When the markets are hot, CPCs are all the rage. What is a CPC? What is so great about a CPC? How do you organize a CPC?
A “CPC”, or Capital Pool Company, is a shell public company organized in accordance with the rules of the TSX Venture Exchange for the purpose of finding and acquiring an active business. CPCs are a common vehicle sophisticated investors use to take successful or promising active businesses public. In effect, the investors create an asset, being the clean public company, which they then offer to another company for its going public vehicle. In theory, the investors increase the value of their shares by rolling the active business into their shell and the active business benefits from all the advantages of being a public company i.e. access to capital and liquidity.
Creating a CPC is a three step process.
Step 1 – Creating the Shell Company
- A corporation is incorporated, under the Canada Business Corporations Act or one of the provincial corporate statutes.
- Three to six individuals with an appropriate combination of business and public company experience put up a minimum of the greater of $100,000 and 5% of total funds raised.
- Each founder subscribes for shares at a minimum price per share between the greater of $0.05 and 50% of the price at which subsequent shares are to be sold via prospectus (See Step 2).
Step 2 – Taking the Shell Public
- A prospectus is prepared and filed with the appropriate securities commission(s). The prospectus sets out management’s intention to raise between $200,000 and $4,750,000 by selling CPC shares at typically twice the issuance price of the seed shares, and to use the proceeds to identify and evaluate potential acquisitions. At the same time, the CPC applies for listing on TSX Venture Exchange.
- The CPC hires a broker/sponsor to sell the CPC shares to at least 200 arm’s length shareholders, each of whom buys at least 1,000 shares. No one purchaser can purchase more than 2% of the offering, and no one purchaser together with his, her, or its associates or affiliates can purchase more than 4% of the offering.
- Once the offering is completed and closed, the CPC is listed and commences trading on the TSX Venture Exchange.
Step 3 – Identifying the Qualifying Transaction
- Within 24 months, the CPC must identify an appropriate business to acquire. This acquisition is the CPC’s “qualifying transaction”.
- The CPC prepares a draft filing statement or information circular providing prospectus-level disclosure on the business that is to be acquired.
- TSX Venture Exchange reviews the disclosure document and evaluates the business to ensure it meets minimum listing requirements.
Step 4 – Completing a Financing and the Qualifying Transaction
- Typically, a private placement financing is completed contemporaneously with the closing of the qualifying transaction. The reason being that often funds are needed as consideration for the sale of the business to the CPC.
- The qualifying transaction (that is, the business purchase) may not be closed until a minimum of 7 business days have past since the posting of the filing statement on SEDAR.
- Upon completion of the qualifying transaction, the company ceases to be a CPC and trades as a regular TSX Venture Exchange listed company.
For more information on CPCs:
If you have an active business and are considering a reverse take-over by a public shell company, have a look at the list of available CPCs. As these companies get closer to the 2 year deadline for completing a qualifying transaction, their organizers will likely be anxious to find an active business. As a result, your leverage increases as the deadline looms.