Tech Futures:
June 16, 2000
By Michael
Volker
Conflicts of Interest, IPO Watch - Discovery
Capital, Capital Pool Corps, Events & High Tech Stats
Conflicts of Interest?
The CDNX appointed a new Chairman this week, Scott Paterson, Yorkton's chief
executive. Many saw this appointment as a signal that the CDNX plans to adopt a
"wild west" approach to insider dealings by its members, the brokerage
firms. Paterson has been in the news lately because of his aggressive position
on broker involvement in corporate financings raising questions about conflicts
of interest.
Paterson himself has profited nicely by buying
into early stage companies at deep discounts, then trading shares for the firm's
clients at substantially higher prices. In the case of one of his recent deals,
Book4Golf.com, he has been criticized by securities regulators for making
statements that he expects the stock to rise to $200.
His view, and I can appreciate this, is that
fledgling companies have a tough time getting a following to raise their much
needed seed capital. By allowing brokers to buy in, it gives the company a start
while giving the brokers an incentive to raise subsequent, and larger, rounds of
financing.
In 1997, The Joint Securities Industry
Committee on Conflicts of Interest (often called the Hagg committee - after its
Chairman, John Hagg, CEO of Northstar Energy Corp) produced a report which
concluded that insider dealing by brokers was acceptable provided that there be
a balance between the two goals of facilitating capital formation and protecting
the investing public. One way of achieving such a balance would be to
participate in moderation and to ensure full disclosure of any such
participation. This commmittee included broad representation from brokers and
companies, including Ballard's CEO, Firoz Rasul.
Case in point: recently, a CDNX company, MMX
Ventures Inc. (CDNX:MMX) announced a reverse takeover transaction of an
internet ISP company, Virtuall Private Hosting Services. MMX was trading around
$0.10 as an old mining shell. It halted trading in its stock to announce the
deal with Virtuall and a few weeks later it opened for trading at $1.50. In the
meantime, though, MMX sold some 5 million seed shares to "sophisticated
investors" at $0.11 (along with attractive warrants allowing the
participants to buy an additional 2.5 million shares at $0.22).
One of the seed share subscribers was a broker
at Canaccord (who was also acting as the official sponsor for the transaction),
Gary Anderson, who bought 1 million of these shares (representing about 5% of
the entire company). Although the news release from the company did mention his
name, his affiliation and his role as sponsor were not disclosed. This is
contrary to the Hagg Committee's recommendations.
Proper disclosure would be a good start. But,
some guidelines as to participation levels and pricing would also be useful in
such a situation. What justification is there for such a deep discount? I would
argue that such juicy deals are OK in today's fast-paced high tech environment
but not without some strings and conditions attached (e.g. sweat equity
commitments, vesting provisions, etc). And investors ought to be apprised of
such details.
As an investor, I'd rather do business with a
successful, wealthy broker, rather than a struggling one who's selling his deals
to others using other people's money instead of putting some of his own dough on
the line. However, if his "success" is the result of him buying shares
at a dime and selling them to me at a buck, I should know about it.
Bill Hess, the CDNX's CEO's response to
Paterson's appointment was along the lines that a Chairman is just that -
someone who chairs meetings but is not hands-on day by day. That view of what a
Chairman does surprises me somewhat. Indeed, the role of Chairman in corporate
circles is one which is not well defined. I'm sure that business leaders, when
asked, will give you varied responses as to what they think a Chairman, sorry -
Chairperson - should do.
Look at it this way, the Board of Directors is
accountable to the stakeholders and is legally liable for a company's
actions. The Board is the "soul" of an enterprise and its Chairman is
the person we look up to for leadership and stewardship.
IPO Watch - Discovery Capital Corp
Now here's a deal I like: Discovery Capital
Corporation, an established investor, developer, and mentor for technology
ventures, is going Public on the CDNX. Instead of doing an IPO, Discovery is
going public by being acquired by a Capital Pool Corp (CPC) -see previous
column for a detailed write-up on CDNX CPCs. The acquirer is a related
company, ExFund (A) Capital Corp. (CDNX:XFC) the directors of which are John
McEwen, Harry Jaako, and Jim
Fletcher.
