Finance

Bio

Mark Lawrence, Chair of the MIT Enterpise Forum of Toronto, recently sat down with Forum Link Editor Peter Zak to talk about the benefits of the Capital Pool Company (CPC) program at the Toronto Stock Exchange (TSX) Venture Exchange. The program has attracted the attention of many international and US-based junior companies wishing to go public and attract institutional financing. Mark Lawrence P.Eng., CFA, is a Managing Partner of NorthCrest Partners Inc., a Limited Market Dealer based in Toronto. He is also a director of Stone Investment Group, a mutual fund company, and a director of several reporting issuers on the TSX Venture Exchange. Mark can be reached at mark@northcrestpartners.com

Interview

Forum Link: Many US-based companies are finding it difficult to go public now, unless they are of a size to do a $30 million financing and take on full Sarbanes-Oxley [SOX] compliance. Is there an alternative?

Mark Lawrence: Yes, the Canadian exchanges have evolved a product to what is now called a Capital Pool Company [CPC]. It is a special vehicle, which creates an empty trading shell on the Exchange whose only asset is cash and a listing. That shell has 24 months in which to merge with a real operating company that wants to go public. The operating company effectively does a reverse takeover [RTO] and its shareholders have a majority position in a public company.

Forum Link: What is different than doing an RTO with a Pink Sheet listed company?

Mark Lawrence: A CPC issues an approved prospectus to gain a listing, and makes all disclosure publicly available on www.sedar.com, the equivalent of EDGAR in the U.S. All directors are researched and approved by the Exchange and a broker of record is used to take the CPC public in the first place. A CPC has institutional investor credibility versus the inadequate disclosures made for a Pink Sheet company.

Forum Link: How much money can a CPC raise at the time it merges with the operating company?

Mark Lawrence: A CPC, when it is formed, has up to $500,000 in founder’s shares, and then is topped up to a maximum of $2,000,000 in total with an IPO round with a minimum of 200 individual shareholders. Once the IPO is done, it is in a position to announce a deal to merge with an operating company and can then raise a concurrent round of financing of any amount. The IPO is always done at a per share price twice that of the seed shares, given the fact that the seed shares are escrowed for between 18 months and 36 months alongside the shares of the operating company being merged with. The amount of concurrent financing is dependent on applying a reasonable pre-money value for the operating company and having a broker undertake the financing.

In reality, a concurrent financing does not have to be done as long as the resulting merged company has working capital in the bank for 18 months. However a good concurrent raise enables getting new institutional investors into the story from day one, and helps the chances of getting research coverage from a brokerage firm, something that might be difficult to achieve currently in the U.S.

Forum Link: What are the requirements for the operating company in order to use a CPC?

Mark Lawrence: The company must have audited financials for a 3 year period and reviewed financials for any sub period. Sometimes 2 years of financials are permitted. An ideal company has $10 million of revenue and is at least break-even. However many firms with less than $1 million are still good candidates. The company must then write a filing statement which is essentially a prospectus-like disclosure. A CPC is a special vehicle in that its shareholders do not have to approve a merger as long as the parties are all at arms length.

Forum Link: What special restrictions apply to a U.S. company being listed on a Canadian exchange?

Mark Lawrence: The idea is to avoid having full SOX compliance cost and structure in the new reporting issuer. There are many considerations which are taken into the cross-border tax issues. Some of these are dealt with by having the CPC make the operating subsidiary a wholly owned Canadian firm. Sometimes having more than 50% of the resulting company owned by non-U.S. investors allows you to take advantage of being a Foreign Private Issuer in the eyes of the SEC, which saves full SEC registration. Sometimes the CPC continues in the U.S. and has a subsidiary that merges with the U.S. operating company to save tax losses and deemed dispositions of shares for capital gains purposes. Credible legal and tax assistance can help structure the transaction to best accommodate all shareholders situations.

Forum Link: Are the Canadian Exchanges recognized worldwide?

Mark Lawrence: The TSX Venture Exchange is the junior exchange to the TSX [Toronto Stock Exchange] and provides some less restrictive reporting and governance requirements to the TSX proper. As the company grows it can seamlessly migrate to the TSX, the AIM, and the NASDAQ should it deem it appropriate. In the meantime it is a great exchange to get used to being a public vehicle. While it has strict governance and reporting requirements, they are less expensive to comply with than SOX.

Forum Link: Can a company use its TSX Share Currency for acquisition?

Mark Lawrence: A CPC not only enables the raising of cash but its shares have been used successfully by many to make acquisitions with. The exchange also allows for the issuance of periodic private placements without prospectus, and only a 4 month hold to investors. [There are] many examples of CPCs that have gone on to raise successive multi-hundred millions of financings and acquisitions to bring total market caps in excess of $1 billion.

Forum Link: What about the board. Do all the CPC directors stay on?

Mark Lawrence: Unlike a Pink Sheet RTO where a majority of existing directors want to stay on and might keep 20% of the shares, the CPC generally advances one of its existing directors to the resulting issuer, supporting the additional appointment of qualified, independent and recognized directors. Currently, staying as a Canadian company, the board will need at least 25% resident Canadian directors. As for the share ownership, the CPC shareholders end up with a percentage depending on the value of the operating company, the concurrent raise, and the number of shares in the CPC initially. There should be no preset ownership percentage set before a deal is struck.

Forum Link: What are some of the risks and costs involved?

Mark Lawrence: A CPC separates the risks of going public and financing. A traditional IPO could see management spend 9 months and over $1 million, only to have the IPO pulled at the last second. A CPC can get the company public and raise a moderate amount of cash immediately, followed by financings as the market permits. The costs for legals and accounting, all in, should be far less than for a U.S. IPO.

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