NEO launches new listing vehicle geared toward mid-sized companies

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Mid-sized Canadian companies intending to go public will soon have a new route to follow.

The NEO Exchange is launching a listing mechanism called the growth acquisition corporation, or G-Corp, a go-public vehicle similar to a special purpose acquisition company, or SPAC, but geared toward companies with a smaller market value.

A G-Corp is essentially a blank-cheque company created by a group of investors who first list the company on the NEO Exchange, and then seek an acquisition of an outside company in a particular sector that will eventually merge with the G-Corp to go public. The NEO Exchange is a relatively new Toronto-based stock exchange that facilitates about 15 per cent of all Canadian trading volume.

Canaccord Genuity Corp. and Bay Street law firm Wildeboer Dellelce LLP have already signed up to be sponsors of their respective G-Corps on the NEO.

On Wednesday, Canaccord submitted a prospectus to regulators for the launch of Canaccord Genuity G Ventures Corp. The blank-cheque company is targeting a $30-million raise, at a price of $3 a share. Wildeboer Dellelce intends to take WD Growth 1 Corp. public on the NEO, also targeting a $30-million raise at a price of $3 a share. Canaccord will act as lead underwriter to WD Growth’s public listing.

The key difference with this vehicle, according to Jos Schmitt, president and chief executive officer of the NEO, is that it is designed to help private companies with an enterprise value of between $50-million and $500-million raise capital on the public markets. SPACs have traditionally attracted investors with deeper pockets and their acquisition targets have usually been companies with a market value of well over $500-million.

“What we’ve seen with SPACs is the average capital raise is around $270-million, which is a substantial amount. It leads to resulting issuers that are worth above $1-billion,” Mr. Schmitt said in an interview with The Globe and Mail.

There are already various ways to take a company public in Canada, beyond the traditional initial public offering process.

The TSX Venture Exchange lists capital pool companies, or CPCs, which are blank-cheque companies with directors and capital, but no actual commercial operations. Creating a CPC requires an initial investment from three individuals of at least $100,000, or 5 per cent of the funds being raised. Once a CPC is listed, it then begins its search for a target – usually a small venture company. There are also reverse takeovers, where a private company bypasses the IPO process and acquires an existing public company in order to go public.

According to Mr. Schmitt, the G-Corp was created with mid-sized growth companies in mind.

“There are SPACs for big companies, CPCs for the small venture ones. But there is an entire universe of mid-sized growth companies looking to raise money. When they can’t find that capital in Canada, they end up moving to the U.S. to look for opportunities,” he added.

In order to list on the NEO, a G-Corp will have to raise a minimum of $2.5-million – $500,000 from founders of the vehicle, and $2-million from the public IPO process. The vehicle will then have a period of 24 months to complete its “qualifying transaction” or, in other words, buy a company.

“This new listing vehicle augments the opportunities available to support the increased demand by high-potential growth companies to access the public markets,” said Michael Shuh, head of structured products at Canaccord, who has taken multiple SPACs public.

One of the primary criticisms of SPACs is the redemption feature that allows shareholders to exit the investment even before a qualifying transaction is made, or before its revenue projections have been fully realized.

American venture capitalist and prominent SPAC enthusiast Chamath Palihapitiya did exactly that recently – 18 months after announcing the merger of the space tourism company Virgin Galactic with his Social Capital Hedosophia holding company, Mr. Palihapitiya divested most of his personal holdings in the company. “I hated to do it but my balance sheet shrank by almost $2B this week,” he tweeted.

Mr. Schmitt hopes to address this particular redemption issue of SPACs in G-Corps. Unlike shareholders of SPACs, shareholders of G-Corps will not be allowed to exit their investments before a qualifying transaction has been announced, Mr. Schmitt said.

“We eliminated the redemption feature. We saw that with SPACs, a lot of investors, particularly large private-equity players, invested in SPACs to just have a first look at a target acquisition, and then shortly after, they say, ‘Ah, we’re not interested in this any more.’”

Instead, the redemption feature has been replaced with a shareholder vote – all shareholders of a G-Corp can vote on a qualifying transaction, and if they are unhappy with a proposed acquisition, they can express that in their vote.

Mr. Schmitt said he was confident that G-Corps would eventually become a popular listing vehicle in Canada. “We have a solid pipeline of interest and we look forward to seeing companies and investors participate.”

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