How your Start-Up can Become a Public Company Now (or Sooner): An introduction to the Capital Pool Company Program
Tesla began as a grand startup idea in 2003. In 2020, the year of Covid, it breached the S&P 500. A lot happened in between, but one thing is certain: it raised tons of capital. Early-stage companies with high-growth potential need money to execute on big ideas. The largest pool of capital – the public markets – remains out of reach unless companies are prepared to weather the cost and complexity of an initial public offering (“IPO”). But is this always the case? Right before Tesla breached the S&P ranks, its first rival, Arrival Ltd., announced that it is going public at a $5.4 billion valuation by merging with a special-purpose acquisition company (“SPAC”), now an increasingly popular route to go public in the United States.
In contrast to a traditional IPO or a direct listing, IPOs via SPAC are usually more expeditious, cheaper, and less complex. This year alone, several other electric vehicle companies, such as Nikola Corp and Fisker, have chosen to go public via SPAC. Interestingly, Canada has had its own version of a SPAC for a long time; one that is built to unlock public capital markets for earlier stage companies.
Going public via CPC
Twenty-five years ago, the TSX Venture Exchange (“TSXV”) introduced a go public program for strong early growth companies seeking capital from the public market. The program uses an investment vehicle known as a Capital Pool Company (“CPC”), formed for the sole purpose of acquiring companies or assets to list on the TSXV. The CPC funds its acquisition with money mainly raised from public investors. Since a CPC has no business operations, these investors are not investing in a business concept so much as in a management team capable of completing successful listings.
Since the program’s inception, over 2,600 CPCs have been created, comprising over $75 billion of total equity capital raised on the TSXV and Toronto Stock Exchange. This go-public method involves a two-step process.
1) Setting up a CPC and listing on the TSXV
A crucial first step is to assemble the CPC’s management team and board of directors. Overall, their backgrounds should demonstrate a proven track record of venture investments or prior public company experience. In addition, each officer or director must subscribe for shares of the CPC for a minimum $5,000 investment. The CPC is required to complete a brokered IPO and obtain approval from the TSXV for its CPC listing application.
Once listed on the TSXV, the CPC remains a shell company with cash but no operations other than to seek out an investment opportunity (an operating business or viable asset). The sole intent of a CPC is to list the resulting operating entity on the TSXV, the completion of which is referred to as a “qualifying transaction”.
2) Completing a qualifying transaction
The second step commences after the CPC completed its IPO and TSXV listing. At this stage, management and board members are responsible for identifying and evaluating potential targets for a qualifying transaction. Once a target is selected, the CPC will enter into a definitive agreement with the proposed target. Along with pricing, this agreement stipulates the conditions to the qualifying transaction and specifies how the transaction will be completed, whether by way of a share exchange, amalgamation, reorganization, arrangement or otherwise. In addition, parties often agree to complete a concurrent financing alongside the qualifying transaction.
After the definitive agreement is signed, the parties will prepare and file a prescribed disclosure document to obtain conditional TSXV approval for the qualifying transaction. In certain circumstances, the CPC may also need requisite shareholder approval depending on the applicable securities laws and policies of the TSXV. Upon completion of the qualifying transaction, the business or assets of the target becomes publicly listed on the TSXV or, in some cases, on the Toronto Stock Exchange.
This article is a high-level overview of the CPC program. Shortly after the New Year, we will release a publication on key aspects of the CPC program and recent amendments to TSXV Policy 2.4 – Capital Pool Companies. The amendments are scheduled to come into effect this upcoming January 1, 2021.
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