Amendments to the Capital Pool Company ("CPC") program of the TSX Venture Exchange (the "TSXV" or the "Exchange") came into effect on January 1, 2021. In order to renew interest in the CPC program by providing greater flexibility and accessibility to growth and development-stage companies, the Exchange has implemented important amendments to the following components of its Corporate Finance Manual:
- Policy 2.4 - Capital Pool Companies (the "New CPC Policy");
- Form 3A - Information Required in a CPC Prospectus;
- Form 2F - CPC Escrow Agreement;
- Form 3B1/Form 3B2 - Information Required in an Information Circular for a QT/Information Required in a Filing Statement for a QT;
(collectively, the "Amended CPC Rules").
The CPC program is a unique listing vehicle that supports private companies seeking to go public. It permits an initial public offering (IPO) to be conducted and an Exchange listing achieved by a new company that has no commercial operations and has no assets, other than cash. The CPC then uses the funds raised to seek out an investment in a growing business. The acquisition of such a business is considered to be the CPC's qualifying transaction ("QT"). A QT is essentially a reverse takeover of a CPC by an operating company in order to access the capital, shareholders, and expertise of the CPC to complete a listing on the Exchange. As of September 30, 2020, 2,600 CPCs have been created, 85% of CPCs have completed QTs, and $75 billion of equity has been raised by CPCs, since the formation of the CPC program.1
The Exchange expects that the Amended CPC Rules will provide:
- increased flexibility by simplifying spending restrictions and easing residency restrictions;
- reduced regulatory burden by relaxing requirements on shareholder distribution and shareholder approval and easing restrictions on certain subscriptions; and
- improved economics by allowing for greater amounts of seed investment, relaxing the restrictions on finder's fees, and shortening escrow periods in certain situations.2
Overview of Key Amendments to the CPC Program
Seed Capital and Aggregate Funds
The New CPC Policy has increased the maximum amount of Seed Capital that can be raised by a CPC through the issuance of Seed Shares issued at less than the IPO price from $500,000 to $1,000,000. In addition, the amendments have increased the maximum aggregate gross proceeds to the CPC from the issuance of IPO shares, all Seed Shares, and any shares issued in a private placement, from $5,000,000 to $10,000,000.
Removal of 24-month deadline for QT
Under the Former CPC Policy, CPCs were required to complete a QT within 24 months of listing on the Exchange. If the CPC failed to achieve this, it ran the risk of being suspended from trading, delisted, or, with the approval of its shareholders, having its listing transferred to the NEX (a market for listed companies that no longer meet the Exchange's continued listing requirements) and certain Seed Shares cancelled. Under the New CPC Policy, the 24-month time limit to complete a QT and any associated penalties, have been eliminated.
CPCs are required to have only 150 Public Shareholders holding at least 1,000 shares, as opposed to 200 Public Shareholders under the Former CPC Policy; however, Public Shareholders will now need to collectively hold at least 20% of the outstanding shares of the CPC upon completion of the IPO. In addition, the minimum size of the Public Float following completion of the IPO has been reduced from 1,000,000 shares to 500,000 shares. Certain restrictions have also been relaxed on the maximum ownership of IPO shares.
Directors and Officers
Under the Former CPC Policy, all directors and officers of the CPC were required to be residents of Canada or the United States, or have public company experience. This requirement has been loosened so that only a majority of directors and officers must be resident in Canada or the United States, or have public company experience. Moreover, the same person may now act as CEO, CFO, and corporate secretary simultaneously.
CPC Stock Options
CPCs are now permitted to adopt a 10% rolling stock option plan, in which the total number of shares reserved under option shall not exceed 10% of the shares outstanding at the time of grant, instead of a 10% fixed option plan under the Former CPC Policy, in which the total number of shares reserved under option could not exceed 10% of the shares outstanding on closing of the IPO. Additionally, the minimum exercise price for CPC Stock Options granted before the IPO is the lowest Seed Share issue price and, after the IPO, it will be the price determined pursuant to Policy 4.4 - Incentive Stock Options of the Exchange.
