The following is a very brief overview of the capital pool company program (the “CPC Program”) of the TSX Venture Exchange (the “TSXV”) and a summary of the principal steps that may be taken by a capital pool company to complete a qualifying transaction under the CPC Program. This summary is not intended as legal advice and provides information of a very general nature regarding only selected issues relevant to the CPC Program. Transactions under the CPC Program can be complex and must be considered in light of the relevant facts of any particular situation. Accordingly, you should consult experienced legal, financial and tax counsel prior to starting any such transaction.

OVERVIEW OF THE CPC PROGRAM

The CPC Program was designed to bring together promising businesses and assets with investors and management having financial market experience. The CPC Program is an alternative to, and often has advantages over, the traditional initial public offering method of “going public”. The CPC Program enables experienced officers and directors to form a company (a “CPC”) with no assets other than cash. The CPC, without any active business operations, is permitted to raise capital by preparing a prospectus (“CPC Prospectus”), conduct an initial public offering (“IPO”) of the CPC’s shares, list the CPC’s shares on the TSXV and use the capital raised to seek out an investment opportunity in one or more assets or businesses which, when acquired by the CPC, would result in the CPC meeting the TSXV’s minimum listing requirements. The minimum listing requirements vary depending on the nature of the CPC’s intended business. The acquisition of the business or asset by the CPC is referred to as the CPC’s “Qualifying Transaction” or “QT” and a company acquired by a CPC pursuant to a QT is referred to as a “Target Company”. A CPC that has completed its QT is referred to as the “Resulting Issuer”.

THE OPPORTUNITY FOR BUSINESS OR ASSET OWNERS

There are presently many CPCs listed on the TSXV that have completed an IPO and are presently looking to identify and acquire businesses or assets and thereby complete a QT. This has created a unique opportunity for a business or asset owner to vend such business or asset into a CPC provided it meets TSXV minimum listing requirements. Prior to completion of a QT, the principal assets of a CPC are its TSXV listing, cash raised from the IPO (usually $500,000 to $2,000,000) and the experience of the CPC’s management team. The business or asset owner should carefully review and consider these when selecting a CPC to do business with.  

The acquisition of a business or asset can be structured in different ways that will satisfy listing requirements. The price paid by a CPC for a business or asset can take different forms, but often consists of a combination of cash and shares (which may be subject to escrow) of the CPC and in the case of mineral properties, depending on the structure of the transaction, often also includes exploration obligations and royalties. Business or asset owners often also negotiate board and management positions on the Resulting Issuer. Depending on the value of the business or asset relative to the value of the CPC and the structure of the transaction, the business or asset owner will frequently end up controlling the Resulting Issuer after completion of the QT. As a result, a transaction with a CPC can be an effective method for a business or asset owner to obtain a public listing for their business or asset. Having experienced and sophisticated legal and financial counsel will help the business or asset owner negotiate the structure of the QT in a manner that achieves and protects their interests.  

COMPLETING THE QUALIFYING TRANSACTION

Completion of the Qualifying Transaction involves the CPC entering an agreement in principle (“Agreement in Principle”) to acquire the business or asset and the preparation and filing with the TSXV of a comprehensive CPC Information Circular or CPC Filing Statement that contains prospectus level disclosure regarding the business or asset. A Qualifying Transaction typically includes the following steps:

  1. An Agreement in Principle to acquire the business or asset is negotiated and signed.
  2. The CPC promptly notifies the TSXV and submits a comprehensive news release announcing the Agreement in Principle to the TSXV for review. The trading in the CPC’s shares will be halted by the TSXV at this point. Trading will remain halted until the news release has been vetted by the TSXV and issued by the CPC and until certain additional filings and background searches have been completed.
  3. The CPC may hold a “Pre-Filing Conference” with the TSXV (this step, although not required, is recommended by the TSXV, especially where the Agreement in Principle or proposed QT may involve unique or unusual circumstances).  
  4. The CPC obtains and files with the TSXV a Personal Information Form for each person who will be a director, senior officer, promoter or insider of the Resulting Issuer, together with resumes for each director and senior officer of the Resulting Issuer. The TSXV will then conduct background searches and police checks on such persons.
  5. The CPC engages an investment dealer to act as a sponsor. The investment dealer will, among other things, conduct a due diligence review of the assets or business to be acquired and the proposed directors and officers of the Resulting Issuer. Exemption from sponsorship may be obtained in certain circumstances, such as where the QT is accompanied by a brokered financing. The CPC will also conduct its own due diligence review of the business or assets acquired.  
  6. The CPC obtains audited annual and unaudited interim financial statements of the business to be acquired and proforma financial statements for the Resulting Issuer giving effect to the QT. The requirements for financial statements are detailed and vary depending on the circumstances. In cases where only an asset that is not a “business” and no Target Company is acquired, such as a mineral exploration property, financial statements for such asset may not be required.
  7. If a mineral property is to be acquired, the CPC obtains a technical report prepared in accordance with National Instrument 43-101 or, if an oil or gas property is to be acquired, a technical report prepared in accordance with National Instrument 51-101. In other cases, a business plan or valuation may be required.  
  8. Within 75 days after announcing the Agreement in Principle, the CPC must file with the TSXV a submission letter summarizing the proposed transaction along with supporting documentation. The supporting documents are specified in TSXV Policy and include the draft CPC Information Circular (where shareholder approval is required) or draft CPC Filing Statement (where shareholder approval is not required), and, if a sponsor is required, the preliminary “Sponsor Report”. The submission must also include a copy of each technical report, valuation, business plan or appraisal required by the TSXV and a copy of each material contract of the CPC, Target Company or acquired business. The TSXV will review the submission to, among other things, ensure that on completion of the QT the Resulting Issuer will meet the TSXV’s minimum listing requirements.
  9. Once the initial submission has been conditionally accepted by the TSXV, the CPC will file additional documentation with the TSXV and, if shareholder approval is required, publicly file the final CPC Information Circular on SEDAR and mail it to the CPC’s shareholders. If shareholder approval is not required, the CPC will publicly file the CPC Filing Statement on SEDAR at least seven business days prior to the closing of the QT and issue a news release disclosing the closing date of the QT and that the CPC Filing Statement is available on SEDAR.  
  10. If shareholder approval is required, the CPC will hold the shareholders’ meeting and seek the shareholders’ approval of the proposed QT and any related matters. CPC shareholder approval is not typically required for arm’s length transactions.
  11. Once approval of the QT has been obtained from the shareholders, or the CPC Filing Statement has been filed, as applicable, the CPC will close the QT and acquire the business or asset. Often a financing will also be completed at the same time.
  12. Once all final documentation has been accepted by the TSXV, the TSXV will issue a Final TSXV Bulletin evidencing such acceptance, confirming the completion of the QT and indicating that the Resulting Issuer will no longer be considered a CPC and that the Resulting Issuer’s shares will commence trading on the TSXV.  

The completion of a QT may involve the preparation of numerous other agreements, documents and filings in connection with the steps above. Depending on its terms and complexity, a QT may involve different or additional steps, including a concurrent financing by way of public or private offering of the resulting issuer’s securities. Owners of the target business or asset can exercise significant influence or even control over these steps and documentation particularly in cases where they will end up controlling the Resulting Issuer.