Discovery Capital has a solid reputation. Over the past 14 years, it has worked
with over 200 technology companies. Concurrently, Discovery is forming a number
of strategic partnerships along with the establishment of a high profile
Advisory Board. These partnerships include: the Angus Reid Group Inc., a
well-known market research organization, Columbus Group Communications Inc.,
a recognized Canadian independent internet company, Korn/Ferry International,
a worldwide executive search firm and Scotiabank, which is making a $3.2
million equity investment in Discovery Capital. The partnerships will allow
Discovery's clients and investees to tap into the resources and expertise
offered by these partners.
To date, Discovery Capital has focused on early
stage technology ventures, having raised approximately $150 million for these
companies. In the early nineties, Discovery launched and managed a number of
venture capital funds - the "ExFund" Group of Companies. With
investments of approximately $19 million through funds raised over 5 years,
Discovery Capital has grown the ExFund Group's market value to approximately $55
million, including having paid dividends to ExFund Group shareholders.
Discovery Capital's track record includes companies like Sierra Wireless Inc.
(NASDAQ:SWIR,TSE:SW), ALI Technologies Inc. (TSE: ALT), Dees
Communications Inc. (NASDAQ: NICE), and Inex Pharmaceuticals Corp. (TSE:
IEX). Discovery reviews over 500 new business plans a year.
Discovery Capital expects to build shareholder
value with gains on its investments, revenue from operations (e.g. advisory
fees), income from preferred equity and debt and from stock option gains.
The management team comprises John McEwen,
co-CEO & Director, well known in B.C. high tech circles for his work with
more than 200 companies, Harry Jaako, co-CEO & Director, a Director of the
Canadian Venture Exchange (CDNX) and a regular columnist in Business in
Vancouver, Randy Garg, Exec. VP, CFO, & Director, also an active high tech
advocate in BC and Patricia Parisotto, Corporate Secretary.
The Independent Directors of Discovery Capital will include Bruce Chapman,
Chairman of Surrey Metro Savings Credit Union, Canada's second largest credit
union, Jim Fletcher, CFO of the Angus Reid Group Inc., and an active investor
and mentor in many of BC's tech firms, and Scot A. Martin, Deputy Chairman of
Scotia Capital.
Discovery also announced the formation of a
seven member Advisory Board comprising Scott Brownlee, co-founder of Columbus
Group Communications Inc., Richard E. Lint, Deputy Chairman of Scotia Capital,
Bill Lipsin, President & CEO of Ironside Technologies Inc., David A. Nosal,
a Managing Director of Korn/Ferry International, Angus Reid, founder of the
Angus Reid Group, Morgan Sturdy, most recently a senior executive with Nice
Systems Inc. and Chairman of Hothaus Technologies, and David Sutcliffe,
President & CEO of Sierra Wireless, Inc. (as an aside, have you ever
wondered what the difference is between a President and CEO?)
ExFund will issue 27,428,568 shares at a price of $0.70 per share in exchange
for all of the shares of Discovery Capital, constituting ExFund's Qualifying
Transaction. The new company will carry on the name and business of
Discovery Capital Corporation.
I like this deal because it will give investors
an opportunity to be involved at a grass-roots level in the development of high
tech enterprises in B.C. and to do so with a top quality group with proven
credentials. And, the buy-in price is reasonable with the stock presently
trading around $1.10. For more details, check http://www.discoverycapital.com.
If you jump in now, remember that the transaction is still subject to regulatory
and stockholder approval.
Capital Pool Corporation (CPC) Update
In the previous column, we discussed Capital
Pool companies - what they are and how they work. I was asked for a couple of
examples of CPC deals. In addition to the affore-mentioned deal involving
Discovery Capital, two of my favorites are in our T-Net top 20 list. They are Burntsand
Inc (TSE:BRT) (see below for upcoming speech by Jim Yeates at the VEF
dinner) and Westport Innovations Inc. (TSE:WPT).
Burntsand become public in early 1996 when it
was "acquired" by Rubicon
Technologies Inc. an Alberta- listed Junior Capital Pool company. Rubicon issued
3,750,000 Common Shares and 1,933,960 Common Share purchase warrants in exchange
for all of the issued and outstanding Class "A" Voting Common and
Preferred Shares of Burnt Sand Solutions Inc. (as it was named back then).
