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Dec 18, 2020

TSX Venture Exchange Announces Significant Positive Changes to its Capital Pool Company Program

By Richard M. Kimel, Russell J. Sanders and Emily Chittick

On December 1, 2020, the TSX Venture Exchange (“TSXV”) announced significant positive changes to its Capital Pool Company (“CPC”) program, a popular program for companies looking to access the public markets. The amendments to the program come in the form of an amended and restated Policy 2.4 - Capital Pool Companies (the “New Policy”) of the TSXV’s Corporate Finance Manual, an overview of which is set out below. The New Policy in its current form is considerably more flexible than the predecessor policy governing CPCs (the “Old Policy”) and is expected to be welcomed by capital markets participants. The New Policy is expected to take effect on January 1, 2021, subject to the receipt of applicable regulatory approvals.

The following are highlights of the New Policy:

Seed Capital and Aggregate Funds: An increase in: (i) the maximum seed capital raised below the IPO price from $500,000 to $1 million; and (ii) the maximum in aggregate funds raised by a CPC from $5 million to $10 million.

Failure to Complete Qualifying Transaction Within 24 Months: It is no longer required to either delist from the TSXV or transfer a CPC’s listing to NEX if the CPC’s Qualifying Transaction (“QT”) is not completed within 24 months after listing. The New Policy eliminates the requirement to cancel any seed shares if the QT is not completed within 24 months of listing.

Distribution: The minimum number of public shareholders of a CPC has been reduced from 200 to 150, with each shareholder owning at least 1,000 shares. Collectively, public shareholders must hold at least 20% of the issued and outstanding CPC shares.

Directors and Officers: A majority of the directors and officers (as opposed to all under the Old Policy) must be residents of Canada or the United States or have public company experience, allowing international resident directors to serve on the board of a CPC and an issuer resulting from a business combination or similar transaction involving a CPC (the “Resulting Issuer”). In addition, it is now permitted for one individual to serve as the Chief Executive Officer, Chief Financial Officer and Secretary of a CPC.

Agents & Pro Group: The CPC’s IPO agent (the “Agent”) no longer needs to be a Member (as defined in the New Policy) of the TSXV. The maximum term of options granted to the Agent has been increased from two to five years. Shares issued to the Pro Group (as defined in the New Policy) as part of the QT will no longer be subject to a four-month hold period unless required by applicable law.

CPC Stock Options: CPCs are now permitted to adopt a 10% rolling stock option plan whereby the number of shares under option is based on the shares issued and outstanding on the date of an option grant. Under the Old Policy, CPCs were only permitted to have a fixed stock option plan in which the total number of shares reserved for issuance could not exceed 10% of the issued and outstanding shares as of the closing of the IPO.

Escrow and Escrow Release: The 36-month escrow period applicable to escrowed securities of a Tier 2 Resulting Issuer has been replaced with an 18-month escrow period, with 25% released on the date of the completion of the QT and 25% released on the 6-, 12- and 18-month anniversaries of such date.

Use of Proceeds: CPCs are now permitted to incur general and administrative expenses of $3,000 per month, whereas the Old Policy limited such expenses to the lesser of: (i) 30% of the aggregate gross proceeds raised by CPC; and (ii) $210,000 over the life of the CPC.

Finder’s Fees: A CPC is now permitted to pay a finder’s fee to a Non-Arm’s Length Party (as defined in the New Policy) provided that: (i) the QT is not a Non-Arm’s Length QT; (ii) the QT is not a transaction between the CPC and an existing public company; (iii) the finder’s fee is payable in cash, listed shares and/or warrants; and (iv) disinterested shareholder approval is obtained. Under the Old Policy, the payment of finder’s fees to a Non-Arm’s Length Party was not permitted.

Structure of CPC: The New Policy allows the CPC to take the form of a trust whereby the Old Policy did not allow for such a structure.

Transition Provisions

The TSXV has included some helpful transition provisions in the New Policy which are applicable to: (i) an issuer that has filed its CPC prospectus, but not yet completed an IPO as at December 31, 2020; (ii) existing CPCs as of January 1, 2021; and (iii) Resulting Issuers as at January 1, 2021.

CPC Applicants

Issuers that have filed their CPC prospectus but have not yet completed an IPO at the time the New Policy comes into force may elect to either comply with the New Policy, or file its final prospectus and complete the IPO in accordance with the Old Policy and be governed by the Old Policy.

Existing CPCs

Existing CPCs will be able to implement certain changes without shareholder approval, such as increasing the maximum aggregate gross proceeds raised by the CPC from $5 million to $10 million and complying with the new and relaxed use of proceeds rules established under the New Policy. Certain other changes will require specific disinterested shareholder approval, such as: (i) removing the consequences of failing to complete a QT within 24 months of listing; (ii) extending the term of outstanding out-of-the-money Agent’s options to five years from two years; (iii) amending the escrow terms to accord with the New Policy; (iv) permitting the payment of a finder’s fee to a Non-Arm’s Length Party to the CPC; and (v) adopting a 10% rolling stock option plan.

Resulting Issuers

Resulting Issuers will be able to amend their existing CPC escrow agreement to track the escrow terms permitted under the New Policy, provided that disinterested shareholder approval is first obtained.

If you have questions about the changes to the CPC program and how they could impact your business or plans for your business, please contact a member of our Capital Pool Company/Reverse Takeover Group.

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