Exchange by the end of the summer.
"We're working closely with the OSC to finalize remaining issues for acceptance of the program in Ontario," says manager
of corporate finance for the CDNX, Tom Graham. A realistic target date might fall in the late summer or early fall timeframe.
Having originated in 1987 under the Alberta Stock Exchange (ASE), CPCs used to be known as junior capital pool (JCP)
companies. These companies were basically shells, consisting of a few founding members. The shells raised funds by
selling shares to risk-taking public investors without having any specific business plan in mind. In effect, it was a blind capital
pool.
The process was, and is, like public venture capital.
The shares involved in JCP deals were issued at prices as low as five cents to founders (now $0.075 minimum), and
provided residents of the province a special category of public company investing that was previously unavailable.
Such an investment opportunity was later made available to residents of British Columbia, Saskatchewan and Manitoba,
and will be made accessible to Ontario investors soon, says Graham. Currently, the Ontario Securities Commission (OSC)
does not recognize CPC prospectuses and, therefore, the initial distribution cannot be sold to Ontario residents. Ontario
businesses, however, have used the program successfully in the past to tap funds from investors outside the province.
Going public through the CPC process involves two stages, with the company first going public on the CDNX and then
seeking a qualifying transaction, or QT.
An IPO involves the creation of a CPC and the issuance of seed shares to the company's founders/directors. A minimum of
$100,000 must be raised from these directors, with maximum proceeds from the seed shares and IPO set at $700,000.
Obviously, these are not huge financings, and the CDNX does not intend them to be.
"We call it public venture capital," says Graham. "If you want to raise $50 million, a CPC is probably not the answer, but for
development-level companies it offers some flexibility."
Shortly after closing an IPO, the company is listed on the CDNX. This offers liquidity to the blind capital pool's faithful
investors. From there, the CPC's only business is to find and acquire a promising company or asset, using its capital pool
to fund the search, due diligence and acquisition process.
This acquisition is called a QT, and cannot be pre-planned in advance of the IPO. That would go against the principles of the
blind pool.
"That is a key restriction. You cannot start a CPC if you have a QT agreement in place. If an agreement in principle exists,
you're better off doing a regular IPO or a reverse takeover," says Blake, Cassels & Graydon's Scott Clarke.
Following such a transaction, the company must be able to meet the CDNX's minimum listing requirements, and will
typically be listed on the exchange's second tier.
Much like a reverse takeover, the CPC approach is a quicker, cheaper way to go public, says Clarke. He is a partner with
Blakes' Calgary office, and has had plenty of experience dealing with CPCs. And, although most of his experience has
been in Alberta, Clarke is confident the same model will work in Ontario.
"Although CPCs are thought of as western inventions, we definitely think they can have applications in Ontario."
An ideal CPC candidate, says Graham, would be a management team with public company experience and a full board of
directors. The rest of the company would be staffed with employees gained through the QT. The management team
should also have enough working capital to get them through 18-24 months.
In September 1996, Ottawa-based Linmor Technologies Inc. went public via the CPC process on the ASE. It used funds
from a public venture capital pool in Alberta to buy Grenview Corp.
Having graduated to the Toronto Stock Exchange last year, Linmor is an example of how smaller companies can use the
CPC process to their advantage.
"It's the easy way to get listed," says Linmor's VP of finance Sabina Dawson. "It's supposed to make it easier to get onto
the stock exchange because the public company is already there. It reduces a certain amount of the securities regulations
that you have to go through."
The choice whether to go public at all, however, is the toughest decision for a young company, says Dawson.
"Any vehicle that allows small companies access to capital more easily is a good thing to do. But I think where there is a
dream of going public and raising all this money, some companies don't realize what the down sides can be," she says,
alluding to costly reporting requirements and shareholder communications.
One company that intends to take advantage of the new rules in Ontario is Toronto-based CCPC SofTech. With a
prospectus in hand, SofTech president David Slater says he's just waiting to get the CDNX's go-ahead before filing.
"This is a good program if executed on properly," says Slater, who used the JCP program to start CCPC Biotech last year
on the ASE. That company recently announced it had identified a QT, which it intends to buy in the near future pending
shareholder approval.
"In today's capital markets, for these kinds of smaller financings, this may be the only way to do it. That wasn't the case a
year ago," he says.
The CDNX's Graham couldn't agree more. With tighter capital markets and due diligence reaching unseen levels, he
believes CPCs offer development-level companies the best access to capital.
"Our challenge is to get capital down to entrepreneurs, so they can use it to grow businesses. The CPC program has been
remarkably successful in doing that. That's what we'll be bringing to Ontario."
