In 2018, Voti Detection Inc. – then known as Voti Inc. – was a fast-growing private company that designed highly sophisticated X-ray security systems.
Founded in 2008, the Montreal-based firm was looking for a way to raise capital to meet demand for their products.
It found its answer via a deal made with the capital pool company Steamsand Capital Corp., a company that was created with the sole purpose of finding another company and taking it public on the TSX Venture Exchange (TSXV).
Without having an initial public offering (IPO) Voti, whose shares started trading in Nov. 2018, is now a public company with a value of $50-million and access to retail investors who can help them expand.
Voti Detection Inc. is one of a growing number of companies that have foregone the traditional IPO route in favour of a Capital Pool Company (CPC) to go public. With a CPC, a group of experienced executives and entrepreneurs – often with a lot of expertise in a certain sector – create a company and list it on the TSXV. The idea is that once they’ve found a company to buy they’ll use their experience–and access to investors–to help it grow.
“The board of directors is assembled purely to be able to find a specific kind of company,” says Brady Fletcher, head of the TSXV.
CPCs have been around for decades, but have regained popularity thanks to emerging sectors like cannabis, blockchain and battery metals, Fletcher says.
They are an alternative to the robust venture capital industry in the U.S., and a way of injecting capital and expertise into early-stage companies, who otherwise might falter on the TSXV as they struggle to operate as a public company while expanding their operations.
In 2018, 90 new CPCs were added to the TSXV, more than the previous four years combined.
Previously, companies like Voti might go public via a traditional reverse takeover – where they find a dormant company that’s publicly listed, and then swap shares so that the private firm essentially takes over the listing and becomes public. “But there’s a dearth of those shell companies right now,” says Gilles Seguin, a partner at BCF Business Law in Montreal and head of the firm’s securities law group.
“In 2017 and the beginning of 2018, there was such a rush to marijuana, blockchain, and artificial intelligence, that I think they ate up all of the shells,” he explains.
One benefit of using a CPC is that it has already rounded up the minimum number of investors (200 on the TSXV, for example) and the listing company doesn’t need to find them, Seguin says.
Although a private company that goes public as a CPC still has to incur costs to prepare a prospectus or a listing statement, they do so with the security that they have the investors they need, Fletcher says.
While the use of CPCs to go public has risen in line with today’s hot sectors, it’s usually the type of company – rather than the industry – that dictates whether a CPC is the way to go, Fletcher says.
“The platform of the CPC is best suited for an entrepreneur that has some upcoming news flow that will help generate value,” he explains. “The companies who do best leveraging the CPC are entrepreneurs that have a defined use of the proceeds. They need to raise – we’ll call it $2- to $10 million – and they want to be public so they can have that efficient access to follow-on capital, and take advantage of being public when their share price appreciates.”
There are some big success stories when it comes to companies that got their start in the public markets using the CPC method. These include Canopy Growth Corp., Wheaton Precious Metals, (both which are now part of the S&P/TSX Composite Index,) and cannabis firm HEXO Corp.
Smaller companies looking for less financing have options beyond an IPO too, Seguin says. With equity crowdfunding, for example, a firm would launch a campaign on an independent online portal to go directly to investors to seek capital in exchange for a stake in their business.
“It can be used as a stepping stone to get the number of shareholders, get some money, and then list on one of the exchanges,” he explains.
It’s a less expensive and less risky way to go public, when compared to an IPO, since it allows you to get the number of shareholders you need ahead of time, he says.
To list directly, companies need to file a non-offering prospectus, which means they aren’t offering new securities when they list, but they don't need to use a broker to do so, Seguin explains. Plus, the review is not as complicated as one for a prospectus with an offering so happens more quickly.
Whether you choose the CPC method or gather shareholders and financing by equity crowdfunding before listing, there are ways to grow your company even if you’re not a unicorn early-stage company with enough traction to close an IPO.
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