A recent Welch CFO Roundtable session addressed a topic that garnered significant interest – accessing public venture capital. For obvious reasons, accessing capital is a topic of interest to the CFO and broad finance community. Most are very familiar with initial public offerings (IPO) – a listing by a mature company on the Toronto Stock Exchange (TSX) – but many do not have a good prospective on what venture public capital is, how it is different and how it can be leveraged.
So what is pubic venture capital?
It is a hybrid between private venture capital and an initial public offering. It is characterized as early stage investment capital that is provided to a public company typically listed on the TSX Venture Exchange (TSXV). Generally the funds are used to assist with product development and commercialization. It has been widely used in funding resource based small cap entities, however, with the challenges accessing venture capital, angel funding and other sources of early stage capital, innovative companies have begun to leverage public venture capital.
How real are the funds that have moved into public venture capital. Well numbers do tell a story and mid way through 2014 over $4B was raised by 166 financings, much of this going into Venture listed entities (TSXV). Further, the innovation sector has been the fastest growing sector on the TSXV and TSX.
The mechanisms to raised public venture capital are more streamlined than an IPO. Common methods included Capital Pool Corporations (CPC) and Reverse Takeovers (RTO). A CPC is a shell company that has raised an initial round of financing in the $500,000 range, created for the sole purchase of assisting a private company to access public venture capital. RTOs are public entities that have been cleansed to facilitate acquiring a private company. Generally in both the CPC and RTO the founding shareholders of the private company, as a group, continue to be the most significant shareholders post financing.
Once completed your company will no longer be a private company and therefore subject to the public company rules that include issuing quarterly and annual financial statements, establishing a formal board that includes independent directors and an audit committee and conforming to the rules of public disclosure around material events. This will increase your administrative time and cost.
There are funds to be raised from accessing public venture capital and therefore should be evaluated as part of your overall fundraising strategy. Some key points I would highlight are:
- Have an overall strategy on how best to leverage taking your company public. This should include what are your capital requirements for a fully funded business and how to ensure liquidity of your stock
- Hire experienced professionals with a track record of success raising capital initially and in subsequent capital raises. This includes the agent/broker, legal advisor and accountant/tax adviser.
- Consider the broader impact to your business as a public company including the fact that your financial information will be accessible by all, the tax implications to the company, shareholders and employees, trading volumes and valuation, and ongoing compliance cost
For more information on fundraising strategy, alternatives and their impacts to the company, please contact Bryan Haralovich.