An Introduction to CPCs
For tech companies that are beyond the initial startup phase - ones that have developed a product and have secured some initial orders, there are basically two choices for securing growth capital - private equity or public equity. Vending your business into a CPC (Capital Pool Company) is one of the public equity options, and is very similar to IPO.
In the US, the typical path is to stay private and finance with VCs until the business qualifies for a NASDAQ Small-Cap Listing or equivalent AMEX or AIM listing (which typically requires market caps above $100M). This route usually involves accepting specific financing terms with VCs that include 'preferred shares'. We believe that these structures can create serious mis-alignments between the founders and investors.
But going public is associated with high overhead costs, both in terms of management time and resources, as well as hard costs (think boards of directors, financial auditors, securities lawyers, and liabilities), and the required pre-disposition on the part of the management team to 'play the pubco game'. Is it all that bad? It depends on your individual situation.
In Canada, the junior (or venture) public markets are an alternative to private equity for technology, life science and resource based companies. In this country, much more growth capital is invested by junior public market investors than by traditional venture capitalists. This is in part due to Canada's history as a resource economy, but in recent decades has resulted in a vibrant financing market for technology and life sciences companies as well.
Regulation of the Canadian venture markets has advanced to the point where now there is a single national exchange (the Toronto Stock Exchange) managing both the senior issuers (the TSX Exchange) and the venture issuers (the TSX Venture Exchange). The TSX has a reputation for effective, fair and efficient market regulations and administration.
CPCs are a vehicle that allows for the efficient and expedient marriage of experienced investors/mentors/advisors and high growth companies who need access to capital. A typical transaction (vending into a CPC) can be completed in only a few months. There is no practical limit to the size of the vend-in transaction, although they are typically in the $2-10M valuation range. Upon conclusion, the resulting entity usually contains a blend of the prior CPC advisors/board members and the vend-in company management and board members.
For more information on CPCs, from a legal perspective, please reference this excellent document, furnished by Clark Wilson, one of Canada's leading securities law firms specializing on TSX Venture listings: CPC Primer - Q&A Document.
|
