FOR INFORMATIONPURPOSES ONLY - NOT TO BE CIRCULATED - THIS IS NOT AN ADVERTISEMENT NOR A SOLICITATION
By: Michel G. Hudon & Katherine Peacocke
Colby, Monet, Demers, Delage & Crevier L.L.P.,
Montreal, Quebec, Canada
CAPITAL POOL COMPANY PROGRAM
A GROWTH OPPORTUNITY FOR EMERGING AMERICAN COMPANIES
ON CANADIAN CAPITAL MARKETS
TABLE OF CONTENTS
1. Foreword
2. Canadian Capital Markets
3. Going Public in Canada
4. The Capital Pool Company or CPC program
5. Conclusion
This article contains information which summarizes complex legal and tax matters and is not intended to provide legal or tax advice and no legal, business or tax decisions should be based only on the contents hereof. Companies, promoters or investors should consult legal and tax advisors before embarking on the process of going public in Canada.
All amounts are in Canadian dollars unless otherwise indicated.
The TSX-Venture Exchange has announced changes to its minimum listing requirements, the Capital Pool Company Program and several minor changes to take effect after June 14, 2010. This paper refers to certain of these changes (http://www.tmx.com/en/news_events/news_releases/4-12-2010_TSXVentures-Bulletin.html)
1. Foreward
This article is addressed to American companies wishing to go public and list their shares on a recognized Canadian stock exchange.
Such companies and their U.S. counsel should consider whether the Canadian securities environment might fulfill their requirements and the applicable tax implications.[1]
This article provides an overview of the principal regulatory issues to be considered before going public in Canada and becoming listed as a capital pool company or CPC on the TSX-Venture Exchange, a Canadian recognized stock exchange.
CPCs are similar to special purpose acquisition corporations (SPACs) in the US although Canadian CPCs are typically used by earlier stage companies; the applicable Canadian thresholds are generally less stringent than in the US.
2. Canadian Capital Markets
2.1 Canadas securities regulatory framework is composed of provincial securities authorities or commissions (there is no federal SEC equivalent in Canada as of yet) and of various recognized stock exchanges. The TMX Group[2], composed namely of the Toronto Stock Exchange and the TSX Venture Exchange (collectively the TMX), is the largest of the Canadian stock exchanges. The Toronto Stock Exchange provides senior issuers with access to public equity and other financing. The TSX Venture Exchange serves the public venture capital market by providing access to growth capital for early stage companies and is responsible for the companies wishing to be listed under the CPC program.
2.2 The TMX Group is a significant market for North American capital. According to the World Federation of Exchanges 2009 Market Highlights, the TMX Group ranked 6th in the world by equity capital raised in 2009. As of September 2009, the TMX Group was 1st in North America and 2nd globally by number of offerings.
The TMX Group ranks 1st in energy and as home to some 40% of the worlds listed energy companies, 1st in mining and as home to over 55% of the worlds listed mining companies (senior and junior companies), 2nd in the world by number of listed technology companies, and 1st in the world by number of listed cleantech companies.
3. Going Public in Canada
3.1 Every public distribution of securities, in Canada involves the preparation and distribution of a prospectus requiring approval of a provincial securities regulator. For the purposes of this paper, distribution is defined as the endeavour to sell or the selling of an issuers securities to the public.
3.2 Going public is a decision requiring careful consideration. This article will only deal with one of the methods of going public to wit: the Capital Pool Company (or CPC) through an initial public offering (IPO) under the CPC program of the TSX-Venture exchange.
Aside from economic and financial considerations, including increased access to capital, the new public company must accept to be subject to the disclosure requirements and scrutiny of the public markets and to commit to the implementation of effective corporate governance measures.
3.3 In order to be listed as a CPC on the TSX Venture Exchange, a company must generally have gone public by doing an IPO in Canada by way of a prospectus. The CPC-IPO requires the consent of the TSX-Venture Exchange and of the applicable provincial securities authorities.
3.4 An IPO prospectus must provide full, true and plain disclosure of all material facts as required by provincial securities laws and the policies of the TSX-Venture Exchange.
3.5 The principal steps to an IPO for a CPC are:
a) the filing of a preliminary prospectus with the TSX-Venture Exchange as well as with the securities regulator in the province(s) where shares are to be offered;
b) the review[3] of such preliminary prospectus for deficiencies, principally by the TSX-Venture Exchange;
c) obtaining the consent of the TSX-Venture Exchange to the filing of a final version of the prospectus after resolution of all deficiencies;
d) the issuance of a receipt from the provincial regulatory authorities as acceptance of the prospectus; and
e) the acceptance of public subscriptions for the newly-offered shares.
