Going Public with Capital Pool Companies – By Craig Hayashi on April 1, 2010

For this article, I thought I would explore Capital Pool Companies (CPCs) as a vehicle for emerging companies to go public and raise capital. I recently met with Mark Lawrence of NorthCrest Partners. NorthCrest Partners provides advisory services to help companies through the CPC process. Mark has been involved with close to a dozen CPC transactions.

CPC Overview

CPCs are administered and regulated by the TMX Group and trade on the TSX Venture Exchange. This is considered a junior exchange to the Toronto Stock Exchange where listing and on-going regulatory requirements are more suited to smaller companies. Once a CPC is listed on the TSX Venture Exchange, its shares can be bought and sold just like any other exchange such as the NYSE or Nasdaq. As the company grows, it is common for them to 'graduate' from the TSX Venture Exchange to the Toronto Stock Exchange.

CPC Company Formation

A CPC starts off when a set of directors puts up seed capital to form the CPC. A minimum of 3 directors are required to contribute between $100k and $500k of total seed money. This capital is used to write an investment prospectus and conduct due diligence on target companies for a reverse takeover transaction (Qualifying Transaction "QT"). At this stage, the CPC is not listed on the TSX Venture Exchange, and is often referred to as a shell company.

According to Mark, "Just as in any investment transaction, it is important to ensure a good match between the CPC and the company the CPC will invest in via the reverse takeover. The directors look for companies with good management, growth potential, and solid operations."

Concurrent Financing

Once a target company is identified, additional financing is often required for the reverse takeover transaction. The TSX Venture Exchange mandates the CPC to provide capital covering 12 months of operations for the target company. Mark explains, "Probably around 90% of CPC deals require concurrent financing."

Reverse Takeover

Once a suitable target company is identified and all approvals and paperwork are completed, the CPC executes the QT. The target company exchanges its shares for the CPC's shares, taking over the shell company.

When Are CPCs a Good Vehicle for Raising Capital?

CPCs are ideal for growth companies needing capital for expansion. They are not intended to replace early-stage seed funding. Institutional investors will be interested in established companies with a roadmap for aggressive growth.

Costs

Costs to list on the TSX Venture Exchange are lower than on the TSX or US exchanges. Mark notes, "We see many early-stage US companies using the TSX Venture Exchange as a cost-efficient vehicle to go public."

Investor Relations

Going public brings additional responsibilities, such as ensuring a strong investor relations strategy. Mark advises, "Without proper investor engagement, a company can become 'orphaned' with low trading volumes, making it difficult for shareholders to sell."