Capital Raising Made Easier, Small Cap
Opportunities, Capital Pool Corps Update, and Local Events
Capital Raising Made Easier
The BC Securities Commission (BCSC) has
delivered. Substantial regulatory changes have now been adopted to make it
easier for businesses to raise money in B.C. without compromising investor
protection.
According to BCSC Chair Doug Hyndman, this will be
especially helpful to start-ups and junior public companies. For investors, it
means that they are no longer forced into making minimum investment commitments
such as the $25K minimum (under certain conditions) and the $97K minimum (under
other conditions).
Angel investors, for example, can now more readily pool
their investments by bringing several investors into a deal without these
minimum constraints. It may be easier to get ten people to collectively put
together a deal than to find one or four to take the risk.
The new capital raising rule was developed in a joint
project of the BCSC and the Alberta Securities Commission. They launched the
project in late 2000, in response to industry needs. Following a series of focus
group discussions, the two commissions formally proposed the new rules in
September 2001.
Just to recap - according to the law (i.e. the Company
Act), companies (i.e. any company - public or private, large or small) can only
raise money from arms-length investors by providing them with a very thorough -
not to mention legalistic and lengthy - disclosure document, i.e. a so-called
prospectus. We've all seen these (but hardly ever read them!) when companies go
public by making a broad distribution of their stock to the public at large. By
the way, if you've every looked at a prospectus to glean some information,
you've probably been frustrated with how difficult it is to find out even the
most basic information about a company and the people behind it.
The only way to avoid the expense and hassle of
producing such a document is by relying on an "exemption" from this
requirement. For example, in the past a company could use the $97K exemption,
meaning that it could receive $97K from an investor without a prospectus. The
theory was that anyone who could risk $97K on a deal knows what they're doing
and doesn't need a lot of protection (yeah, right!).
The rules provide new and expanded exemptions from the
prospectus disclosure requirements that typically apply to issuers (the word
used by regulators for companies that "issue" shares) raising money
from the public.
The four exemptions are, verbatim:
1. Offering Memorandum Exemption - allows issuers to
raise any amount of money from anyone provided that the investor acknowledges
the risks of investing and receives an offering memorandum - a short, simple
disclosure document (there are sample "forms" available for this).
Investor protection provisions have been added giving purchasers almost
identical rights to those they get under a prospectus. The rights include a
two-day right to cancel the purchase and broader rights to cancel or sue for
damages if there is a misrepresentation in the offering memorandum.
2. Accredited Investor Exemption - allows issuers to
raise any amount of money from financial institutions, pensions, investment
dealers, established companies and wealthy individuals (that leaves me out!)
without a disclosure document.
3. Family, Friends and Business Associates Exemption -
allows issuers to raise any amount of money from family members, close friends
and close business associates without a disclosure document.
4. Private Issuer Exemption - increases the ability of
private companies to raise money while remaining private.
The BCSC consulted with investment dealers, companies,
venture capitalists, securities lawyers, accountants, self-regulatory bodies and
government on these changes.
The new capital raising rule and accompanying documents
are available on the BCSC website (www.bcsc.bc.ca).
By the way, stay tuned for more news down the road aimed
at simplifying the formal prospectus-type disclosure process as well as a new
means for public companies to have continual access to the financial markets.
That'll allow them to take quick advantage whenever market sentiments turn in
their favor.
These first changes are welcome news for the companies
that'll be making their pitches at the upcoming 11th Angel Forum on April 29th
in Vancouver (details are available at http://www.angelforum.org/).
Investors will be able to select from over thirty technology & industrial
firms needing $100,000 to $1 million.
Small Cap Opportunities
I received an email from Ahead of the Street
noting that Lipper, a mutual fund company, is a good resource for
tracking small cap stats and rankings. According to this source, Small Cap value
mutual funds led all of the fund sectors last year with a robust average gain of
16.4% while typical diversified U.S. stock funds lost 10.9%.
These, the smallest of publicly traded, mainly
American companies, carry a market cap between $1 million and $300 million and
are often immune to the activities of their larger equity counterparts.
Of the 9,376 publicly traded companies in the
U.S. markets, independent researcher J.M. Dutton & Associates (http://www.jmdutton.com)
identified 4,446 with a market capitalization of $50 million or less - almost
half! Of these, only 514 are covered by analysts. Dutton claims American
companies with market caps between $50 and $75 million are rapidly losing
analyst coverage, mostly because they are too small to generate
investment-banking business for Wall Street
firms.
To some degree, newsletters and journals in
various forms have filled this information gap for small and micro cap
prospectors. Many, like T-Net, have distributed their content on the internet.
The Micro Cap 1000 Index jumped 25% to
1,600 since January. This is attracting more investment professionals who
normally avoid the micro companies. Some mutual funds including the Wasatch
Funds (WMICX), Pimco (PMGAX) and Royce Funds (OTCM) are
getting into the act and are showing strong gains in 2002. Some institutions are
placing a larger portion of their clients' money in the small cap markets via
hedge funds.
In fact, many investors are counting on the
small caps to behave as they have in the past by outperforming large caps on the
way out of the recession. Prudential Securities reported that before a
recession is called a recession, small caps typically decline on average 12.3%,
while large caps usually fall just 6.4%. Coming out of a recession, small caps
historically outperform, jumping 21.3%, (vs a 15.8% average gain for large
caps).
