Intro to CPC’s - Part II: Definitely Not SPACs

As mentioned in the first installment of this series on CPCs, or capital pool companies, in Canada, there are some differences between these smaller shell companies that go public on the TSX Venture Exchange seeking combinations with development stage companies and SPAC’s, or special purpose acquisition companies in the US, which raise large amounts of money hoping to combine with well-established successful companies. Besides the different focus in terms of stage of development, the CPC program has some other interesting differences from SPACs.

Most importantly, in general the CPC’s shareholders do not have to approve the proposed merger (called a “qualifying transaction” or QT). In a SPAC, shareholder approval is generally required and involves a detailed proxy statement that takes months to get approved by the SEC. Plus there is always concern about whether shareholders will actually approve the SPAC merger transaction. Without this burden, CPCs can close deals much more quickly. However, the QT in the CPC has to be approved by the TSX Venture Exchange. There are other interesting differences. The money raised is not held in escrow in a CPC, as it is in a SPAC, to protect investors. However, there are strict rules on the TSX about how the proceeds from the various financings in the CPC can be used. In particular it bans certain types of non-arm’s length transactions.

SPAC management theoretically can be anyone, but in general SPAC sponsors have been experts in the industry in which the particular SPAC is seeking an acquisition. However, the SEC does not regulate who can be SPAC sponsors. The CPC program actually requires that its management be acceptable to the exchange. They also must be a resident of Canada or the US. I have seen the paperwork and it is a pretty detailed disclosure that is required by each proposed director of a CPC. Rules also limit how much can be raised in seed stage, private offering before the IPO and in the IPO itself, none of which are applicable to SPACs. In the CPC, shares that were issued below the IPO price, management shares and shares owned by certain brokers are put in escrow and are released over a 36 month period following the QT. This is not applicable for SPACs. Also, trading in the CPC is halted before an agreement in principle for a QT is announced and it stays halted until certain documentation is filed.

So basically the TSX has said, we will help your deal get done quickly so long as we watch the entire process and feel comfortable. As we will talk about in a future part of this series, lately some deals have had trouble getting completed. More to come….

Leave a comment