Silicon Valley North #23 September, 2000

The Way I See It… by Michael C. Volker

IPO or RTO? CPC is the way to go....

Technology companies can go public in one of two ways: by an Initial Public Offering ("IPO") of their stock to the public or by a Reverse Take Over ("RTO") of an existing public company. IPOs are favored by more mature companies raising multi-mullions of dollars by simultaneously selling a block of stock to thousands of investors and getting listed on a senior stock exchange like the Toronto Stock Exchange ("TSE") or the high-tech favorite, the American Nasdaq market.

For these companies, the IPO is often seen as way for the founders and early backers to "cash in" or "exit", i.e. sell some of their shares and reap some rewards for their work and risk-taking.

Increasingly, early stage technology enterprises are also going public as an alternative to raising their startup funding from traditional venture capital firms. Aside from the difficulty they may have in getting VCs interested, they may find that the public markets lean towards higher valuations and leave the founders in control. For them and their investors, going public is not an "exit". It's an "entry" opportunity.

Emerging firms can go public on the Canadian Venture Exchange ("CDNX"). The CDNX is the only recognized stock exchange in North America which caters to junior companies. (Note: the so-called Over-the-Counter ("OTC") market in the U.S. is often referred to as the Nasdaq OTC. This is incorrect. The OTC is not a recognized exchange.)

I'm a big fan of the CDNX. It provides riskier, unproven companies with broader access to capital. Just as it facilitated the development of Canada's resource sector, it can play a role in the development of Canada's intellectual resources.

Whereas IPOs are popular for the big guys, RTOs are popular with juniors. An RTO is the process whereby a defunct or dormant public "shell" company, i.e. a company with no on-going business, acquires a private company in a share swap transaction such that the owners of the company being acquired end up controlling the public shell. RTOs are popular because they shift the due diligence process from underwriters to deal-makers. They are also faster and more predictable than an IPO, having become fairly routine.

The problem with RTOs is that these shell companies often have tarnished histories (they've already failed at least once), they have a disinterested shareholder base, and they tend to be vehicles for unscrupulous promoters.

Enter the Capital Pool Corporation ("CPC"): CPCs are a product of the CDNX which encourages the formation of clean shells for the sole purpose of acquiring private companies in an RTO-like process.

"Capital pool" is somewhat of a misnomer in that the maximum amount of capital than can be raised in a CPC is only $700K. The CPC serves as a financing vehicle created by financiers or angel investors seeking a target company for development. When a suitable acquisition is identified, the CPC's founders, along with a sponsoring broker then raise another round of capital (usually in the $1-3 million range) concurrent with the acquisition.

What makes CPCs particularly attractive is that they provide not only capital and further access to funding. They also provide early stage ventures with an instant board of directors - typically successful technology entrepreneurs who bring tons of experience to the corporate table, i.e. expertise in corporate governance, finance, marketing, and business development. Many CPCs have been formed by groups of angel investors who use them as vehicles for financing and mentoring promising new firms while at the same time providing investors with liquidity.

Unfortunately, to date, CPCs have only been allowed in Alberta and B.C. Thanks to the CDNX, this is changing. Soon, Ontarians and others may enjoy the same benefits that Westerners have, assuming that our disparate system of provincially-based securities regulation won't hold it up. (We need a national system of securities regulation.)

The way I see it, if you're a junior technology company seeking to go public, forget about an IPO or an RTO, CPCs are the way to go.

Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and is chair of the Vancouver Enterprise Forum. He may be reached at mike@risktaker.com.