When it comes to going public, junior mining companies face a critical decision: whether to pursue the traditional Initial Public Offering (IPO) path or to list by way of a Reverse Takeover (RTO).
This choice can have significant implications for the company’s growth and future prospects. Aaron Wolfe, a Toronto-based corporate and capital markets advisor, explains why junior mining companies often opt for an RTO over the IPO.
“Understanding this difference is important because it impacts the cost, timing, financial resources, and market liquidity,” Wolfe said. “It can influence investment opportunities and also give insight to a company’s growth potential.”
Two Distinct Methods
RTOs and IPOs are two distinct methods for a company to become publicly traded. In an IPO, a company issues new shares to the public, allowing investors to purchase equity in the existing business and to participate in the company’s continued growth and natural evolution.
Conversely, an RTO involves merging with an existing publicly traded company, allowing the junior mining company to gain public status by “taking over” the listed entity. One of the primary reasons junior mining companies often choose the RTO is the cost-effectiveness of this approach.
IPOs can be a costly endeavor, requiring substantial expenses for legal fees, accounting services, marketing efforts, and underwriting commissions, all with the exception of the commissions, are incurred before the junior miner knows whether investor appetite exists, and at what price. For junior mining companies operating with limited financial resources, this can be a significant risk and thus a major deterrent.
“The truth is that by pursuing an RTO, companies can take the pulse of the market and strike while investor demand is high, ensuring that the costs of going public are worthwhile,” Wolfe said. “It is an attractive option for those looking to go public without incurring substantial financial costs because, if managed correctly, the bulk of the legal and regulatory costs can be incurred after the capital is raised. The process can always be aborted or delayed without drawing much public attention to the company.”
Timing Is Everything
Timing is another critical factor that drives junior mining companies towards RTOs, Wolfe said.
The process of conducting an IPO can be time-consuming, involving extensive disclosures, regulatory review, market preparation, and investor marketing. On the other hand, RTOs offer two timing advantages: first, the ability to time the capital raise and hold the funds in escrow until the RTO is completed; and second, a generally quicker timeline to public listing. Wolfe adds, “again, if managed correctly, the financing will occur in parallel with the merger and listing process, as opposed to after all of the regulatory filings have been approved and filed publicly.”
However, Aaron Wolfe notes that there are considerations to be mindful of when opting for an RTO.
Acquiring a publicly traded company means assuming its existing liabilities, potential legal issues, and corporate governance structures. Proper due diligence and careful evaluation of the target company are essential to mitigate these risks and ensure a successful RTO process, he added.
Cost-effectiveness, quicker timeline, and flexibility in deal structuring — these are all compelling reasons for junior mining companies to choose the RTO route
“They’re an obviously appealing option for cash-strapped mining companies looking to access the public markets efficiently,” Wolfe said.