[co-author: Michael Cain]
On December 1, 2020, the TSX Venture Exchange (TSXV) announced changes to its CPC (Capital Pool Company) program. CPCs are publicly traded companies with no commercial operations or assets (other than cash) that are focused on acquiring an emerging business (commonly referred to as a “Target”) in order to complete its Qualifying Transaction (QT) (as defined in TSXV Policy 2.4 – Capital Pool) complete company). The QT ultimately serves as the “go public” transaction of the target and is often used as an alternative to the more traditional IPO (Initial Public Offering) model. Since its inception in 1986, the CPC program has resulted in the formation of over 2,600 CPCs and over 2,200 QTs.
After in-depth consultation with industry stakeholders, the policy was amended to attract founders, shareholders, target companies and third parties to the CPC program. The changes will take effect on January 1, 2021. We have highlighted and commented on some of the key changes below.
The changes are intended to offer the CPC founders more flexibility by, among other things, removing the two-year period for completing a QT after their IPO. Currently, the shares of a CPC can be delisted from the TSXV or transferred to the TSXV’s NEX board of directors, and certain seed shares (usually held by officers and directors) can be canceled if a QT is not made within two years The CPC was closed for shares that are listed on the TSXV. By removing the two-year window, CPC founders will have more leeway to find high-quality target companies as it will reduce the time pressure currently imposed. This flexibility can be particularly pronounced in times of less robust capital markets. What this means in practice is that CPCs may need additional time to find the right target company, and concerns of company executives about making QT agreements that may not be in the best interests of shareholders in order to avoid the cancellation of seed capital, alleviate.
The removal of the two-year period for CPCs to perform a QT also resulted in a revision of the allowable general and administrative (G&A) expenses. Previously, non-QT costs (e.g., G&A costs) were limited to less than: (a) CA $ 210,000; and (b) 30% of the gross proceeds of the CPC. The G&A cost is now capped at CA $ 3,000 per month with no cumulative maximum.
The changes also increase the maximum total budget a CPC can raise from CA $ 5,000,000 to CA $ 10,000,000. It is unclear how this capital increase will affect the use of the CPC program. The TSXV has made a list of current CPCs publicly available that were not announced at QT. As of October 31, 2020, the list is of 62 CPCs, with CPCs bringing in approximately CA $ 600,000 on average with no current CPC raising more than CA $ 2,305,000. However, the increased capitalization potential may invite alternative actors into the CPC program who focus on different types of QTs. This is certainly a step in the direction of the Special Purpose Acquisition Corporation (SPAC) program – the alternative to the CPC program – administered by leading exchanges such as the Toronto Stock Exchange. In the past, such SPACs have tended to be much better capitalized when they go public, making them an attractive source of funding for companies considering their alternatives to the stock market. In addition to increasing the cap on total funding raised, the changes raise the cap on starting capital raised below the IPO price from CA $ 500,000 to CA $ 1,000,000.
Agents, Pro Group members (as defined in TSXV Policy 1.1) and Finders will also welcome the changes. Agents for a CPC to go public no longer need to be members of the TSXV. Shares purchased by Pro Group members at or above the IPO price are no longer subject to escrow, and shares issued to Pro Group members under the QT are no longer subject to a four-month holding period (if this is not required by law). Finder fees can be paid to independent parties to the CPC under the current CPC program. The changes now also allow the payment of a finder’s fee to a party not participating in the CPC on customary market terms under certain prescribed conditions (in particular without the consent of disinterested shareholders).
The changes also create a greater incentive for clients and those raising funds for the CPC. Under current policy, an incentive option granted by a CPC cannot have an exercise price less than the price per CPC share offered at the time of its initial public offering. The changes allow a CPC to grant options in accordance with TSXV Policy 4.4 – Incentive Stock Options, provided that: (a) an option granted prior to completion of the IPO cannot have an exercise price below the lowest price at which the seed stock shares to be sold were exhibited; and (b) options must be subject to a TSXV trust agreement. All options (and shares underlying these options) will be released from the deed of transfer after the QT closes, with the exception of options granted below the IPO issue price prior to the IPO.
As part of the current CPC program, after the QT was completed, the Trust Shares Release Schedule considered whether the CPC was a Tier 1 or Tier 2 issuer upon completion of the QT (the resulting issuer), which dictated whether the trust shares are subject to an 18th -month (Tier 1) or 36-month (Tier 2) trust plan. The new rules no longer differentiate between a Tier 1 and a Tier 2 issuer as all CPC escrow securities are released from the escrow account after 18 months (25% are released after the QT is closed and every six months thereafter). As noted above, with the exception of those options granted prior to the IPO closing below the IPO issue price, all options will be released upon completion of the QT.
The changes also provide further incentives for brokers, as compensation options for buying CPC shares issued to brokers can now be exercised for a period of up to five years (from two years).
Optimized listing requirements
The requirements for the initial listing according to the current guideline require at least 200 public shareholders with at least 1,000 shares each. and a public free float of at least 1,000,000 shares. The changes change these initial listing requirements to 150 public shareholders and a public free float of at least 500,000 shares, with a new requirement that public shareholders must hold at least 20% of the CPC shares.
Under the current policy, all CPC directors and officers must be Canadian or American residents. The changes only impose this residency requirement on the majority of directors and officers, significantly expanding the pool of potential CPC clients.
CPC founders and shareholders should also be aware of the transition rules adopted by the TSXV. For CPC applicants (as of January 1, 2021), the CPC applicant may choose to adhere to the changes if a CPC prospectus is submitted but an IPO has not yet been completed. For existing CPCs (as of January 1, 2021), certain organizational changes can be made without the consent of the shareholders, e.g. B. Increase the limit on total procurement from CA $ 5,000,000 to CA $ 10,000,000 and comply with the changes in G&A costs. Other changes, such as removing the two-year period for performing a QT, extending the option term of an agent by more than two years, and changing the schedule for releasing the escrow account, require the approval of uninterested shareholders.
The current policy has been in place for over 10 years and has certainly been overdue for an update to reflect current market realities. We anticipate that capital market participants like those of us at Dentons Canada who are closely involved with the CPC program will welcome the changes due to their increased flexibility and reduced regulatory burden. We anticipate this will spark a new wave of interest in the CPC program and look forward to continuing to work with CPCs, target companies, and the TSXV to take advantage of the opportunities offered by the CPC program.
For more details on the changes, please refer to the December 1, 2020 TSXV Bulletin, which can be accessed here.
- Click here. ↩
- Click here (see “Download available CPCs”). ↩