The Capital Pool Company (“CPC”) program is a unique listing vehicle offered exclusively by the TSX Venture Exchange (the “TSXV”). Providing an alternative to the traditional initial public offering (“IPO”), the CPC program introduces investors with financial market experience to entrepreneurs whose growth and development-stage companies require capital and public company management experience. Unlike the traditional IPO, the CPC program enables seasoned directors and officers to form a CPC with no assets other than cash and no commercial operations, list it on the TSXV, and raise a pool of capital. The CPC then uses the funds to seek out an investment opportunity. Once the CPC has completed its Qualifying Transaction and acquired an operating company which meets TSXV listing requirements, its shares continue trading as regular listings on the TSXV.
Two stages: Prospective offering and Qualifying Transaction
As noted above, the CPC program involves two distinct steps:
1. The organization of the CPC and the clearance of the prospectus offering of the CPC through the relevant securities commissions; and
2. The completion of a Qualifying Transaction.
The first stage involves the incorporation of a company, funding the company with “seed capital”, completing a prospectus offering to the public and the subsequent listing of securities on the TSXV. The second stage involves the completion of a “Qualifying Transaction” which, generally speaking, is a transaction whereby the CPC acquires an asset or business which allows the CPC to meet the Initial Listing Requirements of the TSXV, thereby elevating it from a CPC designation to a regular Tier 1 or Tier 2 listing on the TSXV.
First stage: The CPC (organization, prospectus offering and listing)
A. Creating the CPC
- Three to six individuals with an appropriate combination of business and public company experience put in a minimum of the greater of:
(i) $100,000 in seed capital; and
(ii) 5% of the aggregate of all proceeds received by the CPC on the date of its final prospectus, to a maximum of $500,000.
- These founders incorporate a shell company, the CPC, and issue shares in exchange for seed capital at a minimum price of the greater of $0.05 and 50% of the price at which subsequent shares will be sold by the prospectus offering. These seed shares will be subject to the escrow requirements of the TSXV.
- The CPC and its advisors prepare a prospectus that outlines managements intention to raise between $200,000 and $4,750,000 by selling CPC shares at a minimum price of $0.10 per share, and to use the proceeds to identify and evaluate potential acquisitions.
B. Selling the shares
- The CPC files the prospectus with the appropriate securities commissions, and applies for listing on the TSXV.
- The agent sells the CPC shares, pursuant to the prospectus, to at least 200 arm’s length shareholders, each of whom buys at least 1,000 shares. No one purchaser can purchase more than 2% of the offering, and no one purchaser together with his, her or its associates or affiliates can purchase more than 4% of the offering.
- Once the distribution has been completed and closed, the CPC is listed for trading on the TSXV. The symbol includes a “.P” to identify the company as a CPC.
Second stage: The Qualifying Transaction
A. Announcing the acquisition
- Within 24 months of listing, the CPC identifies an appropriate business as its “Qualifying Transaction” and issues a comprehensive news release to announce that it has entered into an agreement in principle to acquire the business.
- The CPC prepares a draft filing statement or information circular providing prospectus-level disclosure on the business that is to be acquired, the CPC and the combined entity.
- The TSXV reviews the disclosure document and evaluates the business to ensure it meets the Initial Listing Requirements.
B. Closing the deal
- As shareholder approval is typically not required for arm’s length transactions, the filing statement is posted on SEDAR for at least seven business days, after which the Qualifying Transaction closes and the business is acquired.
- Additional components of the deal often include: name change and private placement coinciding with the closing of the Qualifying Transaction.
- The “.P” from the ticker symbol is removed and the company now trades as a regular TSXV listed company.
The timeline for the first stage, from organization to listing, can vary significantly and depends on several factors. On average, a CPC is listed about 12 weeks from the time the process is started (i.e. filing of preliminary prospectus). Listing, however, can take anywhere from as little as 8 weeks to several months if significant problems are encountered. With respect to the second stage, as noted above, once the CPC is listed, it has 24 months to complete a Qualifying Transaction. If a CPC fails to meet this 24 month deadline, the TSXV may suspend from trading or delist the CPCs shares.
CPC vs. IPO
An issuer should always consider alternative methods of going public before determining to proceed with a CPC. In certain situations, an issuer may be better advised to raise funds through a conventional IPO. The determination by the issuer will always be made in conjunction with an agent, as every CPC and IPO will require an agent. An issuer may have an immediate need for funds beyond the amounts permitted to be raised by a CPC (which is limited to $5,000,000 from seed capital and the IPO). A CPC also has limits on the pricing of the offering whereas an IPO offers more flexibility, as there are no upper limits on pricing. It is a misconception to believe that a CPC is a short cut to the market, in that completion of the two stages can often take longer than an IPO offering and a new listing.
As for CPC advantages, in general, a CPC limits the risk among public company investors, as their investment is generally small and offers substantial upside to initial public company investors. Particularly in times when the markets are slow, a CPC may be the only product that an agent is comfortable in selling. There is also a psychological factor, investors have become very confident in investing in capital pool companies because of the number of success stories and the favorable publicity the program has received. A CPC may allow a company to go public at an earlier stage than it otherwise would, and may permit it to go public when market conditions are not generally favorable, which leaves it in a position to raise private placement money when market conditions improve. It is often the case that a target issuer will be able to induce investment into a private placement when investors have comfort in knowing that a Qualifying Transaction has been announced and is likely to proceed, particularly if the CPC's shares are trading at a premium to the price of the private placement. It also permits development to continue in a target company while the CPC is “going public”.
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