CPC Brochure

THE CAPITAL POOL COMPANY (CPC) ROUTE

"What is a Capital Pool Company, or CPC?"
A CPC (Capital Pool Company) is a "blind pool" company without an active business whose initial purpose is to use its capital to investigate and find a business opportunity to acquire. To raise this capital, the TSX-VN permits CPCs to list and to offer their shares to the investing public. Companies proposing to go public as a CPC and wishing to list their shares on the TSX-VN must meet the requirements of TSX-VN's CPC program. These requirements are set out in the TSXVN's Policy 2.4.

The CPC program permits entrepreneurs to raise a limited amount of capital quickly and relatively inexpensively. This capital can only be used to investigate business opportunities and to acquire a business that will serve as the basis for a continued listing on the TSX-VN as a "non-CPC" public company. Once the CPC's shares have been issued to the public, investors are able to trade them through the facilities of the TSX-VN like the shares of any other public company.

"What is a Qualifying Transaction?"
A QT (Qualifying Transaction) is typically accomplished by the CPC buying all of the issued and outstanding shares of a private company, with an operating business, from its shareholders. The result is that the private company becomes, on the completion of the acquisition, a wholly-owned subsidiary of the CPC. Because the CPC has no active business of its own, the practical result of this acquisition is that the business of the private company becomes the business of the CPC.

The QT begins when the CPC has reached an agreement in principle with the shareholders of the private company to acquire the private company. While it is not necessary to do so, the standard practice is for the parties to sign a "letter of intent", being a non-binding agreement, to evidence the proposed terms of the purchase of the private company by the CPC. This letter of intent would normally address all of the major terms of the acquisition and would serve as an outline for the drafting of the formal agreements that the parties will ultimately enter into. While the acquisition is by far the most significant part of the QT, there are typically other corporate transactions that the parties will negotiate as well. The most important of these is usually a financing to be undertaken by the CPC to raise funds for the further development of the private company's business. The shareholders of the private company will typically not want to proceed with the acquisition unless a financing is attached to it.

In addition, there may be new stock options being granted to the principals of the private company by the CPC, changes to the senior officers and Board of the CPC to add some of the principals of the private company, and a name change for the CPC (to some variation of the private company's name), among other things. Every situation will be different and will depend upon what is needed to get the deal done.

Once the QT has been agreed to, the CPC will then have to seek TSX-VN approval.

"What are the TSX-VN's requirements for a QT?"
• The TSX-VN will require the CPC to secure the approval of its shareholders for the QT. The QT must be approved by a "majority of the minority" of the shareholders of the CPC. This is 50% plus one vote of the votes cast by the CPC's shareholders, excluding the related parties of the CPC and related parties of the private company. In addition, corporate laws may require shareholder approval by a two-thirds or 75% majority, depending in the structure of the transaction.
• The TSX-VN will require the CPC to provide its shareholders with an Information Circular. The Information Circular must contain prospectus level disclosure of the QT, being the terms of the acquisition, a discussion of the private company's business and financial position, and a discussion of what the resulting company that was formerly the CPC will look like once the acquisition has completed.
• The QT will have to be sponsored by a Brokerage Firm that is a member of the Exchange and a formal sponsorship report will have to be filed with the TSX-VN by that firm.
• If the CPC is acquiring a private company (rather than just assets), the financial statements of the private company will have to be audited. The audit will have to cover (up to) the three most recently completed fiscal years of the private company and, possibly, an interim period subsequent to the most recent year-end as well.
• A fair market valuation of the private company being acquired by the CPC will have to be prepared by a competent independent party (such as a Chartered Business Valuator).
• A proper detailed Business Plan will have to be provided by the private company.
• Each member of the private company's management team and Board of Directors, and each major shareholder of the private company will have to file a Personal Information
Form, or "PIF", with the TSX-VN.
• The TSX-VN may ask the CPC to file a Filing Statement (a detailed disclosure document) in addition to the Information Circular. The CPC, as constituted after it has completed the acquisition of the private company, will have to meet the TSX-VN's minimum listing requirements. "What is the process for completing a QT?" The QT cannot be completed until the CPC secures TSX-VN approval. The process for securing TSX-VN approval and completing the transaction is as follows:

Step 1: Upon the agreement in principle being reached between the CPC and the shareholders of the private company (i.e. the letter of intent), the CPC issues a comprehensive news release. The requirements for this news release are extensive and, as such, the CPC must first provide a draft of the news release to the TSX-VN for its review.

