CDNX-Making it Work, Capital Pool Corps
Update and Local Happenings
Almost exactly two years ago, I
wrote a piece in this column, with the heading "New Exchange good for
Tech Stocks".
At that time the Vancouver and Alberta Stock
Exchanges were talking about a possible merger to create a national junior stock
exchange - a concept I'd been keen on for many years. In November, 1999 the Canadian
Venture Exchange (CDNX) was born.
Now, only a year and a half old, the CDNX is in
the process of being acquired by the Toronto Stock Exchange. There's been a lot
of debate and discussion about what this will mean. The owners of the two
exchanges - their member brokers - and the Provincial Securities Commissions are
busily plotting the future of this exchange.
There's no question that a junior stock
exchange can play a vital role in providing risk capital to emerging companies.
But, is the CDNX, in spite of its "venture capital" moniker, going to
live up to that expectation? I'm worried about the future of the CDNX.
Here are a few comments which I've made over
the past few years about the CDNX.
In April, 1999, I was beside myself with
enthusiasm, proclaiming, "I think its wonderful that this is happening. It
will allow tech companies to get much broader exposure to investors than they
now have. More national and international attention will be paid to companies
listed on the new exchange. Shareholders will have more liquidity and markets
will be fairer. One big problem with running a junior exchange is one of
regulation and surveillance. This is a tough job. The VSE has been through the
school of hard knocks with respect to this matter but has emerged with the
knowledge of what it takes to operate such a market. A new, larger exchange will
permit the deployment of adequate resources to ensure that this knowledge is not
wasted."
"This move will also take us a step closer
in the direction of a national securities organization (e.g. Canadian Securities
Association). Then we'll really see a difference. Many market traders don't
understand all the nuances associated with provincial jurisdictions in this
regard. For example, the new Venture Capital Pool (VCP) program in BC is
available only to BC investors at the IPO stage. But, when trading begins on the
VSE, anyone can buy/sell these shares. Figure that out! In the new scenario,
this won't change - at least not immediately but perhaps eventually. Let's face
it, BC companies seeking investment capital should not be limited to only the 4
million population base in BC. A national securities regulator will eliminate
the need for a company to get its share offering approved by different
provinces. The proposed junior exchange could handily assume this approval
process. Case in point: the VSE has taken over some of the vetting from the BC
Securities Commission and this has improved processing times considerably. This
is an idea whose time has finally come."
In my subsequent column, I wrote:
"The amalgamation of our existing exchanges will hopefully push our
disparate provincial securities commissions towards a unified national
securities policy which will facilitate the raising of venture capital for
Canadian firms. It is a known fact that most of the new capital raised by VSE
companies is via "private placements" of shares. Such financings must
be conducted in accordance with the applicable provincial Acts, which vary from
province to province. Here in B.C., we are very fortunate (and this is unknown
to many entrepreneurs) in that as little as $25,000 can be raised by a company
with minimal bureaucracy and red tape whereas in Ontario the entry level is over
$100K! The VSE's Small Financing Exemption, which allows companies to raise up
to $1 million from retail investors in B.C., is yet another benefit offered by
the VSE to its listed companies."
"A boldly stated objective of
the CDNX, as articulated by its CEO, Bill Hess, at a recent Vancouver
Board of Trade breakfast, is to graduate companies off the Exchange to the TSE
or NASDAQ. It's niche as a junior equity market is well defined." I was at
that breakfast. I really felt like leaping onto the podium to talk about the
exciting future prospects for the Exchange - since the speech we were hearing
was putting many to sleep. I got my chance when I was asked by the Board to
thank the speaker.
I did get a few points in, though,
when I said, "Some people, especially mainstream Venture Capitalists, argue
that junior companies should not go public and that the CDNX is not a viable
"exit" opportunity in contrast to a senior exchange. Of course not.
It's an "entry" opportunity - especially for smaller investors who
like getting in early on companies such as QLT Inc or Westport
Innovations which both started off as "penny stocks".
