New and Improved TSX-V Capital Pool Firm (CPC) Program Guidelines Now in Impact
On January 1, 2021, the rules for the Capital Pool Company (“CPC”) program of the TSX Venture Exchange were significantly changed and improved for the first time in many years. These changes, following a comprehensive review by the TSX-V and dialogue with market participants, are designed to reduce regulatory burden and provide greater incentives and flexibility in using CPCs in an IPO strategy. The major changes to the CPC program rules are highlighted below.
No more 24 months to complete the qualifying transaction
Previously, CPCs who did not complete a qualifying transaction within 24 months of listing had serious consequences in the form of suspension, delisting or transfer of their listing to the illiquid NEX Board, along with the cancellation of certain shares in the CPC that were not of parties were held on market terms to the CPC (if approved by its shareholders). Under the new rules, CPCs no longer have a deadline within which to complete their qualifying transaction and no longer need to be suspended, delisted, or transferred to NEX if they fail to do so. By eliminating the qualifying transaction, CPCs have more time to find the most appropriate acquisition target while avoiding the pressure of performing a sub-optimal qualifying transaction to meet the deadline.
Lower distribution and public float requirements
The post-IPO public distribution requirement has been reduced from 200 to 150 public shareholders, and the public free float requirement is now at least 500,000 shares out of 1,000,000. However, public shareholders must hold at least 20% of the outstanding shares after the IPO is completed.
Reduction in Escrow
Escrow CPC Securities, which include shares issued at a price below the IPO issue price, will now be subject to a unified 18 month trust plan after the Qualifying Transaction, regardless of whether the resulting issuer is a Tier 2 issuer or a Tier 1 issuer is and will be published 25% on the date of the final QT Exchange Bulletin and a further 25% on each of the dates 6, 12 and 18 months thereafter. Previously, such securities were subject to a 36 month trust plan with respect to Tier 2 issuers.
CPCs can raise more money
Under the new rules, the limit on seed capital that a CPC can raise before and below the IPO share price has been increased from previously $ 500,000 to $ 1 million. This change gives early CPC investors a greater advantage, while also giving them the opportunity to become more committed to the success of the CPC, as early investors can have more “skin in the game”. Also, the total amount a CPC can raise from all sources including Seed Shares, IPOs, and Private Placements has been increased from the previous $ 5M to $ 10M, allowing for greater flexibility if this is important to some CPCs would have additional capital.
Finder Fees and Incentives for Agents
Additional incentives have been created for those who help activate CPCs. Upon completion of the Qualifying Transaction, the CPC and the Target Company may pay a non-arm’s length finder fee to the CPC, provided certain conditions are met, including the CPC’s approval of uninterested shareholders. Under the earlier rules, CPCs were prohibited from paying finder fees to a non-arm’s length party. The maximum term of an agent’s options has been extended from two to five years.
Stock options expanded
CPCs can now have 10% rolling stock option plans (ie up to 10% of the outstanding shares of the CPC can be reserved for options, calculated on the date the options are granted). Under the previous regime, the maximum number of shares reserved for options was set at 10% of the shares in circulation at the time of the IPO. In addition, the minimum exercise price of pre-IPC CPC options has been reduced to the lowest price at which the CPC has issued seed shares. The minimum price for exercising the option before the IPO was the higher of the stock exchange price and the reduced market price.
Requirements for directors and officers relaxed
Both CPCs and resulting issuers can now have international directors. Under the new rules, only a majority (as opposed to all) of the directors must be Canadian or United States residents or have experience in public companies. The same person can now serve as the CEO, CFO and Secretary of a CPC.
Under the new rules, the overall limit on the general and administrative costs of a CPC has been replaced with a cap of $ 3,000 per month, including the cost of professional accounts, advice and legal services, which are not time-limited. CPCs can now also lend up to $ 250,000, or 20% of the CPC’s working capital, to a target company in a qualifying transaction. The resulting issuers are no longer prohibited from entering into a reverse takeover transaction in the first year after a qualifying transaction.
In-process CPCs and previous CPCs can benefit from the new rules
The TSX-V contains transition rules that allow CPCs who have not yet completed the CPC process and CPCs who have completed their qualifying transaction to take advantage of certain new CPC rules.
CPCs that have filed a prospectus but have not yet completed their initial public offering may still be subject to the previous policy or choose to comply with the new rules as long as the CPC revises its prospectus and changes its trust agreement
CPCs that have completed their IPO but not their Qualifying Transaction can immediately benefit from the $ 10M increase in total gross proceeds limit, but require disinterested shareholder approval to make other changes such as eliminating the consequences of not closing the Qualified Use transaction within 24 months Extension of the term of the agent’s options to 5 years, implementation of the new trust terms, payment of a finder fee for conditions not customary in the market and acceptance of a 10% option plan for vehicles.
Capitalized terms not defined above have the meanings given to them in the TSX-V Corporate Finance Manual, available on the TSX-V website, and additional information in the TSX-V Policy Change Bulletin.
The foregoing is a summary and is intended for informational purposes only and is not intended to be relied upon as legal advice relating to the subject matter.
The authors acknowledge the contribution of articling student Abel Hazon, who helped prepare this article.