Mini SPACs get new life in rule revamp

As surging stock prices prompt a boom in initial public offerings, Canada's largest stock exchange is attempting to breathe new life into a SPAC-like vehicle aimed at helping small firms go public.

Toronto Stock Exchange operator TMX Group Ltd. has overhauled its capital pool company (CPC) program, in which groups gather money from investors to form publicly traded shell corporations that later merge with private operating companies. The changes doubled the amount of capital they could raise, cut the number of public investors needed and eased residency requirements for founders.

The revamp was meant to make the vehicles CPCs more flexible and more lucrative for founders in a bid to reverse a decline in activity in recent years. The early figures are encouraging for TMX, with eight new CPCs listed in the first two months of 2021. If the pace is sustained, it would mean a 55-per-cent increase in CPCs from last year.

“We have seen a marked increase in interest in the program and filings,” Loui Anastasopoulos, TMX's president of capital formation, said in an interview. “The changes really do make the program a more attractive option for qualified boards and management teams and growth investors alike.”

The revamp will be critical to reviving an important feeder into Canada's stock market. About half of the companies that list on the junior TSX Venture Exchange do so through a CPC, and about a third of the companies that graduate from that exchange to the senior Toronto Stock Exchange are former CPCs. Canopy Growth Corp., Canada's largest cannabis producer by market value, was originally a CPC.

But that pipeline has slowed to a trickle in recent years. TMX listed 31 new CPCs last year, less than a third of the 95 formed in 2018. The slowdown occurred during a boom in the equity capital markets: Special-purpose acquisition companies, which share many features with CPCs, have gone from relative obscurity to dizzying popularity, raising about US$84.5 billion globally last year, more than six times their 2018 total.

TMX executives acknowledge the similarities between CPCs and SPACs, but they say the two are different and the changes weren't related to the SPAC boom. Aside from their much smaller size, capital pool companies differ from SPACs in practice in that CPC founders typically take a hands-off approach after the qualifying transaction is complete, said Tim Babcock, managing director for capital formation at the TSX Venture Exchange.

After consultation with stakeholders and a regulatory review of the changes, the new system took effect in January. The CPC program is getting increasing interest from sectors beyond its resource roots, including financial technology and health care companies, Babcock said.