The Truth About the Capital Pool Company (“CPC”) Program in Canada

●  The CPC program solves many merger and acquisition issues.

●  There are a number of items to consider before you start a CPC.

A Capital Pool Company, or “CPC” is a special purpose acquisition company program which offers by the Toronto Stock Exchange. Its structure allows investors to form partnerships with entrepreneurs looking to access the public market capital, which makes it ideal for experienced investors.

The way Canadian CPC work is simple: as an investor, you can start a public company with the sole purpose of acquiring promising ventures. The structural procedures of CPC programs solve many of the issues encountered typically by agents, sellers and business acquirers, such as lack of transparency. In addition, CPC programs create an outstanding buyer’s profile and allow all stakeholders to contribute capital or time during the research, due diligence and negotiation stages. In most cases, businesses are not prepared when selling up, so the CPC management team can offer a great deal of assistance so the business owner and seller won’t have to split their attention between the current transaction and their day-to-day operations.

The key to starting a successful Canadian CPC is preparation and planning. Fifteen or so years ago, CPC had a bad reputation due to the fact they were usually established as a part of a pump and dump scheme. Fortunately, in recent years, a number of transactions have been made by reputable corporations, financial contributions made by asset managers, and CPC programs already have a proven track record of creating value for every party involved in the transaction.  

The beauty of the program is, it’s okay to have a short-term plan to capitalize on the latest capital market trend.

The capital market trend comes in short bursts. Your company may not be able to capture and capitalize on the most recent trend, but a CPC has the capability to change direction to accommodate the market sentiment quickly, so the dealmaker can raise capital efficiently.

The acquisition has to be attractive and financeable.

Test your idea by presenting it to other professional investors who are in your circle. You may have a hard time closing your deal if your friends don't jump out of their seats begging you to take their money. I may be exaggerating, but your team and the industry must appeal to investors. I know someone who spent $500K CAD drafting an offering memorandum only to find out that he couldn't find investors to support his team and idea afterwards.

Structure a winning team; align your team’s interest and set corporate ground rules, otherwise no-one will help you source a deal and raise money.

Service providers for a CPC usually only have an interest in billing the CPC and there is really no way around this except to find service providers that are competent and inexpensive. This is why the CPC program caters for experienced dealmakers because they know how to work with people who produce money, as opposed to people who are an expense to the company.

Collect early and delayed payments.

During the qualification, experienced investors, dealmakers, should help all early supporters to obtain any form of compensation early, and delay compensation to the target company. During the qualifying transaction, the target company receives equity and cash. If the valuation is not favorable to the buyer, the dealmaker should make the target company earn its compensation and link it to performance. You can use CPC shares as a currency to pay the target company and team members, and distribute these shares based on performance.

The $0.10 seed round may be low, but the seed share price can never be low enough.

There are other forms of blind pool shell companies in the market, and they may be selling a seed round much lower than $0.10 per share and operating at a much lower cost. How will you compete in this competitive market?

Take advantage of the inexpensive Canadian capital market.

There are similar programs with other stock exchanges but it would cost much more to start a capital pool company, and the rules would be more stringent,. Therefore, take your financing to other markets, and offshore investors will find your CPC attractive due to the low cost, favorable valuation, and stock market reputation.

There is a time limit.

If you lack the experience, the 24 months’ time limit is typically not enough time to close the deal. Therefore, the dealmaker needs to be prepared, or the founder’s share is cut in half.

Preparation is the key to success.

The dealmaker needs to be prepared, checking out peer groups religiously in order to succeed. They must not rely on others to do their homework. They must have extensive market knowledge and understand the CPC program cycle, keep current of CPC transaction news regarding investors, methods, cost and acquisition valuation.

It's time to think big.

The CPC structure enables dealmakers to make larger acquisitions compared to individual dealmakers who make private deals. Does a dealmaker want to control a $5 million company by him/herself? Do they want to control a $100 million company where they have 5% ownership? In both scenarios, it would cost the dealmaker roughly the same amount of money, but they would have a greater buying power and leverage with the $100 million company.

Protect yourself.

Finally, since a CPC requires dealmakers to work with other people, they should take every precaution to protect themselves. Look at family members’ employment contracts, agreements, corporate resolutions, and registry information of the target company. It’s difficult to change things once you’ve bought a business. Look at the articles of the target company’s incorporation to ensure the dealmakers fully understands the corporate rules.

Purchase director’s insurance, execute a general security agreement, craft a liability release resolution and come up with an indemnity agreement if need be. I know a plethora of dealmakers who found out that one of their 40% of shareholders had a 50% voting right after spending $40 million on a project. Needless to say, the story didn’t end very well.

2017 Transactions Closed by Peer Groups:

Razor Energy Corp. will pay $15m cash for an oil and gas asset that contains proved reserves of 8.3 million barrels of oil equivalent in Alberta. It has arranged a $30 million loan from Crown corporation Alberta Investment Management Corp. (AIMCo) to complete this transaction. Each founder will have approximately 9%+ ownership of the resulting issuer.

Mr. Thomas Schwartz, a founding president of Canadian Apartment Properties REIT, filing qualifying transaction for European Commercial Real Estate Ltd. to purchase a commercial building in Dusseldorf for 11 million euros. I have always been a fan of MainStreet (TSX: MEQ) and Genesis (TSX:GDC).

The bottom line:

Fortunately, history has shown that starting a capital pool company can be rewarding if you know what you are doing.

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About Author:

This article is collectively written by Greater Vancouver Business Brokers and it expresses our own opinion. We own equity in Canadian Capital Pool Company and we provide consultation on the formation of capital pool companies. If you have any questions regarding the use of a capital pool company or any other business acquisition issues, please e-mail us at: info@gvbb.ca.