Listing on TSX via Qualified Transaction with CPC
In my time as an investment banker as well as a corporate consultant, I was privileged enough to help multiple companies list their shares on a stock exchange and become public both on TASE and TSX. In many senses, becoming public for the company is like finding your better, more mature self or even being reborn as a person. However, such as the example of finding your better self comes with a price.
The process of becoming public can be intense and even painful due to the strict regulation requirement of stock exchanges and security authorities. From my experience, the companies that cross the river to the public market not only are able to access an unlimited pool of investment but also benefit from achieving a better structure. This inevitably sets them on the right to become orderly-run businesses with a strong drive for promising developments and well-oiled reporting mechanisms. Being transparent can solve many dilemmas!
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While for large-cap companies going public is the ultimate goal and an opportunity for the shareholder's exit, for many smaller companies and start-ups going public is not always the natural choice. For several companies that I have helped, the IPO/RTO path has been chosen as a more feasible option to raise capital, as it was driven by investors who opted solely for public equity.
Every exchange is trying to lure new companies to get listed and TSX is not an exemption. The Toronto Venture Exchange—or TSX-V—is ​Canada's version of the NASDAQ Small Cap Index of over-the-counter markets. Similar to NASDAQ OTC the most successful companies on TSX.V can be uplisted to TSX and or to-do list on NASDAQ, leveraging an extremely short and smooth process with many regulation exemptions. Moreover, TSX created an even more attractive path to get listed, this path is a wide opened back door, called CPC.
The Capital Pool Company
The Capital Pool Company (CPC) program is a unique listing vehicle offered exclusively by the TSX Venture Exchange (the TSX.V). The CPC program combines investors with financial market experience to business owners whose growth and development-stage enterprises need financing and public company management expertise, offering an alternative to the conventional initial public offering. Instead of a front-door IPO, experienced directors and officers can create a CPC through the CPC program, list it on the TSX.V, and raise a fund of capital with no assets other than cash and no commercial operations. After that, the CPC utilizes the money to look for investment opportunities. When the CPC completes its qualifying transaction and merges with a functioning business that satisfies the criteria for TSX.V listing, also referred to as an RTO, its shares continue to trade as regular listings on the TSX.V.
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The listing via CPC process is mostly similar to what is known as a Reverse Merger with a shell, however unlike a shell, which usually is a public platform component of a previously listed operational company, that has been separated from the activity and cleaned from the liabilities, the CPC is a clean vehicle, that was purposely created to merge with a desirable private company- referred as a “qualified transaction”. Differentially from IPO or Reverse merge that involves a single major transaction, the listing via CPC is conducted in two stages: Prospective offering and Qualifying Transaction. The first step entails a company's incorporation, "seed capital" fundraising, completion of a public prospectus offering, and subsequent listing of securities on the TSX.V. In order to move from a CPC classification to a standard Tier 1 or Tier 2 listing on the TSX.V, the CPC must complete a "Qualifying Transaction," which is typically a transaction in which the CPC purchases an asset or business that enables it to meet the Initial Listing Requirements of the TSX.V.
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There are several groups of capital market entrepreneurs in Canada whose business model is to form CPC, list it on TSX.V, and then start the search for the private company that potentially can maximize the yield for the CPC initial investors. The exchange initially dedicates 24 months to complete the qualified transaction. Ideally, the CPC founders seek to meet the 24 months limitation, which secures the most smooth RTO, however, even post this period it’s possible to complete the RTO subject to meeting additional requirements of the exchange and the Ontario Security Commission (OSC).
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As known, timing is everything! A formation of a CPC and its listing typically lists 3 months after the procedure (the filing of the preliminary prospectus) is initiated. However, the second stage can be more challenging, if substantial issues arise, on average a listing might take anywhere from 2 months to several months. There are no time limits for the CPC to finish a Qualifying Transaction during the second stage once it is listed.
Stage 1:
The organization of the CPC and the clearance of the prospectus offering of the CPC through the relevant securities commissions. This stage is usually structured into 2 phases:
Phase 1:
First, a few founders with an appropriate combination of business and public company experience put a seed capital, incorporate a shell company, the CPC, and issue shares in exchange for seed capital. These seed shares will be subject to the escrow requirements of the TSX.V. Then the CPC and its advisors prepare a prospectus that outlines management's intention to raise between $200,000 and $9,500,000 by selling CPC shares at a minimum price of $0.10 per share, and to use the proceeds to identify and evaluate potential acquisitions.
Phase 2:
Secondly, the CPC files the prospectus with the appropriate securities commissions and applies for listing on the TSXV. The agent sells the CPC shares, pursuant to the prospectus, to at least 150 arm’s length shareholders, each of whom buys at least 1,000 shares. Once the distribution has been completed and closed, the CPC is listed for trading on the TSXV. The symbol includes a “.P” to identify the company as a CPC.
Stage 2:
The completion of a Qualifying Transaction. This stage can be also divided to 2 phases:
Phase 1:
The CPC founders identify a desirable private company as its “Qualifying Transaction” and issue a detailed news release to announce that it has entered into an agreement in principle to acquire the business. The CPC prepares a draft filing statement or information circular providing prospectus-level disclosure on the business that is to be acquired, the CPC, and the combined entity. The TSXV reviews the disclosure document and evaluates the business to ensure it meets the Initial Listing Requirements.
Phase 2:
After the transaction is confirmed the filing statement is posted on SEDAR for at least seven business days, after which the Qualifying Transaction closes and the business is acquired. Oft the CPC is not offering a significant funds/cash balance, thus, most of the RTOs are accompanied by a private placement at the time of the Qualifying Transaction closing. Many companies also change their name at the closing of RTO. The “P” from the ticker symbol is removed and the company now trades as a regular TSXV-listed company.
Pros and cons of the CPC vs. IPO
Regarding CPC benefits, in general, a CPC lowers risk among investors in public companies because their investment is typically modest and delivers significant upside to investors in first public companies. A CPC could be the only product that an agent feels confident selling, especially during periods when the markets are weak. There is also a psychological component since, as a result of the numerous success stories and the positive press the program has received, investors have grown highly confident in investing in CPCs.
A CPC may permit a company to go public earlier than it otherwise would and may allow it to go public while market conditions are generally unfavorable, allowing it to raise private placement capital when market conditions improve. When investors feel confident that a Qualifying Transaction has been announced and is likely to go forward, a target issuer will frequently be able to entice investment into a private placement. This is especially true if the CPC's shares are trading at a premium to the price of the private placement.
Before choosing to move forward with a CPC, an issuer should always take into account alternative options of going public. In some circumstances, an issuer may be better served to obtain capital through a traditional IPO. Every CPC and IPO will need an agent, therefore the decision will always be made by the issuer in collaboration with one. The maximum amount that can be raised by a CPC (which is limited to $10,000,000 between seed capital plus the IPO) may not be enough to cover an issuer's immediate financial needs. A CPC also has restrictions on the offering's pricing, but an IPO provides greater flexibility because there are no price caps. A listing via CPC is not necessarily a shorter process than an IPO.
And here some statistics of success on behalf of TSX:
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There were 2,600+ CPC have been created
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85% OF CPCs completed Qualified Transactions
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$75B+ equity have been raised
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32% of currently listed TSX Venture Exchange grads are former CPCs