TSX Venture Exchange rewrites Capital Pool Company program

On December 1, 2020, the TSX Venture Exchange (the “TSXV”) announced significant changes to its Capital Pool Company (“CPC”) program, which we expect to be received very well by participants in the CPC program.

Subject to the receipt of all requisite regulatory approvals, the amendments to the TSXV’s Corporate Finance Manual (collectively, the “Amended CPC Policies”) will become effective on January 1, 2021. This article provides an overview of the amendments, with a focus on certain of the key changes in the Amended CPC Policies.

Policy 2.4 - Capital Pool Companies

The proposed changes to Policy 2.4 - Capital Pool Companies (“Policy 2.4”) include, but are not limited to:

• An increase in the maximum amount of seed capital that can be raised prior to a CPC’s initial public offering at a price below the initial public offering price from $500,000 to $1,000,000.
• An increase in the maximum amount of aggregate gross proceeds from a CPC’s issuance of seed capital, shares on its initial public offering, and any common shares issued pursuant to a private placement from $5,000,000 to $10,000,000.
• The elimination of the rule that required CPCs that failed to complete their Qualifying Transaction (as such term is defined in Policy 2.4) within twenty-four months of listing to either be delisted or to apply for listing on the NEX board of the TSXV.
• A change to the director and officer suitability requirements such that Policy 2.4 now only requires a majority (as opposed to all) directors and officers of the CPC to be either: (i) residents of Canada or the United States; and (ii) individuals who have a positive association as a director or officer with public companies that are subject to a regulatory regime comparable to that of a Canadian exchange‎¹‎
• The removal of the requirement that a majority of the directors and officers of the Resulting Issuer be either (i) residents of Canada or the United States; and (ii) individuals who have a positive association as a director or officer with public companies that are subject to a regulatory regime comparable to that of a Canadian exchange.
• A change to the regime governing stock options for CPCs, such that CPCs shall now be entitled to adopt 10% rolling stock option plans, in which the total number of common shares reserved under option shall not exceed 10% of the common shares outstanding on the date of grant, whereas the prior version of Policy 2.4 only entitled CPCs to maintain fixed option plans in which the total number of common shares reserved under option could not exceed 10% of the common shares outstanding on the date of the closing of the CPC’s initial public offering.
• A revision to the restriction surrounding the use of proceeds by the CPC prior to the completion of the Qualifying Transaction, which previously limited the amount of proceeds a CPC could use for general and administrative expenses to the lesser of 30% of the gross proceeds from the sale of securities issued by a CPC and $210,000, such that CPCs can now spend up to an aggregate of $3,000 per month on reasonable general and administrative expenses.
• The elimination of the 36 month escrow period that was previously applicable to Resulting Issuers (as such term is defined in Policy 2.4) that qualified as Tier 2 Issuers on the TSXV following completion of their Qualifying Transaction such that all escrowed securities will now be released over a period of 18 months, with 25% released on the date of the Final QT Exchange Bulletin (as such term is defined in Policy 2.4) and 25% on the 6, 12 and 18 month anniversaries of that date.
• A further change to the escrow provisions which results in stock options granted prior to the date of the Final QT Exchange Bulletin and all shares issued prior to the date of the Final QT Exchange Bulletin on the exercise of such options, other than stock options with an exercise price less than the issue price of the shares in the CPC’s initial public offering and shares issued on exercise of the same, being released from escrow on the date of the Final QT Exchange Bulletin.

Transition Provisions

The amended Policy 2.4 also contains a number of transition provisions applicable to: (i) issuers that have filed their CPC prospectus but that will not have not completed their initial public offering as at December 31, 2020; (ii) existing CPCs as at January 1, 2021, including CPCs listed on the NEX Board of the TSXV; and (iii) Resulting Issuers that will be listed on the TSXV or the Toronto Stock Exchange as at January 1, 2021.

CPC Applicants

Issuers that have filed their CPC prospectus but that will not have completed their initial public offering as at December 31, 2020 may, at its option, elect to either (A) comply with the amended Policy 2.4, provided that the final CPC prospectus reflects the amended Policy 2.4 and Form 3A - Information Required in a CPC Prospectus, including the new Form 2F - CPC Escrow Agreement (“CPC Escrow Agreement”); or (B) file its final CPC prospectus and complete its initial public offering under the current Policy 2.4, in which case the CPC will be governed by the current version of Policy 2.4, although it may later elect to comply with the transition provisions applicable to current CPCs.

Current CPCs

Current CPCs can implement any facet of the revised Policy 2.4 at its election with the exception of certain ‎prescribed changes which require disinterested shareholder approval at either a meeting of shareholders or by ‎written consent of shareholders holding more than 50% of the issued listed shares. The changes which require ‎disinterested shareholder approval include, among others, amending escrow terms to track the changes under the ‎revised Policy 2.4 and CPC Escrow Agreement, adopting a 10% rolling stock option plan and removing the ‎consequences of failing to complete a Qualifying Transaction within 24 months of listing. In order to adopt a ‎change, the CPC must issue a news release disclosing its intention to do so, including summaries of the substantive ‎changes, prior to the effective date of such change (seven business days prior to a change that requires disinterested ‎shareholder approval), and for a change that requires disinterested shareholder approval, obtain the acceptance of ‎the TSXV. For clarity, any seed shares of the CPC that were cancelled in connection with the transfer of the CPC to ‎the NEX board of the TSXV are not permitted to be re-issued.‎

Resulting Issuers

A Resulting Issuer can amend its existing CPC Escrow Agreement to track the escrow terms permitted under the revised Policy 2.4 and the revised CPC Escrow Agreement, including the 18 month release schedule and the immediate release of escrow securities no longer subject to escrow, provided that the CPC first obtains disinterested shareholder approval (at meeting of shareholders or by written consent). In addition, the Resulting Issuer must issue a news release disclosing its intention to amend the CPC Escrow Agreement no less than seven business days prior to the effective date of such change, and obtain the acceptance of the TSXV.

Form 3B1/3B2

One of the main changes in Form 3B1/3B2 - Information Required in an Information Circular/Filing Statement for a Qualifying Transaction (“Form 3B1/3B2”) concerns the requirements applicable to a target company’s interim financial statements that are to be included in an information circular or filing  statement. Under the current Form 3B1/3B2, a target company is required to include in its filing statement or information circular statements of income, retained earnings and cash flows for the most recently completed interim period ended more than 60 days before the date of the filing statement or information circular and for the comparable period in the immediately preceding year along with a balance sheet as at the last day of such period. Pursuant to the revised Form 3B1/3B2, which aligns the interim financial statements requirements of a target company with those specified under Item 32 of Form 41-101F1 - Information Required in a Prospectus, target companies will now be required to include in its filing statement or information circular such financial statements for the most recently completed interim period ended more than 45 days before the date of the filing statement or information circular and for the comparable period in the immediately preceding year.

Conclusion

The changes contained in the Amended CPC Policies represent a significant re-thinking of numerous aspects of the CPC program. The CPC program has become a significant catalyst for going public transactions over the last decade and we expect these amendments to further market participants interest in creating new CPC’s and in using CPC’s as desirable public shells for target companies going public transactions.

While this article provides a high level overview of certain of these amendments, readers should seek legal advice prior to making business decisions that may have legal implications. If you have any questions about this article or would like further information about the Amended CPC Policies or the CPC program more generally, please contact the authors.

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