What is a Capital Pool Company (CPC)?
A Capital Pool Company (PCC) is another way for private companies in Canada to raise capital and go public. The seed capital company system was created and is currently regulated by the TMX Groupand the resulting companies trade on the TSX Venture Exchange in Toronto, Canada.
Key points to remember
- A seed capital company (CPC) provides an alternative mechanism for private companies to raise capital and go public.
- A CPC pools the capital of three or more qualified people and integrates it into a front company.
- CPCs exist in Canada in response to the US venture capital industry to make it easier for Canadian start-ups to go public without venture capital backing.
Understanding Capital Pool Companies (CPCs)
A capital pool company is a listing company with experienced managers and capital, but without commercial activity at the time of the initial public offering (IPO). The CPC administrators focus on acquiring an emerging company, and once the acquisition is complete, that emerging company has access to the capital and list prepared by the CPC.
Canada does not have such a strong capital risk industry as the United States does, so companies tend to list on the Toronto Stock Exchange earlier in their growth. The downside of this prior listing to access capital is that companies can easily find themselves abandoned by investors due to their inexperience in operating as a public company and the dual requirement of public responsibilities at one point. critical operational expansion.
Seed capital companies were created and promoted as a means of injecting start-up companies with both the capital and the expert director-level advice that is provided in the United States by venture capitalists. . They also provide an alternative growth path for Canadian companies as well as companies interested in listing 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.
The CPC process
The process of setting up a capital pool company has two phases:
- Phase 1: Creation of the Capital Pool Company
In the first phase, at least three experienced people pool some capital to begin the process – the total amount must exceed $100,000 or 5% of the funds raised. The founders then incorporate a front company to raise seed money to list as a CPC. The prospectus is created and then the company asks to be listed. There are additional rules as to how many shareholders are required and how much of the offering they can hold. The CPC is listed at the end of this process with the symbol “.P” to designate it as a seed capital company.
- Phase 2: completion of 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 final structure results in the founders of the two merged entities retaining a higher level of ownership in the company than might have been the case with an IPO.
Essentially, having a ready-made roster with experienced administrators helps reduce costs for the business and reduces IPO risks. For investors, the decision to buy shares of a CPC requires greater diligence on the part of the founders of the CPC itself, as they will decide what type of company to buy and how to guide it after the initial investment.
Even if a goal has been suggested, as is the case with some CPCs, there is no guarantee that it will be achieved. Investors must therefore have confidence in the management of the CPC and in their ability to create value for companies in general rather than for a specific company.
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