Escrow and Escrow Release
Under the New CPC Policy, escrow applies to the following securities:
- Seed Shares issued below the IPO price;
- shares acquired from treasury by Non-Arm's Length Parties to the CPC;
- CPC Stock Options; and
- shares issued on exercise of CPC Stock Options at an exercise price that is less than the IPO price.
Following the completion of a QT, 25% of the escrowed securities will be released on the date the Exchange issues a final bulletin for the CPC's QT ("Final QT Bulletin") and 25% on each of 6, 12, and 18 months following the date of the Final QT Bulletin. Additionally, CPC Stock Options and shares issued on exercise of CPC Stock Options will be released on the date the Exchange issues its Final QT Bulletin, unless such securities were granted before the IPO and at an exercise price less than the IPO price.
Upon completion of the QT, CPCs are now authorized to pay a finder's fee to a Non-Arm's Length Party to the CPC if:
- the QT is not a Non-Arm's Length QT;
- the QT 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;
- the amount of any concurrent financing is not included in the value of the measurable benefit; and
- disinterested shareholder approval for the payment of the finder's fee is obtained.
Other Noteworthy Amendments to the CPC Program
Agents and Pro Group: The maximum term of Agent's options has been increased to five years from two years and shares issued to Pro Group members as part of the QT are no longer subject to a four month hold period unless required by law.
Use of Proceeds: Non-QT expenses (general and administrative) are now limited to $3,000 per month, whereas under the Former CPC Policy, they were limited to the lesser of 30% of gross proceeds raised by the CPC and $210,000 over the life of the CPC. The Exchange has also expanded guidance on permitted uses of proceeds and payments to Non-Arm's Length Parties.
Private Placements: While the only securities issuable pursuant to a private placement prior to completion of the QT are common shares of the CPC, in certain circumstances, the Exchange may permit CPCs to complete a Concurrent Financing involving the issuance of Subscription Receipts or Special Warrants that convert into listed shares and warrants upon completion of the QT.
Majority of the Minority Approval: When the proposed QT is a Non-Arm's Length QT, the CPC is required to obtain Majority of the Minority Approval of the QT. Majority of the Minority Approval may now be obtained at a meeting of shareholders OR by written consent.
No restrictions on reverse takeovers within first year of QT: The restriction on completing a reverse takeover for a period of one year following completion of a QT has been eliminated.
If a CPC has filed its CPC Prospectus but has not yet completed its IPO, it may elect to:
- comply with the New CPC Policy, provided that the final CPC Prospectus (or amended final CPC Prospectus if its final CPC Prospectus has already been receipted) and CPC Escrow Agreement adhere to the new forms; or
- file its final CPC Prospectus and complete its IPO in accordance with the Former CPC Policy, and continue to be governed by the Former CPC Policy (with the ability to comply with the transition provisions applicable to existing CPCs described below).
Existing CPCs can implement certain changes without shareholder approval, such as:
- increasing the maximum aggregate gross proceeds raised by the CPC to $10,000,000 from $5,000,000;
- complying with the use of proceeds set out under the New CPC Policy (removing the 30%/ $210,000 limit on general and administrative expenses); and
- issuing new Agent's Options in connection with a private placement.
Certain changes require specific disinterested shareholder approval, such as:
- removing the consequences of failing to complete a QT within 24 months of listing;
- extending the term of outstanding out-of-the-money Agent's Options to five years from two years;
- amending escrow terms to track those permitted under the New CPC Policy;
- permitting payment of a finder's fee to a Non-Arm's Length Party to the CPC; and
- adopting a 10% rolling stock option plan.
A Resulting Issuer can amend its existing CPC Escrow Agreement to track the escrow terms permitted under the Amended CPC Rules provided that it first obtains disinterested shareholder approval.
The amendments to the CPC program make it a more competitive platform for growth companies and are expected to contribute to renewed interest in the CPC program by market participants.
1. TSX Venture Exchange Publication, "Capital Pool Company brochure" (2020).
2. TMX Group Press Release, "TSX Venture Exchange Announces Changes to Capital Pool Company Program" (December 1, 2020).
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