Capital pool firm turns to trust model

Structure meant for REIT or foreign assets

Capital pool companies have been part of the financial landscape, especially in Western Canada, for about four decades.

In t hat t i me, t he allcashed-up- but- no- otherasset companies have provided a path for thousands of private companies to go public.

Now thanks to a major innovation, the path for a group of private companies to go public via a CPC has been made easier from a tax, cost and time perspective.

The innovation — brought to you by the folks at Borden Ladner Gervais and Echelon Wealth Partners — was to use a different structure for the CPC. Instead of employing the traditional corporate structure, the two unveiled a trust structure for the CPC from the outset.

Their work resulted in the formation of Value Capital Trust, which recently completed its initial public offering, a $ 500,000 raise via t he sale of f i ve mill i on trust units at $ 0.10 per unit. Earlier the CPC raised $ 330,000 in a private round. Echelon was the agent on the offering.

“The trust will be a CPC,” said a note in the prospectus.

“From and after closing, it is intended that the trust will be a mutual fund trust as defined in the Tax Act and thereafter remain a mutual fund trust without interruption,” added the prospectus.

The innovation “significantly streamlines the listi ng process f or a f uture REIT or trust listing candidate by removing the need for a conversion from company to trust at the time of listing,” said Bradley Fletcher, a managing director at the TSX Venture Exchange whose permission was required to allow the innova- tion to proceed.

Robb McNaughton, a partner in the Calgary office of BLG — who spent more than a year working on the concept of using a trust in a CPC — said the structure was developed, in part, to meet the needs of private real estate companies going public as a REIT via a CPC. “There is a history of CPCs converting to REITs." A partial list includes Boardwalk, True North, Artis, Whiterock, and Genesis.

But McNaughton said innovation was required because of “problems” when using the traditional CPC structure to convert to a REIT.

“It’s expensive with nonvalue costs that are significant possibly in the hundreds of thousands of dollars.”

Apart from the costs, McNaughton said there’s also a “deemed disposition,” on the conversion. “A taxable event is being created. The trust structure avoids that deemed taxable event plus the time and all the incremental costs that are not value drivers.”

McNaughton noted the trust CPCs are set up to flow t hrough vehicles, which means they won’t get caught by corporate tax, “provided that the business of the resulting issuer to the qualifying transaction distributes its income to unitholders.”

The trusts also need to escape the rules governing Specified Investment FlowThrough (SIFT) rules.

McNaug ht o n added REITs, foreign- asset trusts and private trusts are an exception from the SIFT rules. “Value Capital Trust’s deed has been specifically drafted to target assets suitable for a U. S. real estate investment trust or cash flowing foreign assets,” he noted. So what’s next? As with any CPC issuer, the management team at Value Capital Trust will be seeking out a qualifying transaction, a private company that wants to go public. It has two years to find a target.

Given t he s uccess of Value Capital Trust and the interest that’s been generated there’s a reasonable chance that a second CPC issue using the trust structure will be launched soon.