On December 1, 2020, the TSX Venture Exchange (the “TSXV”) announced material changes to its Capital Pool Company (“CPC”) program that we expect to be very well received by participants in the CPC program .
Subject to receipt of all necessary regulatory approvals, the changes to the TSXV’s Corporate Finance Manual (collectively the “CPC Policy Revised”) will take effect on January 1, 2021. This article provides an overview of the changes, focusing on some of the key changes in the amended CPC Policy.
Policy 2.4 – Capital Pool Companies
The proposed changes to Policy 2.4 – Capital Pool Entities (“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 going public at a price below the market price from $ 500,000 to $ 1,000,000.
- An increase in the maximum total gross proceeds from CPC’s issuance of seed capital, IPO shares, and common shares issued in a private placement from $ 5,000,000 to $ 10,000,000.
- The elimination of the rule that CPCs who did not complete their qualifying transaction (as that term is defined in Policy 2.4) were either delisted or requested to be listed on the NEX Board of the TSXV within twenty-four months of listing.
- A change in the suitability requirements for directors and officers so that Policy 2.4 only requires a majority (as opposed to all) directors and officers of the CPC to be either: (i) Canadian or United States residents; and (ii) any person who has a positive relationship as a director or officer with public corporations subject to a system of regulation comparable to that of a Canadian stock exchange 1
- The removal of the requirement that a majority of the directors and officers of the resulting Issuer must be resident in either (i) Canada or the United States; and (ii) persons who have a positive relationship as a director or officer with any public company that is subject to a system of regulation comparable to that of a Canadian stock exchange.
- A change in the stock option regime for CPCs so that CPCs are now eligible to enact 10% rolling stock option plans where the total number of common shares reserved under the option cannot exceed 10% of the common shares outstanding in the market during the grant date the earlier version of Guideline 2.4 only entitles CPCs to maintain fixed option plans in which the total number of common shares reserved under the option cannot exceed 10% of the common shares outstanding at the time of the closing of the original CPC public offering.
- A revision of the restriction on 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 administrative expenses to less than 30% of the gross proceeds from the sale of securities, spent by a CPC and $ 210,000 so CPCs can now spend up to $ 3,000 per month on reasonable general and administrative expenses.
- The elimination of the 36 month escrow period previously applied to resulting issuers (as that term is defined in Policy 2.4) who qualified as Tier 2 issuers on the TSXV upon completion of their Qualifying Transaction, so that all escrow securities deposited are now released will be an 18 month period, with 25% being published on the date of the final QT Exchange Bulletin (as defined in Policy 2.4) and 25% being published on the 6, 12 and 18 months of this year.
- Another change to the escrow rules that results in stock options granted prior to the date of the definitive QT Exchange Bulletin and all shares issued prior to the date of the definitive QT Exchange Bulletin when such options are exercised, except for stock options with an exercise price below the issue price of the shares as part of the CPC’s IPO and the shares issued upon exercise of the same, which were released by the deed of transfer on the day of the final QT Exchange Bulletin.
The amended Guideline 2.4 also contains a number of transitional provisions for: (i) issuers who have submitted their CPC prospectus but have not yet completed their IPO on December 31, 2020; (ii) existing CPCs as of 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 on January 1, 2021.
Issuers who have submitted their CPC prospectus but have not yet completed their initial public offering as of December 31, 2020, may at their sole discretion either (A) comply with the amended Guideline 2.4 provided the final CPC prospectus includes the amended Guideline 2.4 and Form 3A – Information required in a CPC prospectus, including the new Form 2F – CPC Trust Deed (“CPC Trust Deed”); or (B) submit its final CPC prospectus and complete its initial public offering in accordance with current Policy 2.4. In this case, the CPC is subject to the current version of Guideline 2.4, although it may later choose to comply with the current CPCs applicable to transitional provisions.
Current CPCs may implement any facet of the revised Policy 2.4 at their discretion, with the exception of certain mandatory changes that require uninterested shareholder approval either at a general meeting or with the written approval of shareholders holding more than 50% of the listed shares in issue. Changes that require uninterested shareholder approval include, but are not limited to, changing the escrow terms to track the changes under Revised Policy 2.4 and the CPC Trust Agreement, adopting a 10% vehicle option plan, and eliminating the consequences, if a qualifying is not completed transaction within 24 months of listing. To adopt a change, the CPC must publish a press release prior to the effective date of such change (seven business days prior to a change that must be disinterested) disclosing its intent including summaries of the material changes, and for shareholders’ approval a change that requires uninterested shareholder approval should seek approval from the TSXV. For the sake of clarity, no seed capital shares of the CPC canceled in connection with the transfer of the CPC to the NEX board of the TSXV may be reissued.
A resulting issuer may amend its existing CPC Trust Deed to pursue the trust terms permitted under the revised Policy 2.4 and the revised CPC Trust Deed, including the 18 Month Disclosure Schedule and the immediate release of trust securities that are no longer subject to the Trust Deed, if the CPC first receives the approval of disinterested shareholders (at the general meeting or through written approval). In addition, the resulting issuer must issue a press release disclosing its intention to change the CPC Trust Deed and obtain the approval of the TSXV at least seven business days prior to the effective date of any such change.
Form 3B1 / 3B2
One of the key changes to Form 3B1 / 3B2 – Information Required in a Qualifying Transaction Information Circular / Filing Statement (“Form 3B1 / 3B2”) concerns the requirements that apply to a target company’s interim financial statements that are included in a Form information circular or declaration of registration should be included. According to the current Form 3B1 / 3B2, a target company must include income statements, retained earnings and cash flows in its registration or information circulars or information circulars for the last completed interim period ending more than 60 days before the date of filing and for the comparable period of the immediately preceding year together with a balance sheet for the last day of this period. According to the revised Form 3B1 / 3B2, which adapts the interim financial statements requirements of a target company to the requirements specified in Item 32 of Form 41-101F1 – Information required in a prospectus, the target companies must now include in their registration declaration or information circulars these financial statements for the most recently completed interim period ended more than 45 days prior to the date of submission of the statement or information circular and for the comparable period in the immediately preceding year.
The changes contained in the revised CPC guidelines represent a major overhaul of many aspects of the CPC program. The CPC program has become a major catalyst for public transactions over the past decade. We anticipate that these changes will increase the interest of other market participants in creating new CPCs and using CPCs as a desirable public shell for target companies engaging in public transactions.
While this article provides a general overview of certain of these changes, readers should seek legal advice before making any business decision that may have legal implications.