What Is a Qualifying Transaction?
A qualifying transaction is a step whereby a private company in Canada can transition to issuing public stock. This procedure involves forming a Capital Pool Company (CPC) which then acquires all standing shares of the private company, effectively transforming it into a public entity.
Key Takeaways
- A qualifying transaction allows a private company in Canada to go public with the goal of raising capital for continued business operations.
- The process entails setting up a Capital Pool Company (CPC), which acquires all outstanding shares of the private company, thus converting it into a public company.
- The CPC is charged with selling shares and gathering capital while adhering to the regulations governing qualifying transactions.
- A CPC is expected to fulfill the criteria of a qualifying transaction within 24 months from its establishment, which includes submitting a prospectus and applying to the TSX Venture Exchange.
- This approach is the predominant method for going public in the TSX Venture Exchange, often chosen over initial public offerings (IPOs).
The Essence of a Qualifying Transaction
Companies opt to go public to secure funds necessary for running and expanding their businesses. This financing can be pursued through equity financing—issuing shares to the public—or debt financing, which involves taking out loans. While equity financing in the U.S. is typically facilitated through an Initial Public Offering (IPO), Canadian companies have an alternative route via a qualifying transaction, leading to the formation of a Capital Pool Company.
A Capital Pool Company (CPC) is an entity listed on the exchange with experienced directors and capital; however, it doesn’t conduct any commercial operations on its own. Essentially, it serves as a shell to eventually acquire and enable a private company to go public through a qualifying transaction.
The process culminates in the directors of the CPC identifying and acquiring a privately-held company. Upon acquiring the private company’s shares, which then become a subsidiary, the private enterprise gains access to capital and the listing provided by the CPC. Consequently, such qualifying transactions need to be conducted within 24 months of the CPC’s initial listing, a process that demands filing a prospectus and pursuing a new listing on the TSX Venture Exchange.
Different structures may be utilized to execute the qualifying transaction, including a share-for-share exchange, amalgamation, a plan of arrangement requiring court and shareholder approval, or an asset purchase in exchange for cash and/or CPC securities. Regardless of the structure, the private company’s shareholders convert into security holders of the CPC.
Choosing Qualifying Transactions to Go Public
In Canada, the CPC and associated qualifying transactions are preferred over initial public offerings for taking companies public on the TSX Venture Exchange. This approach can be more efficient because it avoids the necessity for private companies to bear upfront costs for marketing shares to investors.
Key Requirements for CPCs Conducting a Qualifying Transaction
CPCs need to abide by several rules when making a private company public. The law requires that a CPC comprises at least three individuals who can invest the higher of $100,000 or 5% of the total funds raised for the issuing of shares.
Moreover, the CPC must sell shares to a public minimum of 200 investors at twice the price of the seed shares, with each investor purchasing at least 1,000 shares. This activity must raise between $200,000 and $4,750,000. The capital raised is then allocated towards an acquisition.
Related Terms: IPO, Equity Financing, Debt Financing, Amalgamation, Shareholder.
