Someone once asked me:  ”What’s a C-Pick?”    When I asked a few questions it became clear that they were asking about Capital Pool Companies or “CPCs” under the TSX Venture Exchange’s  Capital Pool Company Program.  (By the way, I have never heard anyone else refer to it as a “C-Pick”.)

The CPC Program essentially works like this:

• 3 to 6 people get together and incorporate a company.  Together they must invest at least $100,000 in seed money into that company with at least $5,000 each.  
• The company has no assets other than the seed money and no operating business (hence, it is commonly referred to as a “CPC shell”)
• With the help of a banker the CPC shell “goes public”.  Essentially this means that it raises between $200,000 $1,900,000 using a prospectus  from at least 200 shareholders that are unrelated to the founders and begins trading on the TSX Venture Exchange.  The process is not unlike a traditional IPO except that you don’t have the usual level of business and financial information to disclose because the CPC shell would have been only recently formed and has no business or assets.
• Once the IPO is out of the way and the shares are listed on the TSX Venture Exchange, the sole purpose of the CPC shell is to seek out an operating business or some other asset(s) to acquire within 24 months.
• Often the target business is acquired through a “reverse takeover”.  Instead of paying cash for the company or asset being purchased the CPC shell often pays by issuing new shares to the owners of that company or asset.  The “reverse takeover” part comes in because at the end of the day the total number of shares issued to the owners of the target often represents a majority of the outstanding shares of the CPC shell, meaning that as a group the previous owners of the target now control the overall company.

Why would anyone do this?  For the founders and IPO investors of the CPC shell, the hope is that the target business will ultimately be very successful and their initial small investment will be returned to them many-fold.   For this reason, the pressure is on the CPC shell founders to find a viable target with good prospects.   For the owners of the target it is a way to obtain a public listing for their shares, eventual liquidity (i.e. an ability to sell their ownership stake on the public market) and it may provide the company with access to public market capital (i.e. $) that is not available to it as a private company.  

Why would a target do a CPC deal rather than an IPO?  There is a level of skepticism in the market relating to IPOs.  I think it is a bit of hangover from the dot-com bubble where people thought getting in on an IPO was the key to riches.  Once bitten, twice shy.  People seem more comfortable to invest a relatively small amount of money into the CPC shell IPO based on the reputation of the founders and then let those founders make the ultimate investment decision by choosing the right target.  We see serial CPC founders who do it again and again and, if successful, they can build a following of investors willing to invest in their CPC IPOs.  A traditional IPO works best if you have a splashy business story that makes good press and is easy to sell to potential investors.  For companies that have a very viable business that represents a solid investment but may not itself be overly exciting, gaining a public listing by being a target company in the CPC process may be the preferred route.

There are a lot of details about the process and a lot of pros and cons that I don’t have the space to include here.  If you have questions about the CPC program please feel free to give me a call.  I have experience on both sides of these kinds of transactions (i.e. CPC shell and target).