TSX Enterprise Change: Updates To Capital Pool Firm (CPC) Program – Company/Industrial Legislation
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The TSX Venture Exchange (the exchange) recently announced a number of positive changes to the exchange’s CPC program that are expected to take effect on January 1, 2021 (the changes). The changes reflect a revitalization of the CPC program and provide more flexibility and incentives for market participants who wish to take advantage of the program.
In short, the CPC program provides an alternative method for private companies to get listed on the stock exchange. Since its inception, the program has been a cornerstone of attracting high-growth companies to the stock market and provides a streamlined route to listing for private companies seeking access to Canada’s capital markets. The changes will take effect on January 1, 2021, subject to receipt of required regulatory approvals.
This update provides a brief overview of certain key changes that are expected to be implemented.
Increased seed capital and total funds
The changes will increase the maximum amount of seed capital that can be raised at a price per share lower than the CPC’s offering price (IPO) from $ 500,000 to $ 1 million. This increase could provide founders with higher returns and the ability to include additional key stakeholders who are appropriately motivated to achieve a successful qualifying transaction.
In addition, the changes increase the overall cap on the amount of capital that can be raised by a CPC from $ 5 million to $ 10 million, allowing founders to create larger CPCs with a larger venture capital pool for emerging companies seeking listing on the Stock exchange. This change may have the added benefit of reducing the amount of capital that target companies must raise in connection with their qualifying transaction, so that revenue generating companies can limit the dilution involved.
Elimination of the 24 month QT period
Currently, CPCs must complete a qualifying transaction within 24 months of being listed on the exchange. CPCs that fail to complete a qualifying transaction are at risk of being moved to NEX, a trading forum for publicly traded companies that no longer meet the exchange’s ongoing listing standards. After the changes are implemented, CPCs will no longer be moved to NEX if they fail to complete a qualifying transaction within 24 months of being listed. As a result of this significant change, CPCs will be given additional time and flexibility to identify the right qualifying transaction for their shareholders without speeding up the process.
Released escrow requirements
According to the current guidelines of the exchange, the board and management of a CPC, along with any CPC shareholder who has acquired shares below the IPO price, are subject to significant trust restrictions after a qualifying transaction. These restrictions between 18 and 36 months depend on whether the resulting issuer is classified as a tier 1 or tier 2 issuer. The changes have reduced the restrictions by removing the tiered trust clearance and providing for an 18 month escrow period with 25% of the trust clearance released on each Final Exchange Bulletin date and the 6, 12, and 18 month anniversaries of that date.
In addition, stock options (and underlying stocks) will be released from the deed of transfer at the same time the Final Exchange Bulletin is issued, unless they are granted prior to the IPO at an exercise price below the IPO price.
Requirements for directors and officers
Historically, all CPC directors and officers were required to be resident in Canada and the United States or with experience in public companies. After the changes, only the majority of directors will need to be Canadian or US residents or have experience in public companies. This means that senior board members who lack experience in public companies and international directors are now eligible to participate in the formation of CPCs.
Reduced public distribution requirements
The changes will also reduce the sales requirements for CPCs. After the changes are implemented, CPCs only need to have 150 public shareholders holding at least 1,000 shares. This decrease from the current requirement of 200 public shareholders should speed up the IPO process for CPCs by reducing the number of accounts required to participate in the IPO. In addition, the minimum size of the public free float will be reduced from 1 million shares to 500,000 shares after the IPO. However, public shareholders must collectively hold at least 20% of the outstanding shares of the CPC upon completion of the IPO.
CPC stock options and agent options
The changes also revise the compensation requirements for CPCs to reflect a more flexible approach, including providing that CPC stock option plans can be 10% rolling plans based on the number of shares outstanding at the time of grant rather than 10% fixed Plan based on the number of shares outstanding at the time of going public.
In addition, the minimum exercise price for CPC stock options granted before the IPO is now the lowest issue price for starting shares and after the IPO the price determined in accordance with Exchange Policy 4.4 – Incentive Stock Options The minimum exercise price is the discounted market price of the shares. As mentioned above, all CPC stock options granted prior to the IPO with an exercise price lower than the IPO price are held in escrow.
In order to adequately compensate agents for participating in the IPO of a CPC, the term for options issued to agents was increased from a maximum of two years to a maximum of five years.
In the past, CPCs were prohibited from paying finder fees to parties on market terms. The changes removed this restriction, creating additional incentives to non-customary parties to support the CPC in closing a successful transaction. After the changes, CPCs are entitled to pay a finder fee to a party who is not involved in the CPC on market terms if:
- The qualifying transaction is not a qualifying transaction with no market status.
- The qualifying transaction is not a transaction between the CPC and an existing public company.
- The finder’s fee is payable in cash, listed stocks and / or warrants.
- The amount of simultaneous funding is not included in the value of the measurable benefit. and
- The uninterested approval of the shareholders for the payment of the finder fee is obtained.
While the changes are expected to take place on January 1, 2021, existing CPCs can take certain steps to benefit from the increased flexibility of the changes.
Certain changes will be available to existing CPCs without shareholder approval, including:
- Increase CPC Maximum Gross Revenue from $ 5M to $ 10M; Removal of certain restrictions on the use of proceeds (removal of 30% / $ 210,000 limit on G&A spending); and
- Authorization to issue new agent options in connection with a private placement.
In order to incorporate some of the more beneficial changes, a CPC must seek shareholder approval. Changes that require shareholder approval include:
- Eliminating the consequences if a Qualifying Transaction is not completed within 24 months of being listed;
- Extension of the term of outstanding options for out-of-the-money agents from two years to five years;
- Modifying the escrow terms to track the terms allowed under the new policy;
- Allowing a finder fee to be paid to a party who does not participate in the CPC on market terms; and
- Adoption of a 10% option plan for vehicles.
The changes represent a major change in the exchange’s approach to the CPC program. While the program has historically attracted emerging businesses, these changes should help the exchange attract more individuals interested in getting CPCs with a larger size Establish capital pool.
Given the recent success of SPACs in the US, it is expected that CPCs will now be a more attractive option for market participants looking to form a mini-SPAC that is an established route to Canadian listing.
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