What Is a Junior Capital Pool (JCP)?
A junior capital pool (JCP) is a corporate capital structure that allows early-stage startups to sell shares in the company before actually establishing a line of business. This form of company financing is a Canadian invention and is permitted only in Canada.
The JCP may also be known as a capital pool company (CPC).
The JPC is, essentially, a shell corporation with no assets other than cash, which has not yet begun business operations. Their issues might be described as stock options rather than stock shares, since their value remains to be determined at a future date.
- A junior capital pool, or JCP, is a new corporate entity that is permitted to raise money by issuing shares before it begins operations.
- The JCP is permitted only in Canada and trades only on the Toronto Stock Exchange.
- This type of corporate structure was a response to a 1980s boom in the oil and gas exploration industry.
Understanding a Junior Capital Pool (JCP)
This novel form of start-up financing was invented in Alberta, Canada, in the late 1980s, largely to address the needs of startups in the province's burgeoning oil & gas industry.
Over time, it has morphed into a more widely used corporate structure known as the capital pool company (CPC). The capital pool company has become an alternative way for newly-created private companies to raise money and go public.
The system was created by and is regulated by the Canada-based TMX Group. Companies with this structure also trade on the TSX Exchange.
A capital pool company is a company with experienced directors and some capital, but without current commercial operations at the time of the initial public offering (IPO). The directors of the CPC often focus on acquiring an emerging company. After the completion of the acquisition, that emerging company has access to the capital and the listing prepared by the CPC.
The purpose of such a capital structure was to provide an easy way for early-stage companies to raise capital. With a minimum investment from founders of $100,000, the junior capital pool company could get a listing and exposure to public markets, providing them with the additional money needed to launch.
Since its inception, the capital pool program has listed about 2,600 capital pool companies, which have raised some $75 billion Canadian.
Example of a Junior Capital Pool (JCP)
Say you are founding a company that has acquired a newly discovered reserve of oil and intends to explore and extract oil from it. Your company has not yet brought a single barrel of oil to the market or even started drilling.
You structure the company as a JPC, so you and your fellow founders put up some of your own money into the venture. You then list the company as a publicly-traded entity on the Canadian exchange.
Note that this venture is still in the planning phases. Because there is no proven revenue stream yet, capital pool companies are usually considered very risky investments.