“It’s a difficult time to raise capital for early stage companies,”
The TSX Venture Exchange’s Capital Pool Company program, a unique listing vehicle that allows companies to
go public with lower capital requirements.
There have been about 2,021 companies listed through the CPC program.
Roughly 30% of the TSX Venture Exchange companies that graduate to the TSX started off as CPC companies._____________________________________________________________________________________________
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While the economy may be showing signs of recovery, access to capital is still a work in progress. For smaller companies seeking funds
, the hurdles could be magnified exponentially. However, that isn’t to say there aren’t options available. One method that’s becoming increasingly attractive is the TSX Venture Exchange’s Capital Pool Company
program, a unique listing vehicle that allows companies to go public with lower capital requirements.
Established in 1987, the program has grown in size, but the concept has essentially remained the same. Qualified candidates are required to meet a minimum of $100,000 of seed capital and then issue shares between the price of
.05 and 50% of the price at which subsequent shares are to be sold via prospectus. The CPC company can then do a public offering to raise between $200,000 and $2 million to fund a strategic acquisition of private business.
This is the first phase. The next step is what is called the “qualifying transaction phase
“It’s a difficult time to raise capital for early stage companies,” says John McCoach, President of the TSX Venture Exchange, which, along with the Toronto Stock Exchange, is a subsidiary of the TMX Group. “The CPC doesn’t require a lot of capital. Companies can go public with a very small raise. And if they source a qualifying transaction that also is not in a great need for immediate capital, the whole process can be done in market conditions that are not conducive to raising a lot of capital. The market is not going to likely see a private company go public by an [initial public offering] that raises less than a million dollars. So that company, even if it doesn’t need a lot of money, may stay away from the capital markets, but the CPC program gives them an opportunity to access it if it makes sense for them.”
After listing the CPC, the company enters the second phase of the program in which it has 24 months to announce the acquisition of a targeted business. “For the people that created the CPC, it’s an opportunity to have some seed capital and to source businesses, do some due diligence and make an acquisition. Hopefully their investment will do well,” McCoach says.
For investors, it provides the opportunity of “getting in near the ground floor,” McCoach says. “The program was originally intended to give retail investors an opportunity to participate in a going-public transaction at an early stage. Essentially, you’re listing a vehicle that’s sole purpose is to go out and find an asset or a business that would then qualify for the going-public transaction,” he says. “It’s a two-step process to ultimately taking a company public. When the CPC is created, the mandate of the board is to go out and find that business and fund it. That’s the second stage.”
While the concept may sound similar to that of the special purpose acquisition company program
that is more popular with U.S. investors, there are some distinct differences between the two
“Both have the same concept of listing a vehicle that’s purpose is find a resulting business,” McCoach says. “In that perspective, they’re similar. There’s often so much money raised in a SPAC
that the owners of the private company usually end up selling their business to the SPAC. It’s usually an exit for them, as opposed to a CPC, which is a much smaller pool of capital
. In almost all cases, the vendors of the business end up controlling the resulting entity, so it’s a reverse merger type of transaction. That’s really the main difference.
Since its inception, there have been about 2,021
companies listed through the CPC program, 247
of which currently trade on the Toronto Stock Exchange. Roughly 30% of the TSX Venture Exchange companies that graduate to the TSX started off as CPC companies. In 2008, there were 86 qualifying transactions, and currently there are about 250 companies participating in the CPC program that have yet to announce their qualifying transaction
“We’re very proud of the program. One of the tangible ways to measure the success of the CPC program is the number of CPCs that go on to meet the standards of our senior market
,” McCoach says. “We think that that’s a great success. Last year, there were almost 200 CPCs listed.
There are risks, of course. Like all transactions, there isn’t a guarantee for success. If a CPC fails to make a qualifying transaction within the 24 months, then the company is transferred to the NEX board
, which is a trading forum for listed companies that have fallen below the TSX Venture’s standards. “Once on the NEX, the window of opportunities for the CPC to do a deal can get narrower,” McCoach says. “We don’t want to give the impression that they all work out, but the CPC program is an opportunity to get in at a reasonable price and hopefully make capital gain.”
In addition to the opportunities it presents, the regulation structure and the TSX Venture’s efforts to operate a market with integrity also make the CPC program appealing. McCoach says that interest in the CPC program has been growing, particularly in the United States.
The TSX Venture Exchange has made a concerted effort in raising awareness of the CPC listing vehicle, and in return, feedback has been quite favorable.
“We have been operating a formal U.S. campaign over the last three years. We have visited several cities in the United States explaining our value proposition,” McCoach says. “We were very surprised by how much interest there was in the CPC program. We always get a lot of inquires after visits about the CPC program from people wanting to learn more.”
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TSX Venture Capital Pool Company Program (CPC)
The Capital Pool Company (CPC) program is a unique listing vehicle offered exclusively by TSX Venture Exchange. The program is a two-phased process, involving the following steps:
Phase 1 - The Capital Pool Company
Creating the CPC:
- Three to six individuals with an appropriate combination of business and public company experience put up a minimum of $100,000 in seed capital.
- These founders incorporate a shell company - the Capital Pool Company (CPC) - and issue shares in exchange for seed capital at a minimum price between the greater of
.05 and 50% of the price at which subsequent shares are to be sold via prospectus.
- The CPC and its advisors prepare a prospectus that outlines management's intention to raise between $200,000 and $1,900,000 by selling CPC shares at typically twice the issuance price of the seed shares, and to use the proceeds to identify and evaluate potential acquisitions.
Selling the shares:
- The CPC files the prospectus with the appropriate securities commission(s), and applies for listing on TSX Venture Exchange.
- The broker 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 TSX Venture Exchange. The symbol includes a .P to identify the company as a CPC.
Phase 2 - The Qualifying Transaction
Announcing the acquisition:
- Within 24 months, the CPC identifies an appropriate business as its "qualifying transaction" and issues a news release to announce that it has entered 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.
- TSX Venture reviews the disclosure document and evaluates the business to ensure it meets minimum listing requirements.
Closing the deal:
- As shareholder approval is typically not required, 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 the following: 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 TSX Venture listed company.
For more information on the Capital Pool Company Program:
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