Modifications Anticipated to Result in Renewed Curiosity in TSXV’s Capital Pool Firm Program
On December 1, 2020, the TSX Venture Exchange (the “TSXV” or the “Exchange”) published a bulletin (the “Notice“) Announcing certain changes to its Capital Pool Company (“CPC”) Program (the“Changes to CPC guidelines”), Which will come into force on January 1, 2021. The changes to the CPC guidelines are the most important changes to the CPC program since 2010 and are expected to spark renewed interest in the exchange’s CPC program. The scope of these changes affects areas where the exchange has received input from market participants and has formalized a number of issues previously addressed on a case-by-case basis by TSXV management.
The TSXV-CPC program is the predominant structure for private companies going public in Canada as it provides easy access to public venture capital for high growth companies. As of September 30, 2020, 2,600 CPCs have been created since the inception of the CPC program and approximately $ 75 billion in equity raised by CPCs.
The purpose of this article is to: (i) highlight the main policy changes addressed in the bulletin; and (ii) provide further guidance to private companies exploring opportunities in Canada or already listed on the TSXV under the CPC program.
Capitalized terms that are not specifically defined in this article have the meanings assigned to them in the Exchange’s Corporate Finance Manual. including the amended policies and forms that apply to the CPC policy changes.
1. Elimination of the 24 month qualifying transaction period
As part of the current CPC guideline published on June 14, 2010 (the “Current CPC guideline”), CPCs that fail to complete a qualifying transaction within 24 months of listing have the prospect of either being suspended, delisted or, subject to their shareholders’ approval, postponing their listing on the NEX board of the TSXV and 50% of the pre to cancel -IPO Seed Shares. This requirement has received much criticism as it tends to put off CPC boards of directors and their key stakeholders and often results in CPCs closing a qualifying transaction to meet this 24 month deadline. The changes to the CPC policy will remove the 24 month time limit and all associated penalties that previously existed. Accordingly, CPCs are given the flexibility to complete a qualified transaction based on their preferred timing and are better positioned to weather volatile capital markets.
The current CPC policy provides restrictive trust terms and conditions for securities held by directors, officers and other holders of seed stocks that were acquired prior to the completion of a CPC IPO (“initial public offering”) With a discount on the IPO price. Securities held by these deposited shareholders are generally subject to transfer restrictions until a qualifying transaction is completed. Thereafter, these securities will be released for a period of 18 months for tier 1 issuers or (more often) for a period of 36 months for tier 2 issuers.
Although the escrow requirements will not be eliminated, the changes to the CPC policy will significantly reduce the burden on the current escrow system of the CPC program. In particular, there will no longer be a tiered approach to determining the fiduciary period. Upon completion of a qualifying transaction, all CPC escrow securities are subject to an 18 month trust plan (while current rules provide a distinction between Tier 1 and Tier 2 issuers) with 25% of the trust securities being released on the escrow date on the TSXV issues a final bulletin for the qualifying transaction of the CPC (“Final QT Exchange Bulletin”), and 25% on each of the 6, 12 and 18 months after that date. In addition, CPC stock options and stocks issued upon exercise of stock options will be published on the day the TSXV issues its final QT Exchange Bulletin, unless those securities were granted prior to the IPO and at an exercise price that is below the IPO price.
The changes to CPC guidelines will adjust certain CPC distribution requirements to be closer to the requirements of the Canadian Stock Exchange, which has emerged as a viable alternative trading market to the TSXV with the influx of mostly cannabis companies. CPCs must have a free float of at least 500,000 shares (reduced from 1,000,000 shares) and be composed of at least 150 public shareholders (reduced from 200 public shareholders) who each own at least 1,000 shares. However, public shareholders must collectively hold at least 20% of the outstanding shares (compared to 10% required by the Canadian Stock Exchange). In addition, certain restrictions on the maximum ownership of IPO shares will be relaxed.
