When Echelon Wealth Partners Inc. last week announced it had partnered with law firm Borden Ladner Gervais to create a capital pool company, it was a first for the Canadian market. In structuring the capital pool company as a trust under the policies of the TSX Venture Exchange, the two firms were able to create new entity Value Capital Trust, but what does it mean for investors?
“A capital pool company is essentially a mini-SPAC (special purpose acquisition company), but without the same restrictions,” explains Robb McNaughton, partner in the securities and capital markets at Borden Ladner Gervais. “For example, there are not the same shareholder voting rights or potential for redemptions. It’s a streamlined listing platform that exists on the venture exchange.”
The trust structure is ideally suited for REITs but it can also be used for other businesses that distribute income to investors, including a mutual fund trust or foreign asset income trusts.
A significant number of real estate listings currently on the market originated from capital pool companies, including Boardwalk, Calloway REIT and Genesis Land Development. McNaughton believes that using the capital pool structure from the outset is a key advantage for investors.
“If you were to start with a corporate capital pool company, you would have to convert it to an income trust, which could cost tens and in some cases hundreds of thousands of dollars,” McNaughton says. “Typically, any conversion of entities is a taxable event. So, these capital pool companies that started out as corporations were not able to minimize tax in the same way.”
McNaughton points to the speed at which the capital pool structure can get to market as another important feature. Because these type of vehicles have already had an IPO, they can be public listed without the need for a prospectus offering. “All that’s needed is a simple RTO, which is only vetted by the exchange and not the securities commission,” McNaughton says. “It’s a much faster process. You would expect to save a month, or maybe several months, in the listing process. You also have more flexibility in not having a prospectus offering.”
The process of bringing Value Capital Trust to market started last summer when Borden Ladner Gervais approached the TSX Venture Exchange with the idea. The exchange was open to the concept and thus the process of meeting the various legal and regulatory requirements began. Borden Ladner Gervais then approached Echelon with the idea late last year.
“We needed a champion in the financial markets to make it a reality, and that was Echelon,” says McNaughton. “Echelon put together a team and has done a great job. The first offering, Value Capital Trust, was over-subscribed, so we are looking at doing a second one.”
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