, and it therefore removed the need to send out an amended prospectus.
This “really set the company up for success with the IPO,” Gorman said, because the time between the preliminary prospectus being made public and the final prospectus was “incredibly short,” just about two weeks when it usually is between five and six weeks.
Fellow Goodmans partner David Coll-Black, who also led on the IPO, says that the longer a prospectus is in the public eye, the greater risk that the market could change. So, having a shorter public period, thanks to the confidential process that allowed regulators to vet the IPO, allowed for more accurate pricing of the deal, and allowed underwriters to fill the order book with greater confidence that the price fairly reflected market conditions.
Shares of Dye & Durham, a provider of software for law firms and businesses, soared in its debut as a public company on July 17, fuelled by strong demand for technology stocks during Covid-19, especially those that help businesses collaborate as employees work remotely from home. The IPO raised $150 million with a debut price of $7.50 per share. The stock opened on the TSX at $11.49 and closed at $14.80 on its first day. It is now trading in the $13 range.
On March 5, the OSC published a bulletin introducing a harmonized process for full reviews of prospectuses on a confidential pre-file basis, for non-investment fund issuers (those issuers should still use the existing pre-file process). The OSC had allowed confidential filings in certain cases, such as cross-border IPOs, as the U.S. regulators already allow such filings.
The decision to allow these filings came after lobbying from issuers saying that greater flexibility and more certainty was needed in planning their IPO prospectus offers. For example, the OSC noted in its bulletin that “if a material issue is raised during the review process, this may cause delays in receipting the prospectus and closing the offering.” Such delays “can cause uncertainty in the market, something that could be reduced through a confidential review process.”
Both Goodmans’ lawyers said that they had had some experience with the confidential filing process on an ad hoc basis prior to the OSC’s decision to allow them more broadly. They were also aware that the company was “sensitive” about the IPO process, since the had originally filed an IPO prospectus in 2018, one that had to eventually be pulled as market conditions got choppier.
That downturn was a “real roadblock” in the IPO process, and Dye & Durham didn’t feel comfortable going forward, says Coll-Black. But as the markets warmed up to tech companies, especially those that have proven advantages during a pandemic such as the current Covid-19 outbreak, Dye & Durham realized it was a good opportunity to raise money through a public offering. The company had made acquisitions since 2018, came through with earnings that “blew estimates out of the water,” and “right-sized” operations to adapt to the Covid-19 economy, says Coll-Black.
As for launching an IPO during a pandemic that has been wreaking havoc on the economy, Gorman says that the expectation at the start of the Covid-19 outbreak was that it would have a negative impact. But apart from reducing some staffing and taking steps to deal with Covid-19, there was “minimal impact” to the business. In fact, given the nature of the software that Dye & Durham provides, the pandemic showed the market “the benefits and strengths of the business.”
Coll-Black says Dye and Durham provides products that work during a market upswing and market downturn. “It’s one of those steady-eddy companies that continues rolling along,” and has proven itself useful during the current pandemic. Its legal software automates workflow and streamlines access to public records, from due diligence searches to corporate registrations, as well as automation of all documents needed to complete a real estate transaction.
The Dye & Durham IPO should show investors and potential underwriters the promise of the domestic tech sector when it comes to going public. It is the third successful public tech offering since early 2019, the others being Montreal retail and hospitality point of sale provider Lightspeed POS and online training software provider Docebo.
Gorman says that public markets are placing a much higher valuation on tech companies with proven results, in comparison to private capital markets. “Sometimes it is the other way around, but now the public markets are clearly putting a higher valuation” on companies such as Dye and Durham and Docebo, the latter which Goodmans also represented when it went public last fall. And for private capital wanting an exit strategy for their tech investments, now could also be a time for companies with private capital to go public.
Coll-Black adds that his hope is that “companies look at the success of the recent IPOs and see that there’s a great opportunity to stay in Canada,” and that they don’t necessarily look to the NASDAQ or private capital.