Today, the company has 55 million shares outstanding giving it a market cap of
slightly more than $400 million.
Westport Innovations was incorporated as a
capital pool on the Alberta Stock Exchange in early 1995 and one year later, it
acquired Westport Research Inc, a UBC spin-off company for 8 million shares at
$0.30 each. Today, Westport's market cap is close to $500 million.
Funny! Westport's news archives don't go right
to the beginning (I had to dig this info out of Sedar). I hope they're not shy
about their history.
Burntsand and Westport both allowed investors
to get in on the ground floor, being able to buy stock for under $1.00.
Burntsand is now trading around $7.40 (it hit $15.75 this Spring) and Westport
is priced at $13.80 (high $26.40).
In this column, I keep track of Capital Pool
Corporation ("CPC") companies (see chart below) as defined by the
former CDNX because they may provide funding to, and in the process acquire,
technology companies. CPC's are the continuation of the former VCP and JCP
programs on the Vancouver and Alberta Stock Exchanges.
I like CPCs from an investment perspective.
Although one may regard them as speculative (indeed, they are), they are also an
inexpensive way of getting in early and inexpensively. You can pick up 10,000
shares of a typical CPC for less than $1.00. And when it does what is expected,
you can reap a nice reward. On average, CPC share prices have appreciated over
200% from their IPO pricing. The real money, though, will be made once they
complete their acquisitions of real operating companies.
Since the June 2nd update, new
additions to the list are Crossroad Ventures Inc., Genex Enterprises
Ltd., Holy Smoke Capital Corp., Integrated Enviro-Capital Inc.,
Karma Capital Corp., Millennium Ventures Ltd., and Porpoise
Capital Network Inc. (Holy Smokes! Holy Smoke and Intergrated Enviro-Capital
originate from Alberta.)
Check our
Capital Pool
Corporation chart for a complete updated list of the CDNX's CPC and VCP
companies, thanks to David Ing of Pacific International Securities.
Upcoming Events
The Vancouver Enterprise Forum's annual
dinner event on June 27th will feature Jim Yeates, CEO of Burntsand
Inc (TSE:BRT) as the keynote speaker. Burntsand recently received
recognition as the B.C. Tech industry's "New Venture of the Year".
Book now - it may be another sell-out event!
Information on these events may be found
on-line at http://www.vef.org.
Footnotes
Microsoft moving to B.C. to escape the wrath of
the US Justice Department? Unlikely! Because we tend to paint such a negative
picture in BC of our industry, why would they? Besides, Washington software
employees' compensation last year averaged US$400,000 as compared to the state
average of US$35,000. Who'd want that kind of competition?
I've always taken a positive view of our
industry. Sure the cup's half empty - but it's also half full! Yes, taxes are
high (a federal - not a provincial matter) and we need more investment
incentives (especially for early stage investing) but we're making some headway
and we're moving in the right direction.
For evidence of this, just look at BC Stats'
recently released report on High Tech in B.C. Employment is up 10% with more
than 52,000 workers employed, High Tech is now 3% of GDP, industry revenues
reached $5.7 Bn and there are over 7,000 high tech establishments. I've
predicted that high tech will reach 10% of GDP this decade. Any bets that
this will happen by 2005?
You can find the full report from BC Stats at: http://www.bcstats.gov.bc.ca/data/bus_stat/
Cautionary word: be wary of companies or
brokers who refer to NASDAQ OTC companies. There is no such thing - you're
either NASDAQ (senior or small cap) or OTC.
Looking for bargains? take a look at our
T-Net20 list for starters - many companies such as CREO Products (NASDAQ:CREO)
have experienced some substantial drops making them very attractive to long-term
investors.
Michael Volker is the
Director of the University/Industry Liaison Office at Simon Fraser University,
Chairman of the Vancouver Enterprise Forum, and a technology entrepreneur. He
owns shares in many of the companies he writes about. Contact: mike@risktaker.com.
Copyright,
2000.
What Do
You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly column that
focuses attention on new and emerging BC publicly listed technology companies.
Mike Volker is the Director of the University/Industry Liaison Office at Simon
Fraser University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com
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