Qualifying Transactions: Understanding Public Offerings via Capital Pool Companies

A qualifying transaction is a transaction where a private Canadian company issues public stockPublic SecuritiesPublic securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based. via a capital pool company. The capital pool company is created to purchase all of the outstanding shares of the private Canadian company; in doing so, the private Canadian company becomes a subsidiary of the capital pool company.

Summary

• A qualifying transaction is a transaction where a capital pool company purchases the outstanding shares of a private Canadian company with the intention of taking the private company public.
• A private Canadian company would pursue a qualifying transaction in order to raise capital for their business. The transaction is a common method for Canadian companies to go public and raise capital.
• A capital pool company can be created by individuals who want to take their own private company public or those who want to assist private companies in issuing public stock.

Understanding Qualifying Transactions

After a qualifying transaction, the capital pool company becomes a public companyPublic CompaniesPublic companies are entities that trade their stocks on the public exchange market. Investors can become shareholders in a public company by purchasing shares of the company's stock. The company is considered public since any interested investor can purchase shares of the company in the public exchange to become equity owners.. Since the private Canadian company is now a subsidiary of the public capital pool company, it is now a public company, too. In other words, a qualifying transaction is where a public capital pool company purchases the outstanding shares of a private Canadian company with the goal of turning the latter into a public company and issuing public stock.

A private Canadian company would do a qualifying transaction to raise capital. The capital raised would be used for business purposes, including capital expenditures, research and development (R&D), or business acquisitions. Regarding the capital pool company, it is responsible for raising capital for the private Canadian company by selling shares; this is the process that makes the private Canadian company a public one.

When selling the shares, the capital pool company must follow any covenants set out in the transaction and any rules or regulations of the exchange. An example of such a requirement is filing a prospectusProspectusA prospectus is a legal disclosure document that companies are required to file with the Securities and Exchange Commission (SEC). The document provides information about the company, its management team, recent financial performance, and other related information that investors would like to know.. In addition to following the covenants of the transaction and the rules and regulations of the exchange, it is important to note that a capital pool company must fulfill the requirements of the qualifying transaction within two years of its inception.

Capital Pool Companies and Qualifying Transactions

A capital pool company may be created by different groups with similar objectives. A capital pool company can be created by individuals with the expertise to advise private Canadian companies in going public via their capital pool company. In order to create a functioning capital pool company, the founders must pool together capital equal to or greater than the larger of either $100,000 or 5% of the capital raised from taking the private company public.

Alternatively, a capital pool company can also be created by the individuals who run the private Canadian company with the purpose to take their own private company public. In exchange for the cash raised, the owners of the capital pool company receive seed shares from the private Canadian company.

To be able to raise either $100,000 or 5% of the capital raised, the individuals who created the capital pool company incorporate a shell company. The shell company’s purpose is to raise capital to be able to list itself as a capital pool company.

As mentioned above, the shell company must also file a prospectus in order to become a capital pool company. Additionally, within two years of the capital pool company being listed, they must complete a qualifying transaction. Failure to do so within the required two-year period will result in the company’s delisting from the exchange.

Related Readings

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To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• IPO ProcessIPO ProcessThe IPO Process is where a private company issues new and/or existing securities to the public for the first time. The 5 steps discussed in detail
• PublicPublic SecuritiesPublic securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based. SecuritiesPublic SecuritiesPublic securities, or marketable securities, are investments that are openly or easily traded in a market. The securities are either equity or debt-based.
• Shell CorporationShell CorporationA shell corporation is a business that is formed that has no actual business operations. They are mostly created for illegal activities
• SubsidiarySubsidiaryA subsidiary (sub) is a business entity or corporation that is fully owned or partially controlled by another company, termed as the parent, or holding, company.  Ownership is determined by the percentage of shares held by the parent company, and that ownership stake must be at least 51%.