Building a Better Board
As an advisor to fast-growth companies, I spend a lot of time with entrepreneurs who want to take their businesses to the next level. Given my legal background […]Read more
SPACs, Special Purpose Acquisition Corporations, are all the rage. Billions have been raised by these shell public companies that have lots of cash and are looking for an operating company to merge with. After the merger, the operating company becomes the resulting public entity. There are over 420 SPACs, with a collective war chest of more than USD $150 Billion, in existence right now. They are all looking for the right operating company to merge with.
In Canada, the Toronto Venture Exchange’s Capital Pool Company (CPC) program (https://www.tsx.com/listings/listing-with-us/listing-guides/ways-to-list/capital-pool-company-cpc-program) is a fast, cheap and often less dilutive option which you can use to go public. Unlike their American brethren, who can have hundreds of millions of dollars looking for an acquisition, CPCs are limited to CDN $5 million. As a result, the premium paid for liquidity, and, therefore, the dilution for the operating company shareholders, will be substantially less for a CPC.
The CPC program is well established, with over 2,600 companies taken public and over CDN $75 Billion raised by former CPCs. Over 30% of all CPCs, which start life on the Toronto Venture Exchange (Canada’s junior stock exchange), graduate to a listing on the Toronto Stock Exchange.
The big difference between a SPAC and a CPC is the amount of money in the shell company. Typically, SPACs come to the table with all of the funds required for the acquisition (and then some). CPCs, on the other hand, can only have CDN $5 Million in hand and the group will have to raise the additional capital required to fund the acquisition and future operations. While this can take time, in a frothy market like we have right now, investment bankers can easily raise the required funds and close the financing at the same time as, and as a condition of, the closing of the merger of the operating company with the CPC.
There are 2 advantages to the CPC scenario, because you are raising the required funds contemporaneously with the closing:
1. The SPAC investors will have no allegiance to the operating company. You can expect them to be short-term investors, who bought when the SPAC is initiated and will sell when the value of their shares rise due to the merger. Management will have to work hard to maintain the stock price with so many potential sellers.With a CPC on the other hand, the pool of original investors is relatively small, since a maximum of CDN 5$ Million can be raised. Therefore, there will be far fewer sellers and less downward pressure on the stock price. Furthermore, the investors in the financing that is closed contemporaneously with the merger are going in focusing on the long-term prospects of the resulting company and, therefore, are not sellers.
2. To reiterate, the CPC is much less dilutive to the founders and investors in the operating company. The enterprise value of a company with CDN $5 Million of cash on hand will be entitled to a much smaller premium on the value of the company. (I understand the liquidity premium for a CPC right now is less than CDN $1 Million.) The same 20% premium for company with a hundred million dollars of cash is obviously substantially more. There is no premium attached to the cash which comes into a CPC at closing, although some investors can receive warrants and/or options as a sweetener to their investment.
While the vast majority of companies listed on the Canadian exchanges are Canadian, for many years now foreign companies regularly list here in Canada. I was involved as principle in taking a German company public via the CPC program.
If you are thinking about a SPAC as an option to take your company to the next level, you should also give consideration to the CPC program, a fast, cheap and less dilutive way to go.