The failures of Philip Environmental, Laidlaw and Safety-Kleen, among others, have left the investment community with a poor impression of the waste management industry. Although the industry has found solutions to many of society’s problems and has developed promising technologies, the capital markets and this sector have often had a less than satisfactory working relationship.
However, there’s a great new way for waste management and environmental companies to find money for growth. It is called a Capital Pool Company (CPC). Ontario recently introduced the CPC Program to provide business with additional capital and management. The TSX — Venture Exchange administers the program, which is subject to the rules of the Ontario Securities Commission.
The concept originated in Western Canada where Junior Capital Pools (JCPs) were used to finance oil and gas exploration. These vehicles were designed to offer businesses that didn’t want the drama and high costs of a traditional Initial Public Offering (IPO) an alternative way to raise capital that would be simple and cost effective.
A CPC is a “blind pool” listed on the exchange that has capital and seasoned management but no operating business. Its primary objective is to identify and acquire a new business and result in a public company. Recent revisions to the program increased the amount of capital that can be invested to up to $2-million and streamlined the shareholder approval process.
The program is available to emerging companies at a time when a traditional IPO would not be suitable. The IPO route can cost upwards of $1-million in fees alone. Unless a company raises $5- to $10-million, this fixed cost burden means that many environmental companies can’t consider it. In comparison, the CPC route caps commissions, legal fees, and accounting fees so that they are not overwhelming.
The CPC Program is a multi-step process. First, founders set up a new company and invest a minimum of $100,000 to establish a pool. An investment firm finds at least 200 investors who subscribe to the pool. When the pool is between $250,000 and $2-million the founders identify a “target” company. Once the target is obtained the operating business has capital to grow and public status.
Each target company must meet the minimum listing requirements for the Exchange. These requirements vary depending on the industry and seniority of the listing. The requirements for the most senior industrial issuer require: adequate working capital for one year, $50,000 of pre-tax earnings in the last year or in two of the last three years, and $500,000 of net tangible assets.
There are numerous benefits to being a public company. It offers entrepreneurs access to capital, visibility, and a means of employee and management participation. In addition, public shares can be used as a “currency” for subsequent acquisitions and the public (including people in the sector) has the opportunity to own and share in the future.
There are also drawbacks to being a public company. There are costs to maintain the public listing, it can be a distraction for many watching the share price, and it requires financial transparency.
These articles are based on public sources deemed to be accurate. These articles are designed for information purposes and are not intended as a recommendation of the companies discussed. Individuals looking to invest in this sector should consult an investment advisor before proceeding.
James Sbrolla is a management consultant to the environment and waste management industry. E-mail James at email@example.com