Canadian Listing Vehicles

In April 2021, the NEO Exchange launched a new listing vehicle to take companies public called the Growth Acquisition Corporation (G-Corp). G-Corp joins Capital Pool Corporation (CPC) and Special Purpose Acquisition Corporation (SPAC) as another alternative for private companies to go public in Canada. The three listing vehicles share some common traits. At the same time, they carve their own niche and present distinct rewards and risks to stakeholders.

Qualifying Transaction (QT)

There are two paths for a private company to go public. First is the traditional Initial Public Offering (IPO). Second is through a Qualifying Transaction/Acquisition (QT). In a QT, a private company merges with a publicly traded listing vehicle, which has cash and no operating business. This process lets the private company access the listing vehicle’s capital, shareholders, and publicly listed status. All listing vehicles (CPCs, SPACs and G-Corps) have the same mandate: to list on a Canadian exchange then complete a Qualifying Transaction with a private company. But this is where the similarities end. The differences among the three listing vehicles stem right from size and structure to investor’s risk-return profile and governing rules.

Feature Comparison

Since its formal inception in 2001, CPCs have completed 2,000+ successful QTs. They can raise anywhere between $300,000 to $10 million. G-Corps have a capital range of $2.5 million to $30 million. SPACs were introduced to the Canadian market in 2015 and have a minimum of $30 million. In line with their larger size, on average, SPACs tend to seek much larger private companies than G-Corps and CPCs.

G-Corps and SPACs share some similarities. First, both are mandated to find a target within 24 months, failing which the investors will get their capital back. Second, G-Corps and SPACs have dual share classes, with founders and investors having separate share classes. Third, both are required to hold the capital from the investor share class in escrow. Finally, both issue investor warrants during their IPO process, resulting is some additional dilution compared to a CPC. On the other hand, CPCs do not have a time limit to find a transaction, have a single class of shares and no escrow requirements.

It is important to recognize a key difference between G-Corps and SPACs. SPAC shareholders have the option to redeem their initial investment before a QT. G-Corps give their shareholders the ability to vote for or against the transaction but they do not have the option to redeem their shares unless the 24-month deadline is up.

Which one is better? It depends…

Sponsors/Founders: As mentioned earlier, G-Corps and SPACs have separate classes of shares for investors participating in the IPO (Class A) and its founders (Class B). The investors’ capital (Class A) is escrowed and held in trust. Founders’ capital (Class B) is the risk capital and used for all operating expense, such as investment banking fees, legal fees, and permitted overhead.

When G-Corps and SPACs merge with a private company they charge a valuation premium that is ~20% of their cash value. This premium goes exclusively to the founding shareholders.

In the case of CPCs, there is only one class of shares. Hence, all expenses/risk-capital and valuation premium (typically ~$1 million over cash[1]) is shared by all shareholders. Overall, G-Corp and SPAC sponsors take on more risk and get more upside compared to CPC founders.

Investors: G-Corps and SPACs have a 24-month fuse to complete a transaction, failing which investor will their capital back. Whereas, the new CPCs do not have a set timeframe to complete a transaction. As G-Corp and SPAC investors have a time limit for a potential QT, they do not risk locking in their capital for more than 24 months.

Zooming in on only G-Corps and SPACs — SPACs have the redemption feature, which provides investors the option to get their capital back before a QT closes. As G-Corps do not have this feature, SPAC investors receive slightly better downside protection than G-Corp investors.

On the potential upside, the order appears to be reversed. The QT for G-Corps and SPACs are priced at the same level as their original IPO price whereas CPC median QT pricing is 50%[2] higher than that its IPO price. It is true that G-Corp and SPAC investors receive one half warrant when they invest. Yet, in most cases the warrants may not be worth much because most Canadian SPAC transactions (post qualifying transaction/ acquisition) are trading below its IPO price[3]. On balance, we believe CPC investors have slightly less downside protection and get more upside out of the gate compared to G-Corp/SPAC investors.

Depending on where an investor falls on the risk-return curve and investment size, they can choose the listing vehicle that suits them best.

Listing vehicles-looking ahead

The median post-listing market cap for 79 QTs that successfully closed in 2019 and 2020 is $19.9MM3. With G-Corps targeting post-listing market cap of at least $30MM and the Canadian SPAC market not as active as the U.S. SPAC market, we believe CPCs will continue to be the most popular listing vehicle in Canada.

Still, we believe there is a place for G-Corps. As designed they would target higher end CPC transactions that require large concurrent financing. Of the 79 QTs that closed over the last two years, nine3 had post-closing market caps greater than $30MM (minimum requirement for G-Crops) and raised at least $10MM, the minimum amount we believe G-Corps have an edge over CPCs. This indicates a potential market for G-Corps, assuming there is sufficient investor appetite to create them.

It is also possible for G-Crops to attract one or two of the lower-end SPAC targets. Theoretically, a $150 million SPAC with 80% redemption will have the same capital as a $30 million G-Corp. There is no way to know how redemptions will shape up ahead of time. Nevertheless, we believe smaller SPACs with high risk of redemptions (i.e., the investors are predominantly risk-arbitrage hedge funds) could get competition from G-Corps that have the relationships to pull off large concurrent financings.

SPACs have received a lot of recent attention, especially in the U.S. Yet, the distinction between the two markets is seldom discussed. There are currently five Canadian SPACs4 that are looking for a target, compared to 421 in the U.S.3. One of the main reasons for the difference is the size of the Canadian public markets. In 2020, there were 232 U.S. private companies that completed an IPO[4] (excluding SPACs), compared to 17 in Canada[5] (excluding SPACs/CPCs/ETFs). As SPACs are mostly an alternative to an IPO, a smaller IPO market would imply a smaller SPAC market in Canada. Based on SPAC and IPO trends over the last few years, we believe a single digit number of active Canadian SPACs will continue to have a place in the Canadian capital markets.

Listing vehicles have gained popularity because they are faster to list than IPOs, open to creative structures and attract some non-traditional IPO targets, such as smaller firms and unicorns. When there are several listing vehicles, with each offering distinct features and focusing on different target sizes, we believe it creates healthy competition and a robust capital market system.

[1] Source: 4Front research — CPC’s valuation premium over its cash value for all 79 QTs that closed in 2019 and 2020

[2] Source: 4Front research — based on QT’s concurrent financing share price over CPC’s IPO share price (adjusted for share splits) for all 79 QTs that closed in 2019 and 2020

[3] Source: 4Front research

[4] Source: https://stockanalysis.com

[5] Source: TSX MIG Report, Dec 2020