Wednesday, March 6, 2013

Canadian Capital Markets

"Go West, young man!" - Horace Greeley

I can't tell you why a well-respected author like Mr. Greeley would speak like a member of the Village People.  But I can tell you that companies seeking to access the public equity markets should know about some of the exciting things going on at TSX Venture Exchange (TSXV), Canada's junior stock market.  The TSXV is home to over one third of the publicly traded oil and gas companies in the world.  Perhaps the new motto for energy companies should be "Go North, young man!"

Recently, I saw a great presentation on Canadian Capital Pool Companies (CPCs), which are traded on the TSXV .  Over 2,300 CPCs have been listed on the TSXV since the program began in 1987, including over 300 companies that have "graduated" to the Toronto Stock Exchange (TSX), Canada's senior stock market.  The way it works is that a CPC, a newly created corporate shell, gets listed on the TSXV, raises a relatively small amount of capital, and then merges with an operating company via a reverse merger.  Shares in the merged company can be publicly traded on the TSXV.  The merger is referred to as a "Qualifying Transaction," and must occur within 24 months of the CPC's listing.  Going public through the CPC process is much quicker and less costly than a traditional US initial public offering (IPO).  The company's shareholders still get the benefits of being publicly traded, such as liquidity for the company's founders.  And the company typically gets a more attractive valuation than it would in a private placement.

As of August 2012, former CPC's represented over $64 billion in market capitalization. Since 2007, over 400 CPCs have gone public through such reverse mergers, and such former CPCs have over $12 billion in market value.

Although companies in any industry can merge with a CPC, approximately 50% of the former CPC's listed on the TSXV are oil and gas or mining companies.

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