Policy Changes to the TSX Venture Exchange Capital Pool Company Program

December 2020 - 4 min read

On December 1, 2020, the TSX Venture Exchange ("TSXV") announced new policy changes to its "capital pool company" ("CPC") program. The CPC program is a two-step non-traditional listing vehicle that provides private and growth companies the opportunity to access capital through the public markets.

Through the CPC program, seasoned directors and officers are able to form a CPC with no business operations or assets other than cash and have the securities of that entity listed on the TSXV by way of a CPC initial public offering (a "CPC offering"). The CPC then uses the funds raised via its initial seed financing and its CPC offering to identify, evaluate and acquire existing assets or businesses through a "qualifying transaction" ("QT"). Once the CPC completes its QT and acquires an operating business that meets the TSXV listing requirements, its securities continue trading as a regular listing on the TSXV.

The new policy changes proposed by the TSXV seek to improve the CPC program by allowing CPCs to raise more capital, attracting experienced business executives from around the world to be directors and generally encouraging more participation by potential investors and market participants – resulting in better opportunities for Canada's growth companies.

Some of the highlights of the changes being made to the CPC program are below and full information respecting the changes can be found here and here¹.

Highlights of the New Policy Changes

Requirement	Existing Policy	New Policy
Directors and Officers	All CPC directors are required to be residents of the US or Canada, or have public company experience. One person cannot act as CEO, CFO and secretary at the same time.	Majority of the CPC directors are required to be residents of the US or Canada, or have public company experience. One person can effectively act as CEO, CFO and secretary at the same time.
Seed Capital	Maximum of $500,000 seed capital can be raised below the IPO price.	Maximum of $1,000,000 seed capital can be raised below the IPO price.
Aggregate Funds	Maximum aggregate funds that can be raised by a CPC - $5,000,000.	Maximum aggregate funds that can be raised by a CPC - $10,000,000 (Such limit, only applies to the initial CPC offering, subject to the other rules of the TSXV, a resulting issuer is free to raise unlimited amount of capital on the completion of its QT)
Shareholder Distributions	Minimum of 200 public shareholders with each owning at least 1,000 common shares.	Minimum number of public shareholders that is equal to the lesser of: 150 public shareholders; and the minimum number of public shareholders as set out in Policy 2.1 – Initial Listing Requirements for a Tier 2 Issuer, with each such public shareholder owning at least 1,000 common shares.
IPO Agent	At least one IPO agent is required to be a member of the Exchange. Maximum 24 month term for agent's rights or options.	IPO agents are no longer required to be a member of the Exchange. Maximum five year term for agent's rights or options.
No Transfer to NEX	Transfer to NEX board of the TSXV if QT is not completed after 24 months of being listed and certain seed shares may be cancelled subject to shareholder approval.	No transfer to NEX board of the TSXV if QT is not completed after 24 months of being listed. (The CPC will remain listed on the TSXV until QT is completed. No requirement to cancel any seed shares if the QT is not completed within 24 months after listing)
Private Placements	Only common shares can be distributed prior to completion of the QT.	Only common shares can be distributed prior to completion of the QT, but in certain circumstances, concurrent financings may involve the issuance of subscription receipts or special warrants that convert into listed shares, or listed shares and warrants on completion of the QT.
Escrow	Escrow applies to: seed shares issued below IPO price, all securities acquired from treasury by non-arm's length parties to the CPC, shares acquired by a control person in the secondary market, and all seed shares issued to a member of the aggregate pro group, regardless of price.	Escrow applies to: seed shares issued below IPO price, shares acquired from treasury by non-arm's length parties to the CPC, CPC stock options, and option shares issued at an exercise price that is less than the IPO price. Escrow doesn't apply to: shares acquired by the pro group at or above the IPO price.
Escrow Release	18 Month Escrow: If resulting issuer is listed on Tier 1, released as to 25% on Final QT Exchange Bulletin and 25% on each of 6, 12 and 18 months following that date. 36 Month Escrow: If resulting issuer is listed on Tier 2, released as to 10% on Final QT Exchange Bulletin and 15% on each of 6, 12, 18, 24, 30 and 36 months following that date.	18 Month Escrow: Escrow securities released as to 25% on Final QT Exchange Bulletin and 25% on each of 6, 12 and 18 months following that date. CPC stock options and option shares released on Final QT Exchange Bulletin unless granted before the IPO with an exercise price less than the IPO price.
QT Finder's Fees	Finder's fee may be paid to a person that is not a non-arm's length party to the CPC. Finder's fee may not be paid to a non-arm's length party to the CPC.	Finder's fee may be paid to a person that is not a non-arm's length party to the CPC. Finder's fee may be paid to a non-arm's length party to the CPC if: QT is not a non-arm's length QT, QT is not a transaction between the CPC and an existing public company, finder's fee is payable in cash, listed shares and/or warrants, the amount of any concurrent financing is not included in the value of the measurable benefit, and disinterested shareholder approval is obtained.

Conclusion

In implementing the changes to its CPC policy, the TSXV has also included transition provisions that provide guidance to current CPC applicants, existing CPCs and resulting CPC issuers regarding options available to them in light of the changes. As the new policy changes are expected to become effective in January 2021, CPCs, market participants, private companies, potential CPC founders and investors are encouraged to reassess the CPC program and see how these changes impact or may be of benefit to them.

If you are interested in exploring the CPC program in any capacity, our team of securities lawyers will be happy to provide you with the advice you need in order to make an informed decision and ultimately guide you through any capital raising process you may choose.

¹See the TSXV Corporate Finance Manual for both clean and blacklined versions of Policy 2.4, which highlight all of the proposed changes that will be implemented.

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Authors

dshodipo@fieldlaw.com

smcdonald@fieldlaw.com