The TSX Venture Exchange ("TSXV") recently made changes to its Capital Pool Company ("CPC") program. The CPC program is exclusively offered by the TSXV and provides an alternative way for an operating business to list its shares on such exchange. The CPC, being a financing vehicle with no assets other than cash and no commercial operations, is created by experienced corporate directors and completes an initial public offering (an "IPO") to raise funds. After its IPO, the CPC then seeks to complete a transaction with an operating business that will access the capital, shareholders and expertise of the CPC to complete a listing on the TSXV (the "Qualifying Transaction").
The CPC program is considered to be a more flexible listing process for an operating business than a traditional IPO and is similar to a reverse takeover listing transaction with the important difference that the CPC is a clean slate shell company with cash. The CPC program accounted for almost 50% of new TSXV listings in the past 10 years. However, a decline in the use of this program was noted in recent years hence the decision to update the CPC program to increase its attractiveness.
The changes to the CPC program include an overhaul of Policy 2.4 - Capital Pool Companies (the "New CPC Policy"), as well as corresponding changes to the form of escrow agreement and disclosure document to be used in the context of a Qualifying Transaction. The New CPC Policy became effective on January 1, 2021. The most notable changes are described below.
Increase of Maximum Size of the Financing Rounds
The New CPC Policy increases the maximum amount which may be raised by the CPC from $5 million to $10 million, which increases the amount that may be available to fund a Qualifying Transaction. In addition, the maximum value of shares that can be issued at less than the price per share under the IPO (called seed shares) has been increased from $500,000 to $1 million, enabling the founders and initial shareholders to inject more capital in the CPC if they wish to do so. The New CPC Policy also removes the cap on allowable expenses of the CPC incurred in the process of completing a Qualifying Transaction.
Removal of Certain Restrictions Relating to Agents
The current CPC program imposes certain restrictions to the participation of agents in the CPC process, which were perceived as limiting the agents' ability or interest to get involved. Such restrictions included a maximum number of shares which may be issued to members of the Pro Group (as such term is defined in the policies of the TSXV), and a prohibition on the payment of finders' fees to agents involved in the process to identify a suitable target for the Qualifying Transaction (the "Target").
In addition to lifting these restrictions (in the case of the finders' fee restriction, so long as the agent is acting at arm's length to both the CPC and the Target), the New CPC Policy lengthens the maximum term of options which may be granted to agents (from 2 years to 5 years) and introduces the possibility to grant options to agents in the context of private placements conducted by the CPC.
Reduced Escrow Period
The New CPC Policy standardizes escrow periods to 18 months from the issuance of a final bulletin by the TSXV in connection with the Qualifying Transaction, while the current program imposes an escrow of up to 36 months for Tier 2 issuers.
Reconciliation of Certain Requirements with Securities Laws
In order to reduce the regulatory and disclosure burden on CPCs, the New CPC Policy also aligns disclosure requirements and requirements relating to hold periods with those of applicable securities laws. Accordingly, the form of disclosure document required in the context of a Qualifying Transaction has been tailored to refer to corresponding requirements of Form 41-101F1 - Information required in a Prospectus, and the TSXV no longer requires that securities issued to principals of the CPC and of the Target in connection with the Qualifying Transaction be subject to a 4-months hold period in addition to any restriction period that may be applicable pursuant to securities laws.
Existing CPCs and issuers that have already completed their Qualifying Transaction may take advantage of the relaxed requirements of the New CPC Policy in certain situations provided, however, that disinterested shareholder approval is obtained prior to effecting changes to reduce the length of any escrow period that is already in effect, and to amend the terms of any outstanding agent's option, among others.
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