International arbitration report
In this issue, we cover a broad spectrum of ‘hot button issues’ for boards and companies operating internationally.
The TSX Venture Exchange (the Exchange) recently announced a series of positive amendments to the Exchange’s CPC program that are expected to take effect on January 1, 2021 (the Amendments). The Amendments reflect a revitalization of the CPC program and will provide greater flexibility and incentivization to market participants who wish to use the program.
Briefly, the CPC program provides an alternative method for private companies to list on the Exchange. Since its inception, the program has been a keystone in attracting high-growth companies to the Exchange and provides private companies looking to obtain access to the Canadian capital markets with a streamlined path to listing. Subject to the receipt of requisite regulatory approvals, the Amendments will become effective on January 1, 2021.
This update provides a brief overview of certain key Amendments expected to be implemented.
The Amendments increase the maximum amount of seed capital that can be raised at a per-share price that is below the offering price for the CPC’s initial public offering (IPO) from $500,000 to $1 million. This increase could provide founders with greater returns and the opportunity to bring in additional key stakeholders who are properly motivated to achieve a successful qualifying transaction.
In addition, the Amendments will increase the aggregate cap on the amount of capital that can be raised by a CPC from $5 million to $10 million allowing founders to form larger CPCs with a greater pool of venture capital available for emerging companies that are seeking to list on the Exchange. This change may provide the added benefit of decreasing the amount of capital that target companies are required to raise in connection with their qualifying transaction, allowing revenue-generating companies to limit associated dilution.
Currently, CPCs are required to complete a qualifying transaction within 24 months of listing on the Exchange. CPCs that do not complete a qualifying transaction run the risk of being moved to NEX, a trading forum for listed companies that no longer meet the Exchange’s ongoing listing standards. Following the implementation of the Amendments, CPCs will no longer be moved to NEX if they are unable to complete a qualifying transaction within 24 months of listing. As a result of this significant change, CPCs will be provided with additional time and flexibility to identify the right qualifying transaction for their shareholders without rushing the process.
Under the Exchange’s current policies, a CPC’s board and management, together with any CPC shareholder who has acquired shares below the IPO price, are subject to significant escrow restrictions following a qualifying transaction. These restrictions, of between 18 and 36 months, depend on whether the resulting issuer is classified as a Tier 1 or Tier 2 issuer. The Amendments have reduced the restrictions by removing the bifurcation of escrow release depending on tier and providing that escrowed securities will be subject to an 18-month escrow period during which 25% escrowed securities will be released on each of the date of the Final Exchange Bulletin and the 6-, 12-, and 18-month anniversaries of such date.
In addition, stock options (and underlying shares) will be released from escrow concurrently with the issuance of the Final Exchange Bulletin, unless granted before the IPO with an exercise price less than the IPO price.
Historically, CPC directors and officers have all been required to be residents of Canada and the United States or to have public company experience. Following the Amendments, only a majority of directors must be residents of Canada or the USA or have public company experience. This means that experienced board members who lack public company experience and international directors will now be eligible to participate in the formation of CPCs.
The Amendments will also reduce the distribution requirements for CPCs. Following the implementation of the Amendments, CPCs will only be required to have 150 public shareholders holding at least 1,000 shares. This decrease from the current requirement of 200 public shareholders is likely to speed up the IPO process for CPCs as it will reduce the number of accounts that are required to participate in the IPO. In addition, the minimum size of the public float following the IPO will be reduced from 1 million shares to 500,000 shares. Public shareholders, however, will need to collectively hold at least 20% of the outstanding shares of the CPC upon completion of the IPO.
The Amendments also revise the compensation requirements for CPCs to reflect a more flexible approach by, among other things, providing that CPC stock option plans can be 10% rolling plans based on number of shares outstanding at the time of the grant instead of a 10% fixed plan based on number of shares outstanding on the closing of the IPO.
In addition, the minimum exercise price for CPC stock options granted before the IPO will now be the lowest seed share issue price and, after the IPO, it will be the price determined pursuant to Exchange Policy 4.4 – Incentive Stock Options, which provides that the minimum exercise price is the discounted market price of the shares. As noted above, all CPC stock options granted prior to IPO with an exercise price that is less than the IPO price, will be subject to escrow.
Further, in order to properly compensate agents for participating in a CPC’s IPO, the term for options issued to agents has been increased from a maximum two-year term to a maximum five-year term.
Historically, CPCs have been prohibited from paying finder’s fees to non-arm’s-length parties. The Amendments have removed this restriction providing additional incentives to non-arm’s-length parties to support the CPC in completing a successful transaction. Following the Amendments, CPCs will be authorized to pay a finder’s fee to a non-arm’s-length party to the CPC if:
While the Amendments are expected to take place on January 1, 2021, existing CPCs are able to take certain steps to benefit from the increased flexibility provided by the Amendments.
Certain of the Amendments will be available to existing CPCs without shareholder approval, including:
In order to adopt some of the more beneficial Amendments, a CPC will be required to obtain shareholder approval. The amendments requiring shareholder approval, include:
The Amendments represent a significant shift in the Exchange’s approach to the CPC program. While the program has historically been successful in attracting emerging companies, these amendments are likely to assist the Exchange in attracting more individuals who are interested in setting up CPCs that hold a greater pool of capital.
Based on the recent success of SPACs in the United States, it would be reasonable to expect that CPCs will now present a more attractive option to market participants seeking to form a mini-SPAC, which presents a well-established route to Canadian listing.
The authors wish to thank Fatima Anjum, articling student, for her help in preparing this legal update.
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© Norton Rose Fulbright LLP 2021