Stimulating a Tech Rally, Stock Option Woes,
New Ventures BC, Capital Pool Corps Update and Local News.
Stimulating a Tech Rally
See what happens when I take a little holiday?
The markets tank. I must confess that it was so nice not to have handy access to
the internet for a few days. That's why I didn't write a column on Feb 23rd. Not
hearing about Nortel's decline and further drops in the Nasdaq boded well for a
week in the Bahamian sun. It's probably the best strategy for an investor these
days - take a break from the markets.
It took almost two years for the Nasdaq index
to go from 2000 (Jul'98) to 5000 (Mar'00) and less than a year to go back to
almost 2000 today (hitting new lows just this morning - around 2060). That swing
represents a value of U$3.6 trillion. Its just like a roller coaster - slow
and steady on the way up, and a rush on the way down. So, if you've been out of
the market for these past few years, you can jump in now and not have missed a
thing.
In spite of the huge declines we've seen, many
investors I've spoken with recently, firmly believe that we're still in a
long-trending bull market going through a period (which could last a year or
two) of correction.
The
question is how long will this correction take? The obvious answer rests with
the economy's performance. If so, what will make the economy boom?
In
the USA, two-thirds of the economy is determined by consumer spending.
The theory is that if the fed drops interest rates, consumer spending
will be stimulated. But, will it be enough? Another
theory is that if the markets do well, the prosperity enjoyed by investors and,
in particular, successful entrepreneurs will further stimulate growth through
their own re-investing (e.g. as angels) activities.
We certainly saw this happen last year at this time. Most of the wealth was
created in the tech sector with dot-com and internet companies leading the way.
The sudden rise in valuations allowed many to plow their unexpected good
fortunes back into many new ventures. And I'm sure that it stimulated a heck of
a lot more spending than a small percentage drop in lending rates. Note that
recent rate adjustments had little impact.
Now,
many of the investments made just a year-ago are well out of the money (some
100% out). And the original stock assets which provided some of that year-ago
highly valued liquidity (look no further than Nortel for a good example of this)
are now so low in value that their owners are not likely to consider trading
such an asset for a stake in anything but an exceptional deal.
So
we have kind of a chicken and egg situation here. Investment and spending is
good for economy and will cause markets to rise. But rising markets are needed
to stimulate investing and spending.
If
the economy does stall, we also run the risk that our tax rates may not come
down as quickly as both federal and provincial politicians have been promising
further impacting our propensity to invest or spend.
There's
probably no better time than this to introduce some very aggressive tax incentives
to boost investment. It's wonderful that the capital gains tax inclusion
rate has come down to 50% from 75% last year. But that's an investment reward
on the output side of the equation and not an inducement to stimulate investment
on the input side. The Feb'2000 rollover provisions permitting investors to cash
in and re-invest on a tax-deferred basis is a good start in this direction.
Maybe
its time for our political leaders to be a little more innovative with respect
to providing some aggressive tax incentives (that doesn't sound right - maybe I
should say "untax" incentives) to pry loose those presently
hard-to-find investment dollars.
For
example, here's a simple idea: Allow investors to fully write-off an investment
made in newly issued Canadian corporate shares. Investors can eventually do this
anyway if the venture fails. By permitting an up-front write-off, you
effectively reduce the stock's cost base to zero. If and when you sell your
position, the full proceeds are taxed as if the stock were acquired for free. In
the meantime though, you've got at least 25% more capital to reinvest. A
particularly aggressive politician might even suggest that the investment be
given ABIL (Allowable Business Investment Loss) treatment whereby the write-off
is treated as a deduction to income (versus a capital loss), giving the investor
50% more capital to invest (or spend). In this case you'd have to take the ABIL
back into income before you can apply the lower rate capital gains tax.
If
these suggestions are too ambitious, we can always simplify and expand tax
credit programs such as B.C.'s popular (but clumsy and limited) VCC (Venture
Capital Corp) program which gives investors a 30% tax credit on qualifying new
venture investments. Having more than one tax-driven "labour" fund in
B.C. might not be a bad idea, either!
I
doubt that such bold incentives will materially impact gross (indeed, they are
gross!) government tax revenues insofar as the tax dollars given back to
investors will almost immediately be given up by those employees who directly
benefit from the new equity investments in their respective firms.
