On December 1, 2020, the TSX Venture Exchange (the “TSXV”) Published a bulletin (PDF) announcing certain changes to the Capital Pool Company (“CPC”) Program (PDF). These changes (the “Policy changes“), Which will take effect on January 1, 2021, include the following:
- Removal of the 24 Month Period for Closing a Qualifying Transaction (as defined below);
- lower distribution requirements;
- Eliminate the tiered nature of the CPC escrow regime and further relax escrow requirements;
- reduced restrictions on directors and officers of CPCs; and
- Transitional provisions that allow issuers at different stages of the CPC process to take advantage of the policy changes.
The policy changes are designed to: (i) improve flexibility by relaxing jurisdiction, residence and spending restrictions; (ii) reducing regulatory burdens by easing distribution and shareholder approval requirements; and (iii) improve the economics of CPC vehicles by, among other things, reducing restrictions on seed capital, incentivizing agents, pro group members and eligible finders, and tightening the CPC escrow terms.
What is the CPC program?
The CPC program provides a unique listing vehicle that allows private companies in Canada to go public at an earlier stage using an alternative two-step process. Traditionally, this has been a common method for going public on the TSXV, as it gives high growth companies quick and easy access to public venture capital.
In contrast to an IPO (“initial public offering”) Experienced directors and officers may form a CPC by raising seed capital and listing it on the TSXV, with cash being the only asset and not a commercial operation. The CPC then uses the funds raised to look for an investment opportunity in a private operating company and to include its shares in the joint stock company (a “Qualifying Transaction”). This is similar to a reverse takeover. Once the Qualifying Transaction is complete and the CPC acquires a private operating company that meets the listing requirements of the TSXV, its shares will continue to be traded as a regular listing on the TSXV.
What changes are coming to the CPC program?
The main changes to the CPC program are as follows:
Removal of the 24 month period for completing a qualifying transaction
It is no longer necessary to complete a qualifying transaction within 24 months of listing to avoid being transferred to the NEX board of the TSXV and having to void half of the seed shares prior to going public. CPCs are no longer penalized for failing to meet the 24 month deadline and have greater flexibility to complete a qualified transaction.
Lower sales requirements
The public float requirement for CPCs will decrease from 1,000,000 shares to 500,000 shares, which will consist of at least 150 public shareholders instead of 200 and each own at least 1,000 shares. Notwithstanding the foregoing, public shareholders must now hold at least 20% of the outstanding shares.
Removal of the tiered nature of the CPC trust regime and further relaxation of trust requirements
Upon completion of a qualifying transaction, all CPC escrow securities are subject to an 18 month escrow compared to the previous two tier escrow system. Therefore, 25% of the escrow securities will be released on the day the TSXV issues a bulletin on the qualifying transaction of the CPC (known as “Final QT Exchange Bulletin”) And 25% in each of the 6, 12 and 18 months after the date.
CPC stock options and shares issued when these stock options are exercised will be published in the Final QT Exchange Bulletin, unless the shares were granted prior to the initial public offering at an exercise price below the initial public offering price. In addition, there is no longer an obligation to cancel seed capital shares if the qualifying transaction is not completed within 24 months of the CPC listing.
Reduced restrictions on directors and officers of CPCs
CPCs are now allowed to have international directors and officers, although the majority of directors and officers must be Canada or United States residents or have experience in public companies. In addition, the new regime allows the same person to be the CEO, CFO and secretary of a CPC.
The policy changes provide a number of provisions that enable the following individuals to qualify for and take advantage of the policy changes:
- CPC applicant as of January 1, 2021: If an issuer has filed its CPC prospectus but has not yet completed its initial public offering, it may choose one of two actions: (1) Comply with the policy changes, provided the final CPC prospectus and the CPC escrow agreement conform to the new forms ; or (2) submit its final CPC prospectus and complete its initial public offering, which conforms to and is governed by the former CPC regime, subject to the transitional provisions.
- Existing CPC as of January 1, 2021: Can implement certain changes without the consent of shareholders, e.g. B. Increasing the CPC’s maximum gross revenue from $ 5 million to $ 10 million; Compliance with the new requirements for the use of proceeds; and issuing new agent options in connection with a private placement. Changes for which a CPC requires specific disinterested shareholder approval include: adoption of new trust terms; Eliminating the consequences if a Qualifying Transaction is not completed within 24 months of being listed; Extension of the term of the outstanding options of the out-of-the-money agent to five years; Enable a finder fee to be paid to a party who does not participate in the CPC on market terms; and adopting a 10% vehicle option option plan.
- Resulting issuers that will be listed on the TSXV on January 1, 2021: May amend their existing CPC escrow agreement to track the escrow terms permitted under the policy changes, provided that they first obtain approval from disinterested shareholders.
In the linked table (PDF) you will find an overview of the additional amended guidelines for the CPC program.
The policy changes represent a significant shift in the CPC program and should spark renewed interest among investors, market participants and high-growth companies in using CPCs as a vehicle for going public.