Capital Pool Companies
For many growth businesses, going public is an attractive way to access capital, increase visibility for their brands and create liquidity for shareholders. In this article, I want to review the TSX Venture Exchange’s (the “TSXV”) Capital Pool Company (“CPC”) program as a unique listing vehicle that emerging companies may wish to consider.
The TSXV is considered to be a junior exchange where listing and on-going regulatory compliance are more suited to emerging or growth companies. That said, once a company’s shares are listed for trading on the TSXV, they can be bought and sold in the same way as stocks on any other exchange.
The TSXV’s CPC program provides a two-step introduction to capital markets. The CPC program introduces investors with financial market experience to entrepreneurs whose growth and development-stage companies require capital and public company management expertise. Unlike a traditional initial public offering, 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 these funds to seek out an investment opportunity in a growing business. This investment is referred to as the CPC’s Qualifying Transaction. Once the CPC has completed its Qualifying Transaction and acquired an operating business that meets TSXV requirements, its shares trade as a regular listing on the TSXV.
The Capital Pool Company Process
At least three individuals with an appropriate combination of business and public company experience put up the greater of $100,000 or 5% of the total funds to be raised. These founders incorporate a shell company (the CPC) and issue shares in exchange for seed capital.
The CPC prepares a prospectus that outlines management’s intention to raise funds by selling CPC shares and to use the proceeds to identify and evaluate potential acquisitions. The CPC files the prospectus with the appropriate securities commissions and applies to list the securities on the TSXV. A registered dealer then sells the CPC shares pursuant to the prospectus to the public and once the sale is complete, the CPC is listed as a publically traded entity on the TSXV.
Within 24 months of the date of the prospectus, the CPC must identify and announce the acquisition of an appropriate business as its Qualifying Transaction. The CPC then prepares a disclosure document providing prospectus-level disclosure of the business proposed to be acquired and seeks TSXV approval of the proposed transaction. Often, shareholder approval is not required by CPC shareholders and the CPC can close the acquisition shortly after receiving TSXV approval for the Qualifying Transaction.
Frequently, the CPC’s Qualifying Transaction is structured as a reverse takeover with a concurrent financing such that the operating company (the emerging or growth company) essentially takes over the CPC shell. The management team and board of directors of the growth company generally stay intact following completion of the Qualifying Transaction, though it also is not uncommon for one or more of the CPC’s directors to take board positions with the operating entity.
The benefit to the emerging company in CPC approach is that it saves the company the time and expense of going through the usual regulatory process of becoming publically listed and it can draw on the public market expertise of the CPC’s founders.
Why use a CPC?
- CPCs provide an alternative route to accessing capital that allows the company’s founders to retain a higher ownership than through a traditional IPO
- Public companies benefit from greater visibility, stock options and M&A currency for acquisitions via share issuance
- CPCs provide a going public process that has greater flexibility, more certainty and allows for more control by companies
- reduces the risk of the going public process for the company
Keith Inman is a securities and M&A lawyer with broad experience in the capital markets. Keith has advised numerous emerging and growth companies through the go-public process and has been a founder and director of multiple Capital Pool Companies.