Regardless
of how it's done, some action is needed to give a boost to stimulate investment
to get the economy and the markets our of their tail spin and get them cruising
again.
Footnote
- this week, both Federal (Paul Martin and Brian Tobin) and Provincial (Gordon
Campbell) politicians were speaking to the BC Tech Industry. A day after Gordon
Campbell clearly stated that his government would not give industry subsidies,
Tobin announced $11m in support for local BC firms. It would seem to me that,
consistent with Campbell's thinking, some broad tax incentives would serve us
better than investing our tax dollars in trying to pick a few specific winners!
Stock
Options
Woes
You can bet that there are a lot of unhappy
campers (i.e. tech company employees) who got seemingly attractive stock options
last year. I'm sure that those deep out-of-the-money incentive stock options are
not doing a lot to stimulate and motivate employees. Many companies are finding
themselves having to re-price options to the dismay of their stockholders due to
adverse accounting consequences under U.S. Generally Accepted Accounting
Principles (GAAP).
However, by re-pricing options, it is possible
that the 50% deduction allowed when calculating tax owing, may be forfeited.
Canada Customs and Revenue Agency (CCRA) allows the deduction only if the
exercise price is not less than the fair market value on the date the options
are granted. Re-pricing them violates this requirement!
Even in up-markets, there are still some
problems with stock options. I have never seen such complicated tax rules and I
have never found a "lay" person who fully understands the pros and
cons of options. I sure don't.
One of the major advocacy issues that CATAAlliance
continues to pursue is an improvement in the tax treatment of employee stock
options. The federal government has tried to respond by introducing a number of
changes in the February 2000 budget. Unfortunately the changes implemented,
although conceptually correct, do not function adequately. In some situations a
tax liability can be incurred by an employee even though no real benefit has
accrued to the employee as a result of exercising his/her stock option.
Note that under some scenarios employees have
incurred a tax liability on the paper gain realized at the time the stock is
exercised, irrespective of whether or not there is a real monetary gain on the
value of the stock (versus the option price) at the time when the stock is sold,
or deemed to be sold.
Employees may not be aware of these risks and
not set aside the funds to cover the tax liability incurred.
Under certain circumstances where there is a
‘deemed disposition' of the employee's stock (i.e., at the employee's death,
etc.) the employee's estate and heirs would be forced pay any outstanding tax
liability pertaining to the stock option's ‘paper gain'.
Another problem is that
gains achieved by exercising stock options are categorized as income (although
the tax rate is equivalent to the capital gains rate on such income). This means
that a subsequent loss on a stock acquired via options exercising - and held
rather than sold - can not be used to offset the employment "income"
which is taxed. For example, if you buy $100K worth of shares at a cost of $10K
by exercising an option, you have to report $90K in income (reduced by 50%)
although you can defer this tax (under the new rules) until you actually sell
the shares. But if you were to sell the shares for zero (like in a busted
dot-com), you still have to pay this tax. Although you have a capital loss of
$100K, you cannot apply this to reduce your "income".
With respect to the
deferral rules, few optionees seemed to know that there was a Feb. 15 deadline
for making a filing in order to benefit from a deferral of tax on a paper gain.
Ottawa has extended the deadline by 60 days because so many employees were not
aware of this requirement to file by Feb 15th. Those failing to file would be
faced with a tax bill on unrealized gains made on shares which they have yet to
sell. By filling out the forms, employers would not report the employees' income
on their T4 slips as has been the practice up until the end of last year.
Another aspect that many
folks don't pay much attention to relates to the corporate status of a company.
In B.C., for example, many of the pre-public high tech companies are not so
called Canadian Controlled Private Corporations (CCPCs). They may be
incorporated in the U.S. even though the head office is in B.C. or they may have
sufficient foreign investment (e.g. investors with effective "control"
via shareholder agreements) such that they are not CCPCs in which case different
option rules apply. For example, the deferral rules referred to above may not
apply!
The solution to all this
nonsense may be to forget about Incentive Stock Options (ISOs) altogether and
implement an Employee Share Ownership Plan (ESOP) whereby employees actually buy
shares in the company (the company loans them the money to do so, secured by the
shares as the only collateral). In this case they become true owners,
shareholders, and risk takers!
