Corporate Finance & Accounting

Eligible Transaction

What is a qualifying transaction?

A qualifying transaction is the process by which a Canadian private company issues public stock. This process involves creating a capital pool company (CPC) that acquires all outstanding shares of a private company, making it a subsidiary and a public company.

key takeaways

  • A qualifying transaction is the process by which a Canadian private company goes public with the purpose of raising capital for business purposes.
  • Eligible transactions involve the creation of a capital pooling company (CPC) that acquires all outstanding shares of a private company, making it a subsidiary and a public company.
  • CPC is responsible for selling shares and raising capital while complying with the rules and regulations regarding qualifying transactions.
  • A CPC must complete the qualifying trading requirements, which include filing a prospectus and applying to the TSX Venture Exchange, within 24 months of its creation.
  • A qualifying transaction is the most common form of listing on the TSX Venture Exchange, especially when compared to an initial public offering (IPO).

Learn about qualifying transactions

Private companies go public to raise capital to finance their operations and growth. Financing can be done through equity financing (i.e. issuing shares to the public) or debt financing (involving loans). In the US, equity financing is done through an initial public offering (IPO). In Canada, equity financing can also be achieved in different ways through qualifying transactions and the creation of a capital pooling company (CPC).

A Capital Pool Company (CPC) is a public company with experienced directors and capital but no commercial operations. Essentially, it is a shell company whose sole purpose is to acquire a privately held company later in a qualifying transaction.

CPC’s directors are focused on acquiring a privately held company that, after the acquisition, has access to capital prepared by the capital pool company and goes public. The private company then became a wholly-owned subsidiary of the CCP. Eligible transactions must be completed by CPC within 24 months of the date of CPC’s initial listing, which includes filing a prospectus and applying for a new listing on the TSX Venture Exchange.

Eligible transactions may be in the form of share-for-stock swaps; mergers, in which the private company and CPC form a company; plans of arrangement, in which the private company has a complex or unique capital structure that requires court and shareholder approval; or asset purchases, in which the CPC is The three parties purchase assets in exchange for CPC’s cash and/or securities. In each case, the shareholders of the private company became the security holders of the CPC.

Eligible trade listings

Compared to an initial public offering (IPO), capital pooling companies and related qualifying transactions are the most common method of listing on Canada’s TSX Venture Exchange.

This method of going public is more efficient than a traditional initial public offering (IPO) because, unlike an IPO, private companies don’t incur up-front costs before pitching the stock to potential investors. Because capital pooling companies essentially have no business of their own, any industry that private companies engage in becomes the business of the CCP.

A qualifying transaction typically formally begins when shareholders and CPC create a Letter of Intent (LOI) outlining the terms of the agreement. Typically, the CPC must include a plan to finance the transaction in each LOI.

Capital Pool Company Requirements for Eligible Transactions

The CPC has certain rules and requirements to follow when listing a private company. By law, a CPC must have three individuals who can contribute $100,000 or 5% of the total funds raised for the stock, whichever is higher.

In addition, CPC must sell shares to the public to at least 200 investors at twice the seed price. Each of these investors must purchase at least 1,000 shares. The value of this sale must be between $200,000 and $4,750,000. This raised capital must then be used for acquisitions.

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