I also suggested that the CDNX may
be the only regulated junior market for emerging companies and could well
be seen as a "junior NASDAQ." And, perhaps an alliance with NASDAQ
would be a great strategic fit. By the way the OTC-BB market is not a
junior NASDAQ. In fact, it's not even close. The CDNX could fill that bill.
It would appear that Hess's goal
of graduating companies from the CDNX to a senior exchange will be handily
achieved by having a senior exchange, such as the TSE, be the CDNX's parent.
That may be the CDNX's goal, but
what's the goal of a listed company? Certainly the holy grail for every
technology company is a NASDAQ listing. Sorry, but it's not to be on the TSE.
That's a fact. The folks at NASDAQ were quick to see this when they make it
easier for Canadian companies to get onto NASDAQ via the Quebec back door.
Regardless of where companies may
go after graduating from the ranks of a junior exchange, we can't forget what it
takes to get companies launched on the exchange in the first instance. In order
to provide a healthy flow of graduands, we need a system that attracts companies
and - most importantly - the capital and talent to make them grow.
Will a move "back East",
as we love to say in the West, to the TSE aid or abet this process? Frankly, I'm
a little worried about a move to the Eastern Establishment. Toronto's Bay street
players have always aspired to emulate Wall Street. Will the parenting of a
fledgling junior marketplace move them in this direction?
Harry Jaako in
his recent Business in Vancouver column (Apr 10) correctly points out
that TSE ownership may open some new doors to capital and may make the
institutional investors a little friendlier to the small cap market. Certainly,
the big market rules will give them a little more comfort in this regard. But,
this may be like pushing on a string. I'd rather see it become easier for the
smaller retail investor to get in on the junior market action. We know, as Harry
mentions, that Canadians are following the American lead in taking more market
risks. A decade ago, fewer than a quarter of Canadians invested in stocks. Today
fewer than a quarter don't. So, let's pay attention to this trend by
simplifying, not complicating, the process.
We've all seen what happens with
acquisitions. Big company acquires small company. Big company culture is imposed
on small company and small company is assimilated into big company. Why will
this be any different when big market TSE takes over little market CDNX?
I know how the system works in
Ontario, having used it in the building of my company and working with others -
especially startups. Will the rules of the Ontario Securities Commission
(OSC) add to the red tape faced by companies, especially the B.C. ones which
fear that B.C. regulations may evolve to match those of the OSC?
The only good that may come from
all of this is that it will create more jobs for lawyers. They, especially the
Toronto ones, are very good at cutting red tape. The only problem is that they
cut it lengthwise! And that's costly.
We're already seeing Alberta-based
lawyers moving into Howe Street to help B.C. companies conduct their business on
the CDNX which has moved its decision-making to Calgary. Soon, the Hogtown boys
will be on our streets.
Presently, it costs a company
about $100K to raise $1M of capital. That's outrageous. Will a Bay Street
controlled market make this even pricier?
Why on earth should there be any
cost at all? In view of the higher stakes in a TSE-style play, the regulations
are appropriately more stringent. Can anyone tell me how this environment will
work to make a CDNX-style market with much lower-stakes, an efficient one?
Investors betting on a CDNX
company are investing pennies - not dollars (notwithstanding recent market
trends in which many of our top dollar companies could be purchased for
pennies). So, why apply dollar rules to penny situations? Why not simply make
the "red herring" a little bolder? i.e. - less regulation and more
disclosure. Let the market take care of itself.
I'd love to see the day when a
company CFO with a few SFU-style securities courses under her belt can,
by herself, complete all the documents and forms for a financing - without
spending tens of thousands of dollars on legal bills.
In all the talks about the future
of the CDNX, there's one sadly missing element: input from the listed companies.
I've been personally involved in the VSE's and then the CDNX's Policy committee.
It's always amazed me how rules are set in the complete absence of input from the
customer. A rule which may make sense to a regulator or broker may be
totally unworkable from a practical perspective - i.e. by the company in the
trenches working on its survival. This policy making process has, unfortunately,
been de-railed by the internal shuffling of the past year.