New Ventures BC
The most common reason
given for the failure of tech companies is management (i.e. lack thereof). How
can entrepreneurs better prepare themselves and tap into the network of
experienced angels, investors and mentors to help them build their businesses?
And the answer is: a new venture competition
designed to foster innovation and the entrepreneurial spirit with Canada's
biggest prize package: a chance to win a total of $125,000!
This exciting new initiative was formally launched this past week.
British
Columbia’s technology business innovators now have the chance to win a grand
prize package worth $50,000 with more than a little help along the way from
their friends at the BC Venture Society. The New Ventures BC
Competition is an annual event open to all BC residents, with prizes totaling
$125,000 - which is believed to be the largest of its kind in North America.
Individuals with a new business idea can attend seminars and networking
information sessions that will give them the chance to turn their idea into a
successful startup.
(NB - the
real prize is not the prize
money - it's the fact that venture capitalists will be attracted. I cannot
imagine the winners not getting offers in addition to the prize money. They can
apply the venture capital to their business and the prize money to the big
celebration party.)
Entrepreneurs
of any age and background with an idea for an innovative product or service
involving a new technology are encouraged to log on to www.newventuresbc.com
to register. Everything necessary – including seminars and networking
opportunities – will be available online. The aim of the competition is to
increase the number of startup businesses in the province and to help establish
an entrepreneur-friendly business environment that nurtures new ideas.
“Entrepreneurs
are the engine of the BC economy, bringing new jobs, tax revenue, human capital
and investment capital to the region. The New Ventures BC Competition is a
unique partnership of industry, government and academia that is working together
to establish British Columbia as a great place to develop a new
business,” says Don Calder, Chairperson, BC Venture Society.
The financial
backing for this initiative comes from a combination of government, industry and
academia as well as other non-profit industry orgs. Western Economic
Diversification Canada will invest $338,000 in the project. Further to my
earlier comments, providing modest infrastructure support such as this which
will benefit many companies, a superb way of providing economic stimulation!
Lead sponsor Bank
of Montreal has joined other inaugural sponsors Palmer
Jarvis DDB, Western Economic Diversification Canada, SFU Business, TAP Ventures,
Caldwell Partners, and Campney & Murphy in a
three-year commitment to fund the grand prize.
It recognizes that successful venture investing looks to the long term
relationship between the entrepreneur and the investor. Venture capitalists work
in partnership with entrepreneurs to become the architects of future success for
BC’s economy.
“Venture-backed
companies are leaders in innovation and competitiveness. We look forward to
working with the team behind the winning idea in this inaugural competition to
give them the capital and management expertise they’ll need to grow and
prosper,” says Gail Cocker, Sr.VP at BMO.
The competition
is broken down into four phases, and anyone intending to participate should
register by April 7, 2001. Up to 100 of the best ideas will be selected to move
on to Round Two, the Feasibility Test. During this time participants will have
opportunities to attend seminars on legal, accounting, marketing and more. The
jury will choose 35 finalists to compete in Round Three, the Venture Plan, all
of whom can take advantage of mentoring, and networking opportunities. The
30-page Venture Plan is due August 20 . From there, the jury will select six
finalists, each of which will win $5,000 in cash and proceed to Round Four, the
Finale. The final six teams will make an oral presentation to the jury on
September 21 and the first and second prize winners will be announced at a Gala
Wrap-up to be held on September 27, 2001.
The BC Ventures
Society is a cooperative endeavor of business, academic and government partners,
sponsors and contributors that have banded together to help stimulate a strong,
healthy economy in British Columbia. It will work closely with many other
organizations in B.C., such as the Vancouver Enterprise Forum.
The goal of the
New Ventures BC Competition is to support British Columbia’s emerging
technology sector and to motivate researchers and developers to commercialize
their ideas. By participating in the annual competition, entrepreneurs will
build business skills and help to create a sustainable diversity in the
province’s investment community. Contest details and registration forms can be
found at www.newventuresbc.com.
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.
