Capital Pool Company (CPC)

What Is a Capital Pool Company (CPC)?

A capital pool company (CPC) is an alternative way for private companies in Canada to raise capital and go public. The capital pool company system was created and is currently regulated by the TMX Group, and the resulting companies trade on the TSX Venture Exchange in Toronto, Canada.

Understanding Capital Pool Companies (CPCs)

A capital pool company is a listed company with experienced directors and capital, but no commercial operations at the time of the initial public offering (IPO). The directors of the CPC focus on acquiring an emerging company and, upon the completion of the acquisition, that emerging company has access to the capital and the listing prepared by the CPC.

Canada does not have as robust a venture capital industry as the United States does, so companies tend to list on the TSX earlier in their growth. The downside of this earlier listing to access capital is that the companies can easily end up abandoned by investors due to their inexperience in operating as a public company and the dual demands of the public responsibilities at a point of critical operational expansion.

Capital pool companies were created and promoted as a way to inject early-stage companies with both the capital and expert director-level guidance that is provided in the U.S. by venture capitalists. They also provide an alternative growth path for Canadian businesses as well as businesses interested in going public on the TSX Venture Exchange. Capital pool companies are similar to blind pools in the United States, but the process is controlled and regulated by a single Canadian exchange.

The CPC Process

The process of creating a capital pool company has two phases:

Essentially, having a ready-made listing with experienced directors helps to lower costs for the company and reduces the risks of going public. For investors, deciding to purchase shares in a CPC requires more due diligence on the founders of the CPC itself, as they will be deciding what type of business to buy and how to guide it after the initial investment is made.

Even if a target has been suggested, as is the case with some CPCs, there is no guarantee that it will happen. So investors must be confident in the management of the CPC and their ability to create value for businesses in general rather than a specific business.