The TSX Venture Exchange ("TSXV") Capital Pool Company ("CPC") program has been historically popular in the mining industry, but with the liberalization of medical- and recreational-use cannabis, across Canada and beyond, it is proving to offer a viable capital raising platform for cannabis companies seeking to access the public markets.
The CPC program enables experienced investors and directors to form a TSXV listed company that carries on no commercial activities and whose only asset is cash. A CPC's sole purpose is to acquire a promising business or asset (a "Target Company") within a 24 months period of its initial public offering. This acquisition is referred to as a "Qualifying Transaction" ("QT"). The shareholders of the Target Company typically retain their controlling ownership interest on closing of the QT, with the business of the Target Company becoming the "Resulting Issuer."
The process begins with a CPC and Target Company entering into an Agreement-in-Principle. The parties must then prepare a prospectus-level disclosure document in the form of a filing statement or information circular describing the Target Company and including audited financial statements. This disclosure document must be approved by the TSXV before the QT can be completed.
The Resulting Issuer must meet specific listing requirements to complete the QT. There are two tiers of listing requirements available: Tier 1 is the Exchange's premier tier and is reserved for the most advanced Issuers with the most significant financial resources, while Tier 2 companies are smaller, earlier-stage companies. Tier 2 is the tier where the majority of the TSXV 's listed cannabis companies trade.
CPC Program Requirements
Cannabis companies list under the Industrial/Technology/Life Sciences industry classification on the TSXV. The Tier 2 listing requirements for a Resulting Issuer under this classification include the following:
- $750,000 in net tangible assets, or $500,000 in revenue, or $2,000,000 arm's length financing
- if the Target Company has no revenue, a two-year business plan demonstrating a reasonable likelihood of revenue within 24 months of listing must be provided to the TSXV
- adequate working capital for at least 12 months of operations, as well as $100,000 in unallocated funds
- certain experiential and technical requirements for company directors as well as two independent directors
- a public float of 500,000 shares, held by at least 200 public shareholders each holding at least a board lot (ie: 500 shares) with no resale restrictions
- public shareholders control 20% of outstanding shares
- sponsor report may be required
Cannabis companies need to have the proper licenses in place to be listed. Currently, TSXV listing requires validation of the Target Company's business, which means any cannabis producers are required to be "licensed producers" under Health Canada's regime for cannabis cultivation. Cannabis companies that are poised to enter the retail market but are not licensed producers are required to have obtained conditional or final provincial retail permits. The TSXV currently assesses retail cannabis companies on a case-by-case basis and recommends the QT be assessed by the TSXV at the pre-filing stage or sooner.
Benefits of the CPC Program
The CPC program provides a stream-lined method for cannabis companies to become publicly listed, access experienced talent and capital to help plan for and fund their growth. The CPC process offers control, certainty, and flexibility in becoming a listed issuer. CPCs also have the benefit of being "clean" as they have no history of ongoing commercial activities, as opposed to the historical operations inherited when completing a reverse take-over of an existing publicly traded entity.
The CPC program provides a viable alternative to other types of capital raising, such as venture capital, debt financing, and initial public offerings. Venture Capital typically dilutes ownership; non-dilutive debt financing remains tricky given the sensitive nature of cannabis, its global legal status, and creditor concerns regarding the ability to recover defaulted loans with cannabis and cannabis-related inventory. Conventional IPOs are riskier and more uncertain as the market will determine the amount of capital that will be raised whereas under the CPC program funding is determined in advance as part of a concurrent private placement on the QT. Furthermore, a promising company's founders can generally retain more control and ownership in the Resulting Issuer as compared to an IPO.
Lastly, the access to experience and capital under the CPC program can prepare your company to scale quickly when fast growth is expected. As your company grows, you can move your listing to Tier 1 and then eventually onto the TSX, improving market visibility, market confidence in your company, and access to capital.
The above does not, and should not be construed to, constitute legal advice. Navigating the CPC program can be complex and will depend on the unique set of circumstances, needs, and aspirations of each company. For further information and advice regarding the CPC program and your company, please feel free to contact Lorraine Mastersmith, or another member of our Cannabis Group.