Entities looking to raise capital in the Canadian capital markets now have an alternative to the restrictive rules and low maximum capital limits of the TSX Venture Exchange’s Capital Pool Company regime and the more formal, high minimum capital threshold of the traditional initial public offering route. Shell companies with nothing more than non-binding letters of intent are now able to carry out initial public offerings (IPOs) in Canada to raise a minimum of C$30 million. On December 19, 2008 the Toronto Stock Exchange (TSX) adopted Part X – Special Purpose Acquisition Corporations of the TSX Company Manual (Part X) to provide a framework for the listing of special purpose acquisition corporations, or SPACs, on the TSX.
A SPAC is a holding company or shell, with no current operations or business, that completes an IPO to raise capital, with a view to using that capital to acquire one or more operating businesses.
Summary of Key Changes to Part X
Part X was initially published for comment by the TSX on August 15, 2008 (Original Proposal) and was summarized in our Material Change Report of October 2008. The TSX has made minor amendments and clarifications to the Original Proposal based on comments received. Some changes are more significant and these are summarized below.
A SPAC is required to raise a minimum of C$30 million through its IPO. The minimum price per security in the IPO has been reduced to C$2.00 per share or unit from the C$5.00 specified in the Original Proposal. This should allow for more flexibility in the SPAC’s capital structure, while at the same time preserving the prospect of an orderly market for its securities. In the view of the TSX, it is necessary to set a minimum price for securities of a SPAC, because an issuer without an operating business may be prone to more price manipulation or price volatility with an excessively low trading price. If units are issued, each unit may consist of one share and no more than two share purchase warrants.
Founder Investment Requirements
The TSX has also relaxed the minimum investment and equity ownership required of founding securityholders (founders) of a SPAC, with the result that these matters will need to be negotiated in the IPO and listing process. As a means of aligning the interests of the founders of the SPAC with public securityholders, the Original Proposal had required that founders hold an equity interest of at least 10% in the SPAC. This requirement has been relaxed in Part X to mere guidance as to the expectations of the TSX with respect to the equity interest of the founders. Generally, founders are expected to hold an aggregate equity interest of not less than 10% and not more than 20% of the SPAC immediately following closing of the IPO, taking into account the price at which the founding securities are purchased and the resulting economic dilution. There is no minimum price at which the equity interest of founders must be issued, or any minimum aggregate amount to be invested by founders. This change allows for more flexibility with respect to considering the adequacy of the founders’ interest and presumably will now be negotiated with underwriters at the time of the IPO.
Escrowed IPO Proceeds
Upon completion of an IPO, a SPAC must place a minimum of 90% of the gross proceeds and 50% of the commission earned on the IPO by the underwriters into escrow with an escrow agent. This follows the basic concept in the Original Proposal, with the change that the escrow agent need not be a trustee.
The escrowed funds must be invested in certain permitted investments by the escrow agent. The TSX has clarified that any income earned on the escrowed IPO proceeds, together with IPO proceeds that have not been put in escrow, may be used by the SPAC to fund administrative expenses incurred in connection with the IPO, for general working capital expenses and for the identification and completion of a qualifying acquisition, provided such intended use is disclosed in the IPO prospectus.
“Not So Blind” – But Still No Operating Business
In the Original Proposal, a SPAC applying for listing on the TSX could not have an active business, and it could not have entered into a written or oral, binding or non-binding agreement in respect of a potential qualifying acquisition. Part X has been modified to allow the SPAC to enter into nonbinding acquisition agreements, including confidentiality agreements and non-binding letters of intent prior to the IPO. This will enhance the utility and attractiveness of SPACs considerably, since they can now be formed with a view to pursuing an identified target. Similar TSX Venture rules governing capital pool companies, which currently restrict offerings where a target has been identified, probably deserve reconsideration in light of this development.
Completion of a Qualifying Acquisition
SPACs have up to three years from the date of the closing of the distribution under the IPO prospectus to complete a qualifying acquisition. In the Original Proposal, it was required that a proposed qualifying acquisition must be approved by securityholders, other than the founders, at a duly called meeting. This requirement has been modified in Part X to require that a qualifying acquisition be approved by a majority of the directors unrelated to the qualifying acquisition in addition to a majority of the securityholders, other than the founders. The additional board approval requirement was added by the TSX to ensure that directors related to the target being acquired under the qualifying acquisition are not permitted to vote to approve the acquisition. The requirement is consistent with most Canadian corporate law statutes but will provide added protection where the SPAC is incorporated under a corporate statute that does not require “interested” directors to abstain from voting in such transactions. The businesses or assets forming the qualifying acquisition must have an aggregate fair market value equal to at least 80% of the aggregate amount then on deposit in the escrow account (effectively, 72% of the gross proceeds of the IPO), excluding deferred underwriting commissions held in escrow and any taxes payable on the income earned on the escrowed funds. Where the minimum IPO is completed, the minimum target size requirement means that the SPAC would only be able to consider target acquisitions involving values equal to at least C$21.6 million.