Step 2: Once the news release has been issued, the CPC's securities will be halted from trading until the following have occurred:
• The TSX-VN has received confirmation from a member Brokerage Firm that it has agreed to act as a sponsor in respect of the QT.
• A PIF has been filed with the TSX-VN for each individual who will be a director, senior officer, promoter or other insider of the CPC after completion of the QT.
• A pre-filing conference (to pre-clear the QT) has been held with the TSX-VN.
• The TSX-VN and the sponsoring Brokerage Firm have completed their preliminary background due diligence.

Step 3: The CPC files with the TSX-VN the draft Information Circular for the QT and all necessary supporting documents (the Business Plan, audited financial statements and the valuation for the private company being acquired by the CPC). Normally, the sponsoring Brokerage Firm will want to sign off on this document before it is filed with the TSX-VN.

Step 4: The TSX-VN reviews the CPC's draft Information Circular and the supporting documents
and advises of any deficiencies.

Step 5: The sponsoring Brokerage Firm files its preliminary sponsorship report with the TSX-VN.

Step 6: After the CPC addresses the deficiencies raised by the TSX-VN, the CPC's application is presented to the TSX-VN's Listings Committee for consideration.

Step 7: Once the application has been conditionally accepted by the TSX-VN, the CPC files "preshareholder meeting" documentation with the TSX-VN including the proposed final Information Circular and final sponsor report.

Step 8: Upon satisfactory review, the CPC mails the Information Circular and the TSX-VN issues conditional acceptance of the QT.

Step 9: The CPC's shareholders' meeting is held to approve the QT.

Step 10: Assuming shareholder approval is received, the CPC closes the acquisition of the private company and any other transactions that comprise the QT (often there is also a financing to be completed).

Step 11: The CPC files with the TSX-VN final documentation confirming that all closing conditions have been satisfied.

Step 12: Provided the final documentation is satisfactory, the TSX-VN issues a notice evidencing final acceptance and confirming completion of the QT.

Step 13: The company that was formerly the CPC commences trading under a new name and new trade symbol. It is now a "normal" listed company as opposed to a CPC.
"How long will it take to complete the QT?"

As noted above, the CPC must provide a detailed Information Circular to its shareholders. The Information Circular must be approved by the TSX-VN prior to being mailed to the CPC's shareholders. It can take 20-30 days to prepare the Information Circular and obtain the sponsor's sign off on it before it can be filed with the TSX-VN. It can then take 30-40 days to secure TSX-VN's approval for the Information Circular before it can be mailed to the CPC's shareholders. Since statutory requirements require about 65 days to elapse from the time the shareholders meeting is called until it can be held, these steps alone account for 115-135 days. You need to add to this the time to negotiate the QT at the beginning (15 days), the time to prepare the Business Plan, audit and valuation (30 days) all of which are needed before the Information Circular can be prepared, and the time to close (15 days). With this in mind, the fastest a QT can be completed from start to finish is 120 to 150 days, with the possibility of it taking 180 days or more not being unusual.

In order to bring the QT in on the shorter time frame some of the time periods noted above have to overlap and be collapsed. To do this, there has to be exceptional organization and cooperation by all involved.

"What happens on the completion of the QT?"
The TSX-VN will not approve a QT unless the resulting company (meaning the CPC as constituted after the completion of the acquisition of the private company) meets the TSX-VN's minimum listing requirements for a non-CPC company (i.e., for an ordinary operating business company). The former CPC company must at least satisfy the minimum Tier 2 listing requirements for the industry sector in which the private company operates as set out in TSXVN Policy 2.1, except for the public distribution requirement which must be in compliance with TSX-VN Policy 2.5. Typically, the CPC will issue shares to the shareholders of the private company (as opposed to paying cash) in order to acquire all of the issued and outstanding shares (or assets) of the private company. The TSX-VN will impose an escrow on some or all of the CPC shares issued to the (then former) shareholders of the private company. The formula for determining whose shares will be escrowed (small shareholders are often excluded) and how long the escrow will be is very complicated and depends on a number of factors. As a rule of thumb, however, the shareholders of the private company should assume that if they will be principals (i.e. directors or senior officers) or major shareholders of the company resulting from the QT, they will probably have at least a three-year escrow on the shares that they will receive from the CPC and as much as a six-year escrow. The shorter period will only be available if the valuation filed with the TSX-VN fully supports the price being paid by the CPC to acquire the private company. The shares will be released in approximately equal installments every six months over the escrow period.