4. Other changes
In addition to the changes mentioned above, the changes to the CPC guidelines include changes to:
- Start-up capital and IPO funds – CPCs can raise a maximum of $ 1,000,000 in seed capital below the IPO price and a maximum of $ 10,000,000 in total funds (including through the IPO). These new amounts are twice as high as the previous certificates under the current CPC guideline.
- Use of proceeds – Under the current CPC policy, unqualified transaction costs (e.g. general and administrative costs) are capped at less than 30% of the gross proceeds of the CPC and $ 210,000 during the life of the CPC. This requirement, which CPCs typically cannot meet after a few years, is replaced by a requirement that general administration costs be capped at $ 3,000 per month. With the amendments to the CPC Policy, the TSXV has also expanded the guidelines for the permitted use of proceeds and payments to non-arm’s length parties and codified the practice of allowing credit from CPCs to a target company in a qualifying transaction on terms that are consistent with the terms permitted Reverse Takeover Transactions (up to a maximum of $ 250,000 or 20% of the CPC’s working capital).
- Simultaneous financing and bridge financing – CPCs are generally only permitted to issue common shares in funding that was completed prior to a qualifying transaction. The amendments to the CPC guidelines codify existing stock exchange practice to also allow CPCs to enter into concurrent financing or bridge financing which, upon completion of a qualifying transaction, issue subscription receipts or special option warrants that are converted into listed stocks or listed stocks and warrants.
- Agent, Pro-Group, and Finder fees – The CPC program will be more attractive to agents, pro group members and eligible finders as incentives will be implemented for the benefit of these stakeholders. Examples of such changes include: finder fees may be paid to non-arm’s length parties to a CPC in certain circumstances; The maximum term of the agent’s options is 5 years (instead of 2 years). Shares issued to Pro Group members as part of the Qualifying Transaction are not subject to a four-month holding period unless required by law. Shares acquired by the Pro Group at or above the IPO price are not subject to an escrow account.
- Directors and officers – International directors are admitted and one person can serve as the CEO, CFO and company secretary of a CPC.
- Stock options – CPCs may accept 10% rolling option plans (based on the number of shares outstanding at the time of granting) instead of being limited to 10% fixed option plans based on the number of shares outstanding at the time of the IPO. In addition, the minimum exercise price for stock options granted prior to an IPO is the lowest issue price for seed shares, which removes the existing restriction that prohibits the issuance of stock options with an exercise price below the IPO price.
5. Transitional provisions
The changes to the CPC guidelines include transitional provisions that will allow companies to be CPC applicants, current CPCs or previous CPCs that have already completed a qualified transaction from January 1, 2021 (“Resulting Issuers”) To take advantage of certain changes in CPC guidelines.
If a company has filed its CPC prospectus but has not yet completed its initial public offering, it may choose to comply with the changes to the CPC policy, provided that it files the final CPC prospectus and the CPC escrow agreement on the new forms. Alternatively, the company may file its final CPC prospectus and complete its initial public offering under the current CPC policy and will be subject to the current CPC policy (with the ability to adhere to the transitional provisions below).
Existing CPCs may implement certain changes without shareholder consent, including increasing the maximum total gross proceeds, which the CPC will increase to $ 10,000,000. Adoption of the new requirements regarding the use of proceeds; and issuing new agent options in connection with a private placement.
Acceptance of certain other changes requires the approval of the disinterested shareholder, including the removal of the consequences if a qualifying transaction is not completed within 24 months of listing. Extending the term of existing options of the agent or enabling payment of a finder’s fee to a party to the CPC who is not part of the marketplace; and adoption of new trust terms and / or a 10% vehicle option plan.
Resulting issuers who have completed a qualifying transaction
The resulting issuers may amend their existing CPC Trust Deed to pursue the trust terms permitted under the CPC Policy Changes, provided that they first obtain the approval of disinterested shareholders.
Overall, the changes in CPC guidelines have overhauled the CPC program to make it a more competitive candidate for earlier-stage private companies looking to go public in Canada. We assume that these changes will be welcomed by market participants and that interest in the CPC program will be renewed.
Corporations are encouraged to contact us for more information on changes to CPC guidelines and other alternatives to IPO in Canada.