Effective January 1, 2021, the TSX Venture Exchange's (TSXV) Capital Pool Company Program (the CPC Program) will undergo several key policy changes (the CPC Amendments), reflecting the first significant update in 10 years.
The CPC Amendments enhance access to capital for Capital Pool Companies (CPCs) and growth-companies alike by increasing the flexibility of the CPC Program while reducing the associated regulatory burden both when the issuer goes public and for the resulting issuer following the qualifying transaction (the Resulting Issuer).
The CPC Program, with its origins in the junior mining and oil and gas industries, has long been a favoured vehicle for early stage access to public capital, facilitating the growth and development of projects through the CPC's qualifying transaction process. The CPC Program allows seasoned directors and officers to create companies, or CPCs, with no assets (other than cash) and no commercial operations but with a mandate to pursue transactions over a 24 month period. The combination of the TSXV listing, a free cash pool and an experienced board makes CPCs attractive to private companies, offering a lower risk go-public option by virtue of the qualifying transaction.
Key Changes to the CPC
On December 1, 2020, the TSXV announced a series of policy changes to the CPC Program that will take effect on January 1, 2021. The updated policies were developed in consultation with TSXV stakeholders and aim to improve access to capital and reduce regulatory barriers at various stages of the CPC process. The key changes are outlined below.
Increased Limits on CPC Seed and Aggregate Capital Raise
The CPC Amendments double the caps on funds obtained by CPCs through seed rounds and initial public offerings (IPOs) as follows:
- $1,000,000 on capital raised by issuing seed shares below the IPO price.
- $10,000,000 on aggregate gross proceeds raised by the CPC.
These changes are likely to drive more capital into the hands of CPCs with stronger boards and management.
No Deadline to Complete a Qualifying Transaction; No Seed Share Cancellation
CPCs will no longer be subject to the time-pressure of closing a qualifying transaction within 24 months. Under the former policy, if a CPC failed to complete a qualifying transaction within 24 months of listing, the TSXV could suspend or delist its shares. Alternatively, CPCs could elect to transfer their listing to NEX. This measure was often criticized by market participants, as it imposed artificial time-pressure on CPCs to enter into qualifying transactions, backed by the looming threat of cancellation of half of the seed shares issued to non-arm's length parties, pitting self-interest against the pursuit of the best possible transaction. The CPC Amendments eliminate the requirement to close a qualifying transaction within 24 months, the associated seed share cancellation, and do away with the transfer to NEX.
Reduced Public Distribution Requirements
As part of the updated policy, the TSXV is relaxing public distribution requirements for CPCs. Under the new rules, following an IPO, a CPC will only be required to have a public float of 500,000 shares, held by a minimum of 150 public shareholders (each owning at least 1,000 shares). Currently the requirement is a public float of 1,000,000 shares, with at least 200 public shareholders. The CPC Amendments bring the CPC Program's public distribution requirements more in line with the Canadian Securities Exchange. The policy changes also mandate that at least 20% of the outstanding shares of the CPC be held by public shareholders.
Relaxed Requirements for Directors and Officers
The CPC Amendments will reduce residency restrictions for directors and officers of the CPC and Resulting Issuer. Namely, the current policy required all directors and officers of CPCs to be residents of Canada or the United States. The policy changes require only a majority of CPC directors and officers to be Canadian or US residents and eliminates residency requirements entirely for directors and officers of the Resulting Issuer.
The CPC Amendments also allow a single CPC officer to hold the offices of CEO, CFO and corporate secretary at the same time, recognizing the limited demands across all such functions pending completion of a qualifying transaction.
Advantages for Agents and Pro Group Members
Agents and pro group members (i.e. members of the TSXV and their employees, partners, affiliates, etc.) will have new incentives to participate in the CPC Program.
- The exercise period for agent's options will be extended from 24 months to 5 years.
- Shares acquired by pro group members (who are not principals of the CPC) at or above the IPO price will no longer be subject to escrow. Further, effective January 1, 2021, CPCs and Resulting Issuers may amend their escrow agreements to immediately release all such shares.
- Shares issued to pro group members as part of a qualifying transaction will no longer be subject to an exchange hold period.
Reduced Scope and Term of Escrow
The CPC Amendments streamline the CPC Program's escrow structure and adopt universal timelines.
- Under the current policy, escrow conditions followed a tiered approach, with distinct escrow terms for shareholders of Tier 1 and Tier 2 issuers (with holders of Tier 2 subject to a 36-month escrow schedule). The CPC Amendments eliminate this approach and provide that all escrowed securities will be held on an 18-month schedule regardless of the issuer's tier, to be released in 25% increments at closing of the qualifying transaction and every six months thereafter.
- CPC stock options and shares issued on the exercise of CPC stock options will also be subject to escrow. However, these shares will be released on completion of the qualifying transaction, unless such shares were granted before the IPO and for less than the IPO price.
Qualifying Transaction Finder's Fees
Eligible finders will also have new incentives in the form of reduced restrictions on finder's fees.
- Previously prohibited entirely, non-arm's length parties
will be eligible to be paid finder's fees in connection with a
qualifying transaction if:
- The qualifying transaction is not a Non-Arm's Length qualifying transaction;
- The qualifying transaction is not a transaction between the CPC and an existing public company;
- The finder's fee is payable in cash, listed shares, and/or warrants only;
- The amount of any concurrent financing is not included in the value of the measurable benefit used to calculate the finder's fee; and
- Shareholder approval by simple majority (excluding the votes of the recipient of the finder's fee and its associates and affiliates) is obtained.
Flexible transition provisions will enable CPC applicants, existing CPCs and Resulting Issuers alike to benefit from the CPC Amendments. CPC applicants who have not yet completed an IPO may elect to comply with the revised policy or complete their IPO in accordance with the existing framework.
Existing CPCs will be allowed to carry out certain actions without shareholder approval, including increasing their maximum aggregate gross proceeds pursuant to the new cap and issuing new agent's options in connection with a private placement. However, some amendments, such as eliminating the consequences of failing to complete a qualified transaction within 24 months, extending existing agent's options and amending escrow terms pursuant to the revised policy will require disinterested shareholder approval.
Lastly, Resulting Issuers can amend their CPC escrow agreements, subject to disinterested shareholder approval, to align with the terms of the revised policy. This includes the immediate release of shares that are no longer subject to escrow.
Overall, the CPC Amendments represent a promising leap forward for the CPC Program. At their core, the policy changes create added incentives for participation by various stakeholders across the CPC process, whether by reducing the regulatory burden on the CPC itself or enhancing the flexibility of the CPC's capital raising activities and pursuit of qualifying transaction. We anticipate these changes will make the CPC Program an even more attractive option for qualified boards and management teams, growth-companies and investors alike, and stimulate growing participation from a broad range of stakeholders.
This article was co-authored with the assistance of Sebastian Maturana, articling student.
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