TSX Escrow Policy Statement
The TSX Escrow Policy Statement (Appendix C to the TSX Company Manual) has been amended to provide separate escrow provisions for founders of SPACs. The amended policy states that where escrow is applicable to an issuer listing on the TSX by completing a qualifying acquisition with a SPAC, 10% of the founding securities will be released at the date of closing of the qualifying acquisition, rather than 25% as required for other issuers by the TSX Escrow Policy Statement. The balance of the founding securities will be released in three equal amounts over the next 18 months at six-month intervals. Securities of the SPAC held by principals other than the founding securities will be subject to the regular escrow requirements and release schedule, where applicable.
TSX Staff Notice re SPACs
Concurrent with publishing the adopted version of Part X, the TSX also published Staff Notice 2008- 00007 that provides guidance on certain listing matters relating to SPACs including: (i) the contents of the SPAC’s IPO prospectus; (ii) the documents to be filed with the TSX in connection with the original listing of the SPAC; (iii) the contents of the information circular to be mailed in connection with the meeting to approve the SPAC’s qualifying acquisition; and (iv) listing fees payable by the SPAC to the TSX. These requirements are set out in detail in Part X and are summarized below.
Contents of the IPO Prospectus
The TSX expects that the IPO prospectus filed by a SPAC will include specific disclosure with respect to the following items:
a. the terms of the initial investment in the SPAC by the founders, which must include an agreement by the founders not to transfer their founding securities prior to the completion of the qualifying acquisition and an agreement that in the event of a liquidation and delisting of the SPAC, the founding securities will not participate in a liquidation distribution;
b. a statement that as of the date of the filing of the prospectus, the SPAC has not entered into a written or oral binding acquisition agreement with respect to a qualifying acquisition;
c. the target business sector or geographic area for the SPAC’s qualifying acquisition, if applicable;
d. the valuation methods intended to be used in valuing the qualifying acquisition, if known;
e. a statement that the SPAC will not secure debt financing, other than in accordance with Section 1009 of the Company Manual, prior to the completion of a qualifying acquisition;
f. the proposed nature of permitted investments for the SPAC’s escrowed funds and any intended use of income earned on the escrowed funds from the permitted investments;
g. the anticipated allocation of funds for administrative and working capital expenses; and
h. the limitation, if any, on the exercise of conversion rights by securityholders who vote against a proposed qualifying acquisition.
Documents to be Filed in connection with the Original Listing Application
When the SPAC is applying for listing on the TSX, the following documents should be submitted to the TSX concurrently with the filing of the preliminary prospectus with the applicable securities regulatory authorities:
a. a TSX listing application in draft form together with the documents required to be filed in support of the application;
b. a cheque for the original listing application fee;
c. a draft escrow agreement governing the IPO proceeds;
d. the preliminary prospectus;
e. certified copies of all charter documents, including Articles of Incorporation and equivalent documents; and
f. a Personal Information Form and a Release and Discharge Relating to Consent to Disclosure of Criminal Record Information for every individual who, at the time of listing, will be an officer or director of the SPAC or who beneficially owns or controls , directly or indirectly, securities carrying greater than 10% of the voting rights attached to all outstanding securities of the SPAC.
Information Circular for the Meeting to Approve the SPAC’s Qualifying Acquisition
A qualifying acquisition must be approved by a majority of the securityholders (other than the founders) of the SPAC at a meeting duly called for that purpose. The information circular prepared for this meeting must contain prospectus-level disclosure of the resulting issuer, assuming completion of the qualifying acquisition, and must be submitted to the TSX for pre-clearance prior to mailing to securityholders. To ensure consistency of disclosure, the TSX expects that the information circular will wrap around the SPAC’s prospectus that assumes the completion of the qualifying acquisition. The information circular may only be mailed once a receipt for the prospectus has been obtained from securities regulators.
For the purposes of calculating the listing fees that are payable by SPACs, the TSX has confirmed that SPACs are considered as “Corporate Issuers”. SPACs will pay the original listing application fee, original listing fees for securities listed in connection with the IPO, and listing fees for any additional securities listed at the time of the qualifying acquisition.
Please click here: http://tsx.complinet.com/en/display/display.html?rbid=2072&element_id=642 for a copy of Part X.