What is a Qualifying Transaction?
How Does a Qualifying Transaction Work?
For example, let's assume Company XYZ is a Canadian company that is privately held. Company XYZ wants to raise some capital to buy a competitor, and so it wants to issue shares on the Toronto Stock Exchange. Essentially, it is going public.
To do the transaction, Company XYZ must first create a capital pool company (CPC), which is a group of investors who have cash and expertise to assist Company XYZ. The CPS buys all of the shares that Company XYZ is offering (the qualifying transaction), and then Company XYZ becomes a subsidiary of the CPC, thereby becoming a public company.
It is important to note that a CPC must have at least three individuals who are able to put up the greater of $100,000 or 5% of the total funds raised. The CPC must raise between $200,000 and $4,750,000 by selling CPC shares at twice the price (usually) of the seed shares to at least 200 shareholders (who have to buy at least 1,000 shares each) and then use the proceeds to make one or more acquisitions. The CPC must file a prospectus within 24 months with the appropriate securities commissions and apply for listing on the TSX Venture Exchange. The ticker symbol includes “.P” to identify the company as a CPC.
Why Does a Qualifying Transaction Matter?
A qualifying transaction is a two-step way for a Canadian company to go public. Unlike a traditional IPO, a qualifying transaction allows companies to raise a pool of capital with a shell company (the CPC) in exchange for seed capital. The CPC also provides managerial and technical expertise to the company.