"Can you show me an example of a QT?"
The following is an example of what a CPC might look like after the completion of its QT. The actual structure will depend on a number of factors the most important of which are:

• The price at which the CPC's shares are trading at the time the QT is agreed upon and announced.
• The value of the private company being acquired as supported by the independent valuation opinion that is secured for the QT. For the purpose of this example, let's assume the following facts:
• The price at which the CPC's shares are trading at the time of the QT is $0.50 per share (please note that this is not a representation of the future price of a particular CPC's shares; simply an example for illustrative purposes).
• The CPC signs a letter of intent to acquire all of the issued and outstanding shares of a privately owned technology company, call it No-Name Inc.., which is valued at $4,000,000 (as supported by an independent third party valuation).
• No-Name Inc.. needs, initially, $1,000,000 in financing to continue building its business.
• No-Name Inc.. is owned 100% by three founding shareholders, as to 40% each by two of them and 20% by the third. This is represented by the following shareholdings in No-Name Inc..:

Currently, the issued and outstanding share capital of the CPC and its fully-diluted share structure (again, just examples; there will be variations of this) looks like the following:

(1) The CPC's seed shares are held by the five founding shareholders of the CPC.
(2) These stock options are held by the five founding shareholders of the CPC and are exercisable at a price of $0.15 per share for a period of five years.
(3) The initial public offering shares sold by the Agent to the public. The TSXVN requires that these be sold to at least 300 members of the public each owning 1,000 shares.
(4) A warrant entitling the Agent to purchase 140,000 common shares of the CPC at a price of $0.15 per share for 18 months. On the acquisition of No-Name Inc., the CPC agrees to issue to the three shareholders of No-Name Inc.., pro-rata in accordance with their shareholdings of No-Name Inc., a total of 8,000,000 shares of the CPC. These shares will be issued at a price of $0.50 each because that is the current trading price of the CPC's shares. This means the three shareholders of No-Name Inc.. will be receiving $4,000,000 worth of the CPC's shares for their company. On the basis of their current holdings in No-Name Inc.., they will each receive the following shares of the CPC:

In order to provide No-Name Inc.. with the $1,000,000 it needs to build its business, the CPC and the sponsoring Brokerage Firm have agreed to complete a private placement of 2,000,000 common shares of the CPC at a price of $0.50 per share. Again, the $0.50 price is used because this is the current share price for the CPC. It is agreed that this private placement will close concurrent with the closing of the acquisition of No-Name Inc.. Let's assume that the Brokerage Firm places these 2,000,000 shares with 10 of its clients.

After the completion of the acquisition and private placement, the issued and outstanding share capital of the CPC and its fully-diluted share structure will look like the following:

(1) These are the 8,000,000 shares of the CPC that are issued to the three shareholders of No- Name Inc.. in exchange for all of the issued and outstanding shares of No-Name Inc..
(2) On the completion of the QT, the parties agree that a new block of 800,000 stock options will be made available to the three former principals of No-Name Inc.. and for the new employees of No-Name Inc..
(3) Sold by the sponsoring Brokerage Firm to ten of its clients to raise the $1,000,000 that the principals of No-Name Inc.. want to further develop their business. In addition to the foregoing, the following has occurred:
• No-Name Inc.. has become a wholly-owned subsidiary of the CPC. Since the business of No-Name Inc.. has become the business of the CPC, the CPC has changed its name to Tech (Canada) Inc.
• The Board of No-Name (Canada) Inc. now consists of all three of the former shareholders of No-Name Inc.. In addition, they asked that two of the existing Board members of the CPC stay on in order to access their significant expertise.
• The President of No-Name Inc. has also become the President of No-Name (Canada) Inc.

For more information on CPC’s and QT’s, please contact us.

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