Listed companies are becoming
involved. They formed the CDNX Listed Companies Association (see www.cdnxlca.com)
in order to get into the picture. It's a good sign that the regulators, i.e. the
B.C. Securities Commission, welcome this input. Still, more company
CEOs need to get into the act and immerse themselves in the process or be
subjected to the whims of others.
The CDNX is owned by it members,
the stock brokers. These are the same folks who own the TSE. From this
perspective, an acquisition by the TSE is an efficient move, and will put some
$50 million in their jeans as a result of the buyout. Maybe the listed companies
should own the CDNX. Now, that would be interesting! That may be nice in theory,
but these companies are too busy minding their own business.
By the way - there are some 2300
companies now listed on the CDNX. Of these, about half are involved in the
resource industries. Pure tech companies account for only 10% and the remainder
consists of industrial, service, finance companies, and Capital Pool Corps (10%
as well). Of all the listed companies, only 15% have market caps in excess of
$10 million. More than half of the 2300 firms had working capital reserves of
less than $100K - not an encouraging picture. But, it does indicate what this
market looks like. Toronto - do you know what you're getting into?
However, given that the current
takeover is imminent, what can be done to ensure that the CDNX will work in the
interests of developing its listed companies so that they can graduate to
whatever exchange they want to go?
In my view, we've got to stop
screwing around and make some radical, sweeping, changes to securities
regulations in Canada - especially as they pertain to junior companies. We don't
need band-aids. We need reforms. Legislation is not keeping up with technology.
Our infrastructure is impeding business progress (in B.C. at least we can now
some some light at the end of the tunnel with the upcoming election).
Companies and investors must be at
the table, along with the regulators and agents. Will a TSE takeover move us in
this direction? I'd like to be positive. But, now you can see why I'm worried.
Capital Pool Corporation (CPC) Update
In this column, I keep track of Capital
Pool Corporation ("CPC") companies (see chart below) 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 and JCP programs on the Vancouver and Alberta Stock Exchanges.
Of the approximately 250 CPCs
which have been formed only some 30 have completed their so-called Qualifying
Transactions (QT). While this may appear "slow", one has to remember
that good deals take time to cook. After forming a CPC, one should allow at
least a year for it to find a suitable takeover candidate and then allow another
six to none months for a deal to be finalized.
Depending on what lies ahead for
the CDNX, the future of the CPC program will be determined by the attitudes of
the new CDNX players and most importantly their willingness to make major
changes in the underlying policies governing this program. There are certain
rules, such as the requirement to get a "majority of the minority"
shareholders' approval on a transaction - a process that takes at least 90 days
and is no more than a rubber stamp in any event. In my view, once a deal has
been negotiated, it should take weeks - not months - to close. Presently, CPCs
are having a tough time in attracting quality companies because they just won't
tolerate the bureaucratic delays. They go elsewhere for funding - sometimes the
OTCBB, heaven forbid!
Some observers believe that the
CPC program may be a victim of the TSE takeover and will be disbanded. I
personally believe that unless some sweeping changes are made in the
administration of this program, they won't survive regardless of what the CDNX's
new owners think about the concept.
In an upcoming column, I'll be
taking a look at the done deals and how their doing, ie. the successes and
failures.
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.
An introductory article explaining
CPCs may be found at www.bctechnology.com/statics/mvolker-jun
Local Happenings
The next Vancouver
Enterprise Forum event will be held next Tuesday, April 27th at Science
World. The topic will be: "The B.C. Genome Project: A View from Inside the
Industry", organized by David Ing of Pacific-International.
Just this month the federal government announced $136 million in funding to Genome
Canada of which close to $40 million will flow to B.C. for research. The
human genome project and research based on the resulting work and data promise
to revolutionize the way we treat illnesses and diseases, provide healthcare and
conduct medical research in the future.
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