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Different Types of Liquidity Events
Different Types of Liquidity Events
Updated over a week ago

This article covers the following:

Types of Liquidity Events

A liquidity event is an opportunity for investors to sell their illiquid investments, and/or see a return. As of November 2023, FrontFundr has had 19 liquidity events.

The following are the most common examples of a liquidity event:

  • The company is acquired by another company, at which point you would either sell your shares or receive shares in the company making the acquisition;

  • The company goes public on a stock exchange, at which point you may sell your shares on the open market; or

  • The company generates excess cash and decides to issue dividends to its shareholders. The company’s Offering Document and Shareholders Agreement will outline any specific sale restrictions on your shares, as well as the signed Subscription Agreement.

Public Listing on an Exchange

There are different ways a company can list publicly on a stock exchange, such as an Initial Public Offering (IPO), a Direct Listing, or a Reverse Takeover (RTO), sometimes referred to as a Strategic Acquisition or Reverse Acquisition. This allows any member of the public access to buy and sell shares in the company.

Initial Public Offering ("IPO")

An IPO is a new issue of securities (shares) offered to the public for the very first time. This term is only used when a private company is selling their shares and listing on the public market for the very first time, and becoming a publicly traded company. IPOs must adhere to strict regulations as to how the investments are sold to the public.

Eg. Tech Company Inc. sold 500,000 shares through FrontFundr while they were still a private company. They decided to do an IPO a year later. The incorporation documents state that the company can issue up to 10,000,000 shares. Tech Company Inc. offers 1,500,000 new shares through the IPO that were previously held in treasury. They now have 2,000,000 shares outstanding, and 8,000,000 remaining in treasury.

Reverse Takeover (RTO)/Reverse Acquisition

This form of "acquisition" is an amalgamation between a public company, usually a shell corporation that is not operating, and a private corporation (the operating company). This form of go-public opportunity is offered by the TMX Group, called the Capital Pool Company (CPC) Program. The program supports earlier stage private companies complete go-public transactions.

Benefits to this form of listing are the lower costs involved, and the corporation being acquired having directors that are experienced with public companies and the legal requirements going forward, and business knowledge for the acquiring (operating) company.

To learn more about the stages of listing through the program go -> here.

Eg. Green Tea Corp. is looking to become a publicly traded company. They have decided to acquire/merge with a shell corporation, Flaming Ventures Inc., through the CPC Program. Upon all the steps required, the new merged company, Green Tea Inc., will be listed on a the TSX Ventures Exchange.

Direct Listing

A direct listing is a process by which a company can go public by selling existing shares instead of offering new ones. Existing shareholders can sell their shares as soon as the company goes public. Since no new shares are issued, transactions will only occur if existing shareholders sell their shares.

Companies that choose to go public using the direct listing method usually have different goals than those that use an IPO. The goals of the company are not focused on raising additional capital, which is why selling new shares is not necessary. Direct listing increases liquidity for existing shareholders and is usually cheaper than an IPO.

Eg. Yoga For Life Inc. listed Directly onto the TSX Ventures Exchange. They had 125 shareholders and 400,000 outstanding shares before they listed. 6 months after listing, they have 200 shareholders holding the 400,000 shares, as some of the original holders sold part of their holdings.

Acquisition between Two Private Companies

This form of acquisition takes place between two privately held corporations, with no intentions of listing on an exchange, and neither is already public. (However, if the acquiring company was public, this would give the shareholders of the acquired company immediate liquidity.)

This is usually seen when a larger private company is looking to acquire a smaller company, and will either buy out all existing shareholders of the smaller company, or will exchange the shares with the shares of the acquiring company (the company buying the smaller company).

If the shares are bought out, you will receive a cash payment and no longer be a shareholder of the company. If the shares are exchanged, you become a shareholder or the acquiring company, though you will be unable to sell the investment.

Eg. Skyscraper Corp. (the acquirer) is a private company looking to acquire another private company within their supply chain, Window Supply Inc. (the acquiree). Skyscraper Corp. will be exchanging all Window Supply Inc. shares 1:1. Therefore, if an investor previously held 500 shares in Window Supply Inc., they will now hold 500 shares in Skyscraper Corp.. Window Supply Inc. will no longer be a standalone company, and will be a division of Skyscraper Corp..

In the previous example, the shares of the acquirer likely holds a higher valuation, increasing the value of the investment/shares for the shareholders of the acquired corporation.

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