As many a would-be mogul will tell you, effective financing options for growth companies have always been few and far between. Going public? Not a chance, unless you sell 20-kg bags of dog food online—and we’ve time-warped to 1999.
But an underappreciated program of the TSX Venture Exchange (TSXV) is helping to address both those problems. The exchange’s Capital Pool Company (CPC) program has become a serious alternative to angel investors and venture capitalists as a means of funding Canada’s growth businesses. And thanks to nascent investment groups formed to address the concept’s shortcomings, CPC deals are growing even more appealing. Whether you sell dog food, diesel engines or data-processing services, it just might be time to take your company public by hooking up with a CPC.
Under the CPC program, experienced financiers and public-company directors create a shell company and provide it with seed capital. Then it’s listed on the TSXV through an initial public offering, raising $300,000 to $2 million from at least 200 investors. Once public, the CPC has two years to complete a “qualifying transaction,” which usually means a reverse takeover of the CPC by an operating company.
That’s where you, the entrepreneur, come in. Merge with a CPC, and your firm assumes the cash sitting on the CPC’s balance sheet. Because the qualifying transaction essentially takes a private company public, it’s usually done in conjunction with a public offering of shares in the merged entity, raising even more cash to fund your growth. The post-merger company usually retains the name, auditors and directors of the operating business, although in many cases the CPC founders will stay on as directors in order to leverage their expertise and investment-community contacts.
Many more steps and rules apply, so consult the TSXV website for a comprehensive account of the CPC process. But you can begin to see its appeal as a source of growth capital. There are other advantages as well. Merging with a CPC is generally less dilutive than a traditional IPO or selling equity to angels or VCs, and the shareholders in the operating company (i.e., you) usually retain control. It’s preferable to a traditional reverse takeover, which can expose you to the contingent liabilities of the public shell being acquired. It’s also cheaper than an IPO, principally because the transaction is completed pursuant to the filing of an information circular rather than a full-blown prospectus. Finally, a CPC takeover is faster than a traditional IPO, so you can tap the public markets when investor appetite in your business is high.
Surprisingly, the CPC program has been around in its basic form for almost 20 years. It was conceived on the old Alberta Stock Exchange as a way to take oil and gas exploration plays (read: speculative opportunities) public. Today, the program is national under the auspices of the TSXV, which is heavily promoting it. As a result, more technology and industrial firms are using the program to go public. Foreign companies who want to go public without the cost and hassle of a listing on NASDAQ or London’s AIM exchange are even using it.
One recent CPC success is Kaboose Inc. (TSX:KAB), a player in the hot “Web 2.0” field. Based in Toronto, it’s the largest independent online media company focused on kids and families. It went public in August 2005 by merging with a CPC, raising $10 million through a related private offering. By February 2006, Kaboose had graduated to the TSX; in June, it raised another $33 million.
How did the CPC program make a difference to Kaboose? By allowing the firm to leap into the public capital pool just as investor interest in Web 2.0 opportunities was reaching critical mass. CPC or otherwise, Kaboose’s success is also due in large part to the involvement of a top-notch investment bank, GMP Partners, which brought the firm additional capital and research coverage.
And that brings me to the most significant downside of the CPC program. Many private companies merge with CPCs and their capital only to become “orphans” of the stock market, ignored by research analysts and traded by appointment only. Without coverage and liquidity, it’s hard to raise additional capital. Yet orphans must bear the same expense and compliance hassles of being public as other, more “successful” stocks.
To be a successful public company, you need more than a good business. You need connections—and lots of them. One source lies in the emergence of what I call “serial CPCs.”
Groups of seasoned financial professionals are beginning to band together to launch CPC after CPC. The serial CPC founders not only bring a public listing to a private company; they can also provide broad-based management experience, investment banking and research relationships, and merger and acquisition leads to a greater degree than the average standalone CPC. (After all, there’s strength in numbers.) Serial CPC groups can also cross-pollinate the firms in their portfolios.
I believe in this concept so much that I recently formed my own serial CPC group. Together, the eight of us have many years of experience in a variety of professions, including law, accounting, investment banking, public- and private-company management, and information technology. We also bring many important relationships to the table, especially close connections with the investment bankers who can help companies avoid the public-market orphanage—which is no place for a good company to be.