Capital pool companies

‎[This article was ‎updated since it was first published in December 2020 to take into account ‎significant changes to the Capital Pool Company program by the TSXV.]‎

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. ‎
• 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 management's intention to raise ‎between $200,000 and $9,500,000 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 150 arm’s length ‎shareholders, each of whom buys at least 1,000 shares.  ‎
• 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

• Following the 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.‎

Timeline

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 eight weeks to ‎several ‎months if significant problems are encountered. With respect to the second stage, once the ‎CPC is listed, there are no deadlines for when the CPC needs to complete a Qualifying Transaction.‎‎

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 $10,000,000 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 shortcut 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, as investors have become very ‎confident in ‎investing in CPCs 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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