This program, which has been very
popular in the West, is now heading East - to Ontario. The Ontario Securities
Commission has finally given its support. Thanks to our screwy system of having
provincially regulated securities commissions (instead of a national one),
Ontario investors have been shut out of the IPO offerings by CPCs in Alberta and
B.C. Now they can get in on the action. It means that B.C. companies can now
offer their IPO stock to Ontarians.
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 pennies.
New additions to the list are Agile Ventures
Inc., Gateway Capital Corp., Golden Valley Mines Ltd., Luxor Developments Inc.,
Apsley Management Group Inc., Legend Capital Corp., Leitrim Group Inc., Semco
Technologies Inc., and The Ulysses Group Ltd.
Agile Ventures is from B.C. Gateway Capital is from
Saskatchewan. Golden Valley Mines is from Quebec. Apsley Management Group,
Legend Capital, Luxor and The Ulysses Group are from Alberta. Leitrim Group and
Semco Technologies are from Ontario.
Since the previous update, the following
companies have come to trade: ABI Capital Corp., B2B Solutions Inc., Buckeye
Energy Corporation, King Capital Corporation, Aqua Capital Corp., Aspire Capital
Inc., eVenture Capital Corp., Holy Smoke Capital Corp., MaxTech Ventures Inc.,
Neptune Capital Corp., and Smart Api Capital Corporation.
The following companies have been deleted
because they have completed their Qualifying Transactions: Context Energy
Inc. and E-Quisitions Inc.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete updated 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-jun02
Local News & Local Buys
The next Vancouver
Enterprise Forum event will be held on March 27th at Science World. The
topic will be: "Building a Bankable Management Team". How have
successful companies built their Bankable Management Team, and what is a
Bankable Management Team anyway? What attributes would a team of people have for
them to be bankable and how is the synergy built and maintained? The event will
be moderated by Susan Koch, Controller, Cellex Power Products and
presenters will include Chris Reid, President & CEO, Cellex Power
Products and Sheila Moynihan, VP Human Resources, Bandgap Photonics.
The ASI Exchange
takes place on Tuesday, March 13,
2001 (all day) at Enterprise Hall in Vancouver’s Plaza of Nations. This year,
as The ASI Exchange celebrates its tenth anniversary, it expects to host more
than 3,000 participants, a remarkable increase from the 60 who attended in the
first year. Over 2,300 participants attended last year - not only hundreds of
high-tech industry professionals, but also hundreds of post secondary education
institution researchers and corporations.
Because
there will be more than 100 companies, it provides a great opportunity to learn
more about these companies - be it for a possible job, general interest, or even
a possible investment (or future investment) for that matter. Complete
details are available at www.asiexchange.com.
For
Biotech Angels and Biotech companies - there will be a special Vancouver
Angel Network meeting in early April which is specifically dedicated to biotech
deals. Check www.vef.org/vantec.html
for details.
In our "local buys" category, Canaccord
Capital is recommending Westport Innovations Inc. (TSE:WPT) and Infowave
Software (TSE:IW).
Westport is currently at $11.95 with 39.9M
issued shares because the company announced a landmark joint venture agreement
with Cummins to develop, build, and sell a complete line of natural gas engines.
A planned 50:50 split on engine profit supports Westport's longstanding stance
that it would not "just" be a component supplier. Canaccord is
maintaining their SPEC BUY rating and a $20 target price. Rob Millham, an
analyst with Research Capital Corp., had a $30 target price in mind but
according to today's Globe, he's considering a downward adjustment to that
target because he can't see another Cummins-like deal on the horizon.
Infowave Software is in their STRONG BUY
category trading at only $3.89 with 34.4M shares issued. The company reports
record revenue of US$1.5 million for fiscal 2000 with Compaq and Intel forming a
foundation for US$10.0 million for fiscal 2001. Canaccord is revising its price
target to $10.00.
Local industry leader, PMC-Sierra (NASDAQ:PMCS)
is written up in today's Globe. Wendy Stueck provides some useful
insights. Her bottom line: "PMC-Sierra looks like a bargain - but analysts
say the stock could take a further pounding before it recovers." Of course,
nowadays you can say that about almost any tech stock.
For a convenient printable, pdf version of this
column, click
here.
© 2010 T-Net. All Rights Reserved. |