Capital pool companies connect local investors with small ventures seeking to go public. They worked in the oil patch, and can work here

by David Holt

Sitting in the lobby of Citadel Securities in Halifax, I observe its logo: the archway of a stone fortress framing a bushy tree in the middle distance. Strength and security balanced with fertility and growth. It reminds me that we tend to think in symbols. That is what branding is all about, and don't forget those stock symbols that can represent fortune, or ruin, depending.

I am waiting to speak to founder and CEO John Hanrahan about capital pool companies (CPCs), a way to connect local investors with small growth-oriented ventures seeking an IPO.

Lining the halls are more symbols: photographs of European castles, and the framed reproduction of an article Hanrahan once wrote for Progress on the history of the Atlantic economy. It outlines how in our pre-Confederation heyday merchants and shipping magnates plowed their profits back into the region. In the past hundred years or so the trend has been reversed, with capital leaving for large public companies and pension funds in Toronto and New York-anywhere but home.

Citadel, a full-service boutique founded in 2006, is one of only a handful of independents on the East Coast. "We believe that the Atlantic has huge potential that it hasn't seen since its earliest beginnings," says Hanrahan, "and that our companies have less access to public markets than any other part of the country. We export our capital. Until the CPCs, people had no way to invest here except for the few large companies, or to participate with private equity."

Encouraging local investment is a big theme for Hanrahan. Rule one is that all strong economies invest in themselves. So he is pleased to tell me about the founding of Chrysos Capital Corporation, a CPC that allows small investors a chance to participate in the growth of a company, presumably one from our region.

In essence, a CPC is a public investment vehicle in search of a company seeking investment. In the "qualifying transaction," the company takes over the CPC. It is a straightforward way for the company to go public, and the CPC investors take a minority position in a company that has been vetted by experienced founders.

The legislation that created CPCs in several provinces helped small companies access markets for capital. However, this happened in places that needed the boost the least: the West and, later, Ontario. Indeed, the CPCs made a huge contribution to the oil patch. A step toward this model took place a few years ago, when Atlantic-based Killam Properties used a Western CPC to fund its real estate start-up.

In 2005 the TSX Venture Exchange and the securities commissions in Nova Scotia and New Brunswick introduced the CPC Program. The rules are that three to six individuals with public company experience incorporate the CPC and put in seed capital of $100,000 to $500,000 in exchange for "seed shares."

They then prepare a prospectus with the intention of raising $200,000 to $1.9 million by selling "IPO shares." The proceeds are used to evaluate potential acquisitions. On completion of the IPO, the CPC must have a minimum of 200 arm's length shareholders. Within 24 months of the IPO, the CPC must identify an appropriate asset or business for its "qualifying transaction."

Chrysos was created by five founders who put in the original seed capital. The strength of their reputations attracted another 200, who put in small amounts, generally from $1,000 to $5,000, for a total raise of $400,000. Tom Hickey is CEO and director. The others are Bill Ritchie, Colman O'Brien, Mike Anaka, and Glenn Jessome (the lawyer for the company).

All except O'Brien are based in Nova Scotia. Colleen Keyes has been retained from Atlantic law firm McInnes Cooper. Accounting firm KPMG is also based in Nova Scotia, as are most of the 200 small "IPO shareholders." The underwriting was led by Troy Grant, Citadel's corporate finance director.

This is the first locally driven CPC, which Hanrahan hopes will succeed and become a model for others. "There are all kinds of financial resources here, so why can it be so difficult to raise seed capital for new ventures?" he asks. There are several reasons, including a conservative mindset and an aging demographic, but the main one is what Hanrahan calls "a lack of the transparency of success."

In the West there is a waiting list for people wanting to invest in CPCs. They know of friends and relatives whose investments have paid off, and they want in on the action. "The beauty of it is that you can take a position in a public company that has been vetted by experienced founders," says Hanrahan. "I am a strong believer that this is going to be an essential cog in capital markets. In five years I would like to see 15 to 20 in our region. This will help to create a culture of participation and success."

I ask him what type of company the founders are looking for. "A scalable one," he says. "Perhaps in resources." I look up "chrysos." It means gold. This could symbolize a successful investment, or it could be even more basic than that.

David Holt is a writer and consultant on strategy and communications. He can be reached at dholt@eastlink.ca.