SPACs and CPCs: Alternatives to Private Equity and Traditional IPOs
Special Purpose Acquisition Corporations (SPAC) and Capital Pool Companies (CPC) are two capital raising vehicles that can benefit investors and business owners looking to access capital markets. A SPAC and CPC are both publicly traded holding companies which have the sole purpose of acquiring other companies. There are, however, significant differences in their formation, regulatory rules, features, and outcomes. Whereas SPACs have made splashy headlines since rules introducing them to Canada were implemented in 2009, CPCs may be a more attractive means of raising capital and delivering returns to investors.
SPACs and CPCs have similar features. Both are programs set up by the TSX and TSX-V as alternatives to the traditional and costly IPO process. Both go through an IPO and are listed on the TSX(V), have minimum capital raising requirements at the IPO level, and both are required to complete a qualifying acquisition or transaction within a set time period. Both are prohibited from entering an agreement in principle to acquire a private company prior to listing (otherwise, the private company would have to go through the traditional IPO process to become a publicly listed company).
SPACs and CPCs are holding companies that do not carry on business. Their founders are often experts in a certain field, whether it be fin tech, bio pharmaceuticals, or consumer goods, with relevant senior management and public company experience. Both SPACs and CPCs rely on the reputation and quality of their founding directors to attract investors, create value, and access deal flow.
The most obvious difference is the capital raising requirements between a SPAC and a CPC. A SPAC IPO must raise a minimum of $30 million at $2 per share. Founders must account for at least 10% and up to 20% of the SPAC’s equity interest depending on the requirements of the Exchange. Half of the underwriter’s commission must be placed in escrow pending the successful close of the qualifying acquisition (QA). Also, a SPAC cannot offer security based compensation to its directors, officers, or consultants prior to the completion of the QA.
SPACs have 36 months to close a QA. Shareholders have conversion rights to take their investment back if a QA is not closed in the permitted time frame. SPACs must prepare and file a prospectus containing disclosure regarding the SPAC and its proposed QA with each securities regulator in the jurisdictions which the SPAC and the resulting issuer is and will be a reporting issuer. The QA must be approved by the shareholders and shareholders have conversion rights to take their investment back if they vote against the QA, even if the majority of the shareholders approve the acquisition.
A serious challenge for SPACs is that they compete with private equity for the same deals. Private equity providers do not face the same regulatory challenges as SPACs. Another challenge is shareholders’ conversion rights; SPACs must consider or estimate how many shareholders’ will exercise their conversion rights after voting against a particular QA when negotiating the price of the QA among other terms. The rules dictate that the business or assets comprising the QA must have an aggregate fair market value equal to at least 80% of the value of funds held in escrow. This requirement may necessitate the closing of more than one QA at the same time. Shareholder approval is required for each QA.
CPCs, on the other hand, can close their IPO with a minimum of $200,000 at $0.10 per share. Directors and officers can be offered securities based compensation. Agents are paid their full commission on closing the IPO.
The board of a CPC does not need shareholder approval for its Qualifying Transaction (QT) in all circumstances. A prospectus is not required where the target company and the CPC are at arms’ length. Instead a filing statement is filed with the security regulators.
In almost all cases, a CPC will need to raise further capital in order to close its QT. A private placement can either be brokered or non-brokered. Prior to raising the financing, the existence of the pending QT has already been disclosed. If the QT is attractive, fully subscribing a private placement is a smooth process. Accredited investors, and not the public-at-large, participate in the private placement.
As of October 5, 2016 there are currently six SPACs in Canada. They have raised a total of $1,079,500,000. Only two have announced QA and the targets of both SPACs are already publicly listed companies.
Smaller cap companies are not potential targets for SPACs. CPCs are often more attractive. There have been several successful CPC Qualifying Transactions in Ottawa. However, potential targets of a CPC must seriously consider the costs and responsibilities of becoming a public company and speak with a lawyer about the added disclosure and reporting requirements.
Both CPCs and SPACs are alternatives to IPOs and raising private equity. Both have their challenges and their limits. SPACs may not be appropriate for the Ottawa market, but accessing the capital markets through a CPC may be beneficial under certain conditions. The Securities Law practice group at Perley-Robertson, Hill & McDougall LLP/s.r.l has extensive experience setting up CPCs and guiding targets through the private placement and qualifying transaction process.
Conor is a lawyer in the Business Law Group at Perley-Robertson, Hill & McDougall LLP/s.r.l. He can be reached at 613.566.2155 or [email protected].