With regard to publicly traded B.C. technology
companies, which collectively have lost almost 90% of their aggregate value over
the past two years, this observation on microcap performance is a good reason to
start taking a second look at some of our home-grown opportunities. You can find
a list of all B.C. technology companies right here on the T-Net web site. Most
of them are micro-caps! Of the 100+ B.C. pubcos, fewer than twenty have a market
cap in excess of $100 million (the top twenty comprise the T-Net20 index).
So, which ones are promising? Well, I'd start
by taking a look at their balance sheets (the recent quarter's is easily found
at www.sedar.com). Check the
cash balance and divide it by the net quarterly burn (net cash outflow). If this
is less than a year, the company is on shaky ground. If the time to flame-out is
much longer (or undetermined in the case of a positive cashflow), the company
merits a closer look. Have fun!
My fun comes from being able to afford a nice
position, e.g. 10,000 or even 100,000 shares in a penny stock with a future. It
beats owning 100 shares of Nortel at $122 (2 years ago) or 2000 at $6
(today) when you can buy 50,000 shares of Marine Bioproducts (CDNX:MBP)
or 20,000 shares of Infowave Software (TSE:IW) for a similar amount! Some
of the CPC (see below) companies, especially those with noteworthy Boards, might
also turn you on.
If you've been listening to economists -
starting with the Fed's Alan Greenspan, you've probably noticed how
quickly they change their projections - within a week - from numbers like .5% in
GDP to 2.1% in GDP (note the accuracy!). Just a couple of months ago they
couldn't see any light at the end of the tunnel and now they've changed their
tune. It's the positive sentiment, in my view, that'll drive investors back into
the market.
Investors in microcaps tend to wait on the
sidelines until they see some action. This is typical. Even if you can buy a
stock you like for $.25, we put out the money if the stock price is drifting.
Most prefer to wait until volumes start to build (that's a key point - watch for
growing daily trading volumes) before jumping in. So, even if they end up paying
$.35, the extra dime is immaterial because they're looking for a 300% to 500%
return - not the 30% - 50% they might get with a "quality" stock like
Nortel!
Capital Pool Corporation (CPC) Comments and
Update
In this column, I keep track of Capital
Pool Corporation ("CPC") companies as defined by the CDNX because
they may provide funding and management to, and in the process acquire,
technology companies. They provide companies with an alternative to traditional
venture capital financing. CPCs are the continuation of the former VCP (Venture
Capital Pool) and JCP (Junior Capital Pool) programs on the Vancouver (VSE) and
Alberta Stock Exchanges.
Although I have mixed feelings about how this
program is working, I still like the concept and will, for the time being,
continue to track these companies. We should see some, hopefully major, changes
to this program over the next year or so. CPC formation has slowed somewhat over
the past year.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the CDNX's
CPC and VCP companies, thanks to David Ing of Pacific International
Securities. This list is updated on a regular, e.g. monthly basis. It is now
current to the end of March, 2002. (previous update was at February 28, 2002).
The list is shrinking a bit with only about 220 active CPCs.
Since the February update, new additions to the list are
NutraMed Capital Corp. and Tango Energy Inc. NutraMed is from the
United States (Interesting!) while Tango is from Alberta.
The following companies have recently started trading: Benem
Ventures Inc., Dream Wizards Investments Ltd., Dynamic Capital Canada Corp.,
Landmark Capital Corp. and Typhoon Venture Capital Corporation (this
latter one may blow you away!). I love some of these names!
And finally, the following companies have been removed
from the list because they have completed their Qualifying Transactions: Killam
Properties Inc., Medical Ventures Corp., Patriot Capital Corp. and
Revolve Capital Corp.
Soon (I promise), we'll take a look at how
these companies (the ones that have graduated from the CPC board) are faring.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
Local Events
This month's Vancouver Enterprise Forum
event on April 23rd should be a hot one. This is the one titled, "CEO War
Stories". Local tech CEOs will be opening their kimonos to
share with us some of their "learning experiences". These are usually
very candid (surprisingly so sometimes!) revelations and in addition to the
educational content, also tend to provide some enlightening entertainment.
Details of the talks (and info on upcoming VEF
events) are (or will soon be) available at: www.vef.org.
A complete calendar of technology events can be
found on T-Net's
Events page.
For a complete listing of all tech-oriented web
sites in B.C., check www.hitechbc.com.
Footnotes
If you're an entrepreneur looking for a place
to get your company started; there's some great space available at Harbour
Centre downtown. The New Media Innovation Centre (NewMIC) and SFU's
TIME Centre have teemed up to provide not only office space but also access
to various resources, e.g. tech advisors, access to capital, mentors, etc.
Worried about the high cost of being downtown? Well, not to worry - they'll even
reduce the fees and take some payment in the form of equity. Check www.sfu.ca/time
for contact info.
A reminder: SFU's TIME Centre is open for
business - business folks, that is. TIME is an acronym for Technology,
Innovation, Management, and Entrepreneurship. TIME supports the growth and
development of the tech industry in B.C. TIME features a "Business Centre"
(looks like an airport business lounge) which is open to technology
entrepreneurs and business people to use as a drop-in downtown office facility.
Need to plug-in? Make some calls? Do some work? Hold a meeting? There are some
great facilities for holding your company's AGM. Why hang out at MacDonald's
when you can work productively at the TIME Centre? Drop by and check it out! It
is located at SFU's downtown campus at 515 West Hastings St.
For a convenient printable, pdf
version of this column, click
here.
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