4. The Capital Pool Company or CPC program
4.1 The CPC program is a TSX-Venture Exchange listing vehicle for small-cap companies. Policy 2.4, of the TSX-Venture Exchange[4] outlines the procedures for listing a CPC and the standards to be followed.
4.2 The CPC program permits a new company having successfully completed its IPO in Canada to list its shares on the TSX-Venture Exchange as a CPC.
4.3 This CPC must not have any assets except for cash (from the proceeds of seed private placements and the IPO), no commercial operations and cannot have reached a binding agreement for the acquisition of assets or the acquisition of or the merger with a company (referred below to as a qualifying transaction or QT).
4.4 The CPC program may be divided into two steps: i) the listing on the TSX-Venture Exchange of a company as a CPC; and ii) the conclusion, financing and acceptance by the TSX-Venture Exchange of the qualifying transaction or QT.
4.5 The CPC process and some of the requirements can generally be described as follows.
A. Listing of the CPC
a) A private company (Canadian or American) with seed financing of a minimum of $100,000 and no operations, proceeds with an IPO in Canada of its common voting shares.
b) The company must retain a Canadian underwriter who will conduct a due diligence on the company and its directors and, for a fee, sign the prospectus as agent to offer common shares of the company to the public on a best efforts basis.
c) The minimum price per share at which the seed common voting shares may be issued is the greater of $0.05 and 50% of the price at which the IPO common voting shares are offered; the minimum offering price under the IPO is $0.10 per common voting share.
d) The minimum seed capital must be equal to or greater than the greater of (i) $100,000 and (ii) 5% of the aggregate of all proceeds received from its final prospectus including proceeds from the seed shares.
e) The minimum seed capital must be contributed by directors and officers of the CPC.
f) The seed capital and the IPO proceeds cannot exceed $5,000,000 in the aggregate.
g) 1,000,000 of the issued and outstanding common shares of the company must be in the hands of the public upon completion of the IPO.
h) Upon completion of the IPO, the company must have a minimum of 200 shareholders; each shareholder must own at least 1,000 common voting shares.
i) Each proposed director or officer must meet minimum suitability requirements under the policies of the TSX-Venture Exchange. A resident of the United States can be a director and an officer of the CPC.
j) Upon completion of the IPO as aforesaid, the common voting shares of the company are listed on the TSX-Venture Exchange as a CPC.
B. Qualifying Transaction (QT)
a) The only business a CPC is permitted to conduct is the identification and evaluation of assets or businesses to be acquired. As a result, until the completion of the QT, no more than the lesser of 30% of the gross proceeds from the IPO offering and $210,000 may be used for purposes other than the identification and evaluation of such assets or businesses. In other words, administration costs may not exceed $210,000.
b) The QT is the acquisition of assets of a business or of shares of a company (the target). The QT must meet the rules of the TSX-Venture Exchange and receive its approval.
c) The target may have its operations in or outside of Canada.
d) The resulting issuer and its financing must meet the general listing requirements of the TSX[5]-Venture Exchange depending on the business sector of the resulting issuer. Listing requirements exist for: exploration and mining, oil and gas, industrial technology (clean technology and renewable power) and research and development.
e) The TSX-Venture Exchange may suspend from trading or delist the shares of a CPC if a QT is not completed within 24 months after the date of listing of the CPC. The CPCs which have not yet completed a QT as at April 30, 2010 are listed at: http://www.tmx.com/en/pdf/CPCReport.xls.
5. Conclusion
Small to mid-cap companies, including American companies seeking for growth capital should consider the CPC program in order to list their shares on the TSX-Venture Exchange.
In order to qualify for the TSX-Venture Exchange CPC program, it is not necessary to incorporate or have operations in Canada. A company will not incur Canadian corporate taxes for the equity raised.
Interested American companies, their counsel and advisors should contact, Michel G. Hudon or Katherine Peacocke at www.colby-monet.com.
Michel G. Hudon and Katherine Peacocke practice securities and business law at Colby, Monet, Demers, Delage & Crevier, Montreal, Canada. http://www.colby-monet.com
[1] http://www.tmx.com/USA
[2] http://www.tmx.com
[3] The review carried out is for the sole purpose of determining compliance with the applicable rules, policies, rulings, forms, instructions and regulations, as the case may be.
[4] Policy 2.4, info@tsx.com; 1-888-873-8392 or 1-800-361-5353, http://www.m-x.ca
[5] http://tmx.com/en/about_tsx/contact_us.html; info@tsx.com or 1-800-361-5353