Going public is, expectedly, the goal of many private companies and their founders. There are two methods of taking a private company public—initial public offerings (IPO) and reverse take-overs (RTO)—that draw the most attention in our capital markets and headlines, most often because of the lucrative opportunities or surprising arrangements that they create. But there is another method of releasing a company's privately held stock for wider retail ownership which combines elements of both an IPO and RTO: the Capital Pool Company Program (the Program). Although a purely Canadian investment structure, the Program functions similar to 'blank check' underwriting deals in the United States, also known as 'blind pools.' Under the Program, private companies are introduced to the market through a two-step program: (1) listing a capital pool company (CPC), and (2) completing a 'qualifying transaction'.
History of the Program
The Program was structured by TMX Group after it acquired the Canadian Venture Exchange in 2001, basing it on the junior capital pool program previously offered by the Alberta Stock Exchange (and blind pools programs prior to that). TMX Group is, in its own words, "an integrated, multi-asset class exchange group"—the largest exchange group in North America by number of listed companies—with equity and derivative markets and clearinghouses, including the Toronto Stock Exchange and the TSX Venture Exchange (the TSX-V). The latter, partly due to its lower costs of listing and simpler regulatory requirements than exchanges in the United States and Europe, is home to many junior companies in the growth stage. Like other exchanges, the TSX-V sets out the processes and implements for companies to be listed, but uniquely, companies are listed among peers with small market capitalization. One such process for listing on the TSX-V is the Program, which provides junior companies access to the markets with the support of experienced directors and officers.
Listing a CPC
Since its inception, the Program has listed over 2,400 capital pool companies, and as of October 23, 2015, there were 130 companies listed on the TSX Venture Exchange Capital Pool Company List. The CPC is, essentially, a clean shell corporation with no assets other than cash, which has not yet commenced business operations. Listing a CPC is mechanically similar to preparing an IPO: a prospectus is prepared and a receipt is issued by the governing securities commission(s). But in addition to a '.P' designation following the ticker symbol of every CPC, there are significant differences in the listing requirements. In order to create a CPC, at least three individuals who have business and public company experience as directors or officers must personally invest the greater of $100,000 or 5% of the total funds raised by the offering. Therein lies one of the two key features of the Program: a CPC will ultimately be taken over by a private company that will not only be publicly traded as a result, but also will benefit greatly from the counsel, supervision and assistance of the founders of the CPC. The TSX-V acts as an incubator, creating an environment in which small companies can get the advice and capital they need to mature.
The qualifying transaction
Once listed, a CPC has 24 months to identify a private company to merge with and exchange shares through what the Program refers to as a 'qualifying transaction'. The CPC announces the agreement in principle and then prepares an information circular for its shareholders that includes the type of disclosure one would find in an IPO prospectus. If shareholder approval is not required (and it typically is not for arm's length transactions), the share exchange takes place after seven days and the businesses are combined through the mechanics of an RTO. If the private company has solid fundamentals, viable products or services and a strong business plan, the business combination may even include a concurrent private placement with accredited or institutional investors for financing in addition to the cash assets of the CPC. It is only after the RTO deal has closed that retail investors can begin to trade shares of the new company, which would have lost its '.P' identifier through the process and may have acquired a new name. This highlights the second key feature of the Program: junior companies are encouraged and given the opportunity to be publicly listed without having to go through the more-onerous regulatory hurdles of an IPO, by merging through an RTO with a CPC that is already listed.
The Program is designed to match seasoned business professionals that have cash and investment-generating abilities, with private companies that may or may not be junior (but likely are), that would like to be listed on an exchange in order to reap the benefits of going public. In addition to providing private companies with access to capital, going public creates liquidity for existing shareholders, increases corporate credibility, distributes the risks of ownership and allows for continuous market-based valuation of a business. The Program offers a worthwhile alternative to the typical methods of getting to market. The fact that companies that choose this path are given the opportunity to be familiarized with initial public offerings, reverse take-overs and maybe even private placements if they are not already, is just one more reason why the Program excels at what it sets out to do.
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