What is a Qualifying Transaction
A qualifying transaction is a transaction where a capital pool company (CPC) acquires significant assets, other than cash, such as a private business or businesses. Significant assets refer to one or more assets or businesses that when acquired result in the CPC meeting the minimum listing requirements of the exchange. A capital pool company is a listed company with experienced directors and capital, but no commercial operations. Essentially, it is a shell company whose sole purpose is to later acquire a privately held company through a qualifying transaction. The directors of the CPC focus on acquiring an emerging privately held company and, upon the completion of the acquisition, that company has access to the capital and the listing prepared by the capital pool company. The private company then becomes a fully-owned subsidiary of the CPC. Qualifying transactions must be completed by a CPC within 24 months after the date of the CPC's first listing.
BREAKING DOWN Qualifying Transaction
The qualifying transaction may be structured as a share for share exchange; an amalgamation, where the private company and CPC form one corporation; plan of arrangement, where the capital structure of the private company is complex or unique and requires court and shareholder approval; or an asset purchase, where the CPC purchases assets from a third party in exchange for cash and/or securities of the CPC. In each case, the shareholders of the private company become security holders of the CPC.
Qualifying Transactions to go Public
Capital pool companies, and associated qualifying transactions, are the most frequently used method of going public on the TSX Venture Exchange in Canada. This method of going public is more efficient than a traditional initial public offering because, unlike in an IPO, private companies are not required to incur upfront costs before marketing shares to prospective investors. Because the capital pool company will, by nature, have no business of its own, whatever line of trade that the private company engages in becomes the business of the CPC.
Qualifying transactions usually formally begin when the shareholders and the CPC create a Letter of Intent (LOI) outlining the terms of the agreement. Usually, the CPC must include a plan for financing the transaction in every LOI.