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Overview
On December 1, 2020, the TSX Venture Exchange (the “TSXV”) published a bulletin (PDF) announcing certain amendments to its Capital Pool Company (“CPC”) program (PDF). These amendments (the “Policy Amendments”), which come into effect on January 1, 2021, include the following:
- removal of the 24-month deadline for completing a Qualifying Transaction (as defined below);
- lower distribution requirements;
- removal of the tiered nature of the CPC escrow regime and further relaxation of escrow requirements;
- reduced limitations on directors and officers of CPCs; and
- transitional provisions allowing issuers at different stages of the CPC process to take advantage of the Policy Amendments.
The Policy Amendments are intended to: (i) enhance flexibility by relaxing jurisdictional, residency and spending restrictions; (ii) reduce regulatory burden by easing shareholder distribution and shareholder approval requirements; and (iii) bolster the economics of CPC vehicles by, among other things, reducing seed capital restrictions, introducing greater incentives for agents, Pro Group members and eligible finders, and streamlining CPC escrow conditions.
What is the CPC Program?
The CPC program offers a unique listing vehicle that permits earlier stage private companies in Canada to go public with an alternative two-step process. Traditionally, it is a common method for going public on the TSXV because it provides high-growth companies with quick, easy access to public venture capital.
Unlike an Initial Public Offering (“IPO”), experienced directors and officers can form a CPC by raising seed capital and listing on the TSXV with cash as the only asset and no commercial operations. The CPC then uses the funds raised to seek out an investment opportunity in a private operating company and incorporate its shares into the public company (a “Qualifying Transaction”). This is similar to a reverse takeover. Once the Qualifying Transaction is complete and the CPC acquires a private operating company that meets the TSXV’s listing requirements, its shares continue to trade on the TSXV as a regular listing.
What amendments are coming to the CPC Program?
The key amendments to the CPC program are as follows:
Removal of the 24-month deadline for completing a Qualifying Transaction
It will no longer be necessary to complete a Qualifying Transaction within 24 months of listing to avoid being transferred to the NEX board of the TSXV and having to cancel half of the pre-IPO seed shares. CPCs will no longer face penalties for failing to meet the 24-month deadline and will have increased flexibility to complete a Qualifying Transaction.
Lower distribution requirements
The public float requirement for CPCs will fall from 1,000,000 shares to 500,000 shares, consisting of a minimum of 150 public shareholders, instead of 200, each owning at least 1,000 shares. Notwithstanding the foregoing, public shareholders will now need to hold at least 20% of the outstanding shares.
Removal of the tiered nature of the CPC escrow regime and further relaxation of escrow requirements
After the closing of a Qualifying Transaction, all CPC escrowed securities will now be subject to an 18-month escrow in comparison to the previous two-tier escrow system. As such, 25% of the escrow securities will be released on the date that the TSXV issues a bulletin on the CPC’s Qualifying Transaction (known as the “Final QT Exchange Bulletin”) and 25% on each of the 6, 12 and 18 months following the date thereof.
CPC stock options and shares issued on the exercise of those stock options will be released on the Final QT Exchange Bulletin unless the shares were granted before the IPO with an exercise price that is less than the IPO price. Further, there is no longer a requirement to cancel any seed shares if the Qualifying Transaction is not completed within 24 months after the CPC listing.
Reduced limitations on directors and officers of CPCs
CPCs will now be permitted to have international directors and officers, although the majority of directors and officers must be residents of Canada or the United States, or have public company experience. In addition, the new regime will allow for the same person to be the CEO, CFO and secretary of a CPC.
Transition Provisions
The Policy Amendments provide for a number of provisions that allow the following to qualify for, and take advantage of, the Policy Amendments:
- CPC Applicant as at January 1, 2021: If an Issuer filed its CPC prospectus, but has not yet completed its IPO, it may elect to do one of two things: (1) comply with the Policy Amendments, provided the final CPC prospectus and CPC escrow agreement comply with the new forms; or (2) file its final CPC prospectus and complete its IPO complying with and being governed by the former CPC regime, with the ability to comply with the transition provisions.
- Existing CPC as at January 1, 2021: Can implement certain changes without shareholder approval, such as increasing the maximum aggregate gross proceeds raised by the CPC to $10 million from $5 million; complying with the new “Use of Proceeds” requirements; and issuing new agent’s options in connection with a private placement. Changes that a CPC will require specific disinterested shareholder approval include: adopting new escrow terms; removing the consequences of failing to complete a Qualifying Transaction within 24 months of listing; extending the term of outstanding out-of-the-money agent’s options to five years; 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.
- Resulting Issuers that will be listed on the TSXV as at January 1, 2021: Can amend their existing CPC escrow agreement to track the escrow terms permitted under the Policy Amendments, provided that they first obtain the approval of disinterested shareholders.
Please refer to the linked table (PDF) for an overview of the additional amended policies regarding the CPC program.
The Policy Amendments represent a significant shift in the CPC program and are likely to create renewed interest amongst investors, market participants and high-growth companies alike to utilize CPCs as vehicles to go public.
If you have any questions with respect to this legal update, please contact Jonathan Tong (jtong@millerthomson.com), Syed Rizvi (srizvi@millerthomson.com) or any other member of our Capital Markets & Securities Group.
Acknowledgment
The authors of the publication would like to thank Madison Derraugh for her assistance with this publication.
