What Is a Capital Pool Company (CPC)?
A capital pool company (CPC) is an alternative way for private companies in Canada to raise capital and go public. The capital pool company system was created and is currently regulated by the TMX Group, and the resulting companies trade on the TSX Venture Exchange in Toronto, Canada. A capital pool company is a listed company with experienced directors and capital, but no commercial operations at the time of the initial public offering (IPO). The directors of the CPC focus on acquiring an emerging company and, upon the completion of the acquisition, that emerging company has access to the capital and the listing prepared by the CPC.
Understanding Capital Pool Companies
Canada does not have as robust a venture capital industry as the United States does, so companies tend to list on the TSX earlier in their growth. The downside of this earlier listing to access capital is that the companies can easily end up abandoned by investors due to their inexperience operating as a public company and the dual demands of the public responsibilities at a point of critical operational expansion. Capital pool companies were created and promoted as a way to inject early-stage companies with both the capital and expert director-level guidance that is provided in the U.S. by venture capitalists.
Capital pool companies were created to provide an alternative growth path for Canadian businesses as well as businesses interested in going public on the TSX Venture Exchange. Capital pool companies are similar to blind pools in the United States, but the process is controlled and regulated by a single Canadian exchange.
- A capital pool company (CPC) provides an alternative mechanism for private companies to raise capital and go public.
- The process involves a pooling of capital among three or more qualified individuals and incorporate under a shell company before completing a qualifying transaction.
- CPCs exist in Canada as a response to the American venture capital industry as a way for Canadian start-ups to more easily go public without venture backing.
The Capital Pool Company Process
The process of creating a capital pool company has two phases:
- Phase 1: Creation of the Capital Pool Company
In phase one, at least three experienced individuals pool capital to begin the process — the total amount must exceed $100,000 or 5% of the funds being raised. The founders then incorporate a shell company for the purpose of raising seed capital with the intention to list as a CPC. The prospectus is created and then the company applies for listing. There are additional rules as to how many shareholders are required and how much they can own of the offering. The CPC is listed at the end of this process with the symbol ".P" to designate it as a capital pool company.
- Phase 2: Completing a Qualifying Transaction
Within 24 months of listing on the TSX, the capital pool company must complete a qualifying transaction or face delisting. The qualifying transaction is an agreement to purchase a company and incorporate its shares into the public company, similar to a reverse takeover. The end structure results in the founders of both merged entities maintaining a higher level of ownership in the company than may have been the case in an IPO.
Essentially, having a ready-made listing with experienced directors helps to lower costs for the company and reduces the risks of going public. For investors, deciding to purchase shares in a CPC requires more due diligence on founders of the CPC itself, as they will be deciding what type of business to buy and how to guide it after the initial investment is made. Even if a target has been suggested, as is the case with some CPCs, there is no guarantee that it will happen. So investors must be confident in the management of the CPC and their ability to create value for businesses in general rather than a specific business.