On December 1, 2020, the TSX Venture Exchange (the TSXV) announced changes (the Amendments) to its Capital Pool Company (CPC) program, to become effective January 1, 2021.
Specifically, the TSXV noted that the Amendments should:
Provide flexibility by easing residency restrictions and simplifying spending restrictions;
Reduce regulatory burden by relaxing requirements on shareholder distributions and shareholder approval, and by decreasing restrictions on certain subscriptions; and
Create value for participants by increasing seed investments, relaxing requirements on who can receive finders’ fees, and shortening certain escrow requirements.
Amendments to CPC Program
The key policy changes are summarized below. For a complete overview, the TSXV Bulletin announcing the changes can be found here.
Removal of 24-Month Deadline for Qualifying Transaction
Pursuant to the Amendments, if a CPC fails to complete its Qualifying Transaction within 24 months of listing, it no longer has to obtain shareholder approval to transfer the CPC to NEX and cancel certain seed shares.
Directors and Officers
The Amendments provide that only the majority of directors and officers—not all of them—must be residents of Canada or the United States or have public company experience. Further, one person may act as CEO, CFO and Secretary simultaneously.
Seed Capital and Aggregate Funds
The Amendments increase the maximum aggregate gross proceeds earned from the issuance of shares in a CPC’s initial public offering (the IPO), seed shares and shares issued pursuant to a private placement from $5 million to $10 million.
Public Distribution Requirements
The requirement for a CPC to have 200 public shareholders at the time of the IPO has been reduced to 150 public shareholders. it should be noted that, at the time of the Qualifying Transaction, standard listing requirements still require the issuer to have 200 shareholders.
Further, under the Amendments, CPCs will be required to have a Public Float (as defined in TSXV policies) of at least 500,000 shares, rather than 1,000,000. The Amendments also introduce a new requirement for public shareholders to collectively hold at least 20% of the outstanding shares.
Shortening of Escrow Periods
Under the Amendments, following the completion of a Qualifying Transaction, all CPC escrowed securities will be subject to an 18-month escrow schedule—regardless of whether the CPC is a Tier 1 or Tier 2 issuer—with 25% of the escrowed securities being released on the date that the TSXV files a bulletin for the CPC’s Qualifying Transaction and 25% on each of 6, 12 and 18 months following that date. In addition, CPC stock options and shares issued on exercise of stock options will be released on the date the TSXV issues its final bulletin, unless such securities were granted before the IPO and at an exercise price less than the IPO price.
Shares Subject to Escrow
Certain shares will no longer be subject to escrow requirements under the Amendments, including shares acquired by the Pro Group (as defined in TSXV policies) at or above the IPO price and shares acquired by a Control Person (as defined in TSXV policies) in the secondary market. However, escrow requirements will continue to apply to seed shares issued below the IPO price, shares acquired from treasury by non-arm’s length parties to the CPC, CPC stock options and shares issued on exercise of CPC stock options at an exercise price that is less than the IPO price.
Use of Proceeds
Under the Amendments, general and administrative expenses will be limited to $3,000 per month, with new guidance on permitted uses of proceeds and payments to Non-Arm’s Length Parties (as defined in TSXV policies).
Finder’s Fees
A non-arm’s length party will be able to receive a finder’s fee, provided that certain criteria are satisfied, including obtaining disinterested shareholder approval.
Stock Options
CPCs will now be entitled to adopt 10% rolling stock option plans, in which the total number of common shares reserved under option shall not exceed 10% of the common shares outstanding on the date of grant.
Disclosure Requirements
The form of disclosure document to be utilized by a CPC in connection with a Qualifying Transaction has been revised to more closely align with requirements under NI 41-101 to reduce duplication and regulatory burden.
Transition Provisions
New CPCs
If a CPC has filed its CPC prospectus but has not yet completed its IPO, it may elect to comply with the new rules, provided it revises its prospectus and escrow agreement; or it may file its final prospectus and complete its IPO in accordance with the former policy, and continue to be governed by the former policy, with the option to comply with the transition provisions applicable to existing CPCs detailed below.
Existing CPCs
Existing CPCs can implement certain changes immediately, such as increasing the maximum aggregate gross proceeds raised by the CPC to $10 million.
However, the following changes require disinterested shareholder approval in order to implement:
Removing the consequences of failing to complete a Qualifying Transaction within 24 months of listing;
Extending the term of outstanding agent’s options to five years from two years;
Amending escrow terms to track those permitted under the new rules;
Permitting a payment of a finder’s fee to a non-arm’s length party; and
Adopting a 10% rolling stock option plan.
Former CPCs
CPCs that have already completed a Qualifying Transaction can amend existing CPC Escrow Agreements to track the escrow terms permitted under the Amendments and the revised CPC Escrow Agreement, including the 18-month release schedule and the immediate release of escrow securities no longer subject to escrow, as long as they obtain disinterested shareholder approval at a meeting of shareholders or by written consent.
DISCLAIMER: This post is intended to convey general information about legal issues and developments as of the date above. It does not constitute legal advice and must not be treated or relied on as such.