Venture exchange puts out welcome mat

Too many regulations, not enough venture capital, critics say
The TSX-V plans to put out a “welcome mat to companies in all sectors,” says venture exchange president John McCoach, who was in Vancouver last month for a town hall on fixing the venture exchange.  | Glen Korstrom

One of the complaints the Toronto Stock Exchange (TSX) hears from investors, brokers and companies listed on the venture exchange is that its fees are too high.

But Canada’s venture capital market has bigger problems than just the TSX Venture Exchange’s (TSX-V) fee structure.

The fees might not have become such an issue were companies that list on the TSX-V still raising money.

But except for a few star players that have had major capital raises recently – biotech being one relatively hot sector – many companies listed on the venture exchange are starving for venture capital.

The once-robust TSX Venture Exchange has been the worst-performing stock exchange in recent years. Since 2011, it has lost 76% of its value, wiping out $50 billion in market capitalization, according to Ivan Lo, founder of Vancouver’s Equedia Investment Research.

A commodity price collapse has a lot to do with that decline, since 71% of the companies listed on the TSX Venture Exchange are junior resource companies.

But Canada’s capital markets are plagued by more than just macroeconomics, according to a growing number of investors, brokers and TSX Venture companies who say the problems are not just cyclical, but structural as well.

Those critics say regulations and costs imposed by the TSX, the Investment Industry Regulatory Organization of Canada and the BC Securities Commission are deterring investment in Canada’s venture markets.

Pretium Resources Inc. (TSX:PVG) is one of the few junior miners to raise any significant capital recently – US$540 million last year to develop its Brucejack mine. But that may speak more to the high quality of the Brucejack property than to the health of Canada’s capital markets.

“There is a lot of capital on the sidelines that, I think, can invest,” said Pretium CEO Bob Quartermain. “But I think we have to reduce the burden of the regulations around investing in risk opportunities. It’s not just a TSX problem – it’s a BC Securities [Commission] problem.”

So how can Canada’s markets be fixed to restore investor confidence and bring more risk capital back into Canada?

One of the TSX’s solutions is to diversify the venture exchange. There are already 500 non-resource companies on the exchange. The TSX wants to expand that.

It is creating new sales teams and plans to open offices in key U.S. cities like San Francisco and New York or Boston. These teams will work with the dealer community to try to attract new companies and investors to the TSX Venture Exchange.

“What we’re doing is creating a platform that puts out a welcome mat to companies in all sectors,” said TSX-V president John McCoach. “Essentially these people will be prospecting for dealers and other financiers, and understanding what the financiers want and then bringing them opportunities that they may not otherwise see themselves.”

The TSX will showcase some of the venture exchange’s success stories and “identify friction points and smooth those out.”

One of those friction points is the growing red tape on either side of the border that is discouraging U.S. venture capital investment.

That Canadian markets are well regulated is one of the things that historically made Canadian junior resource companies attractive to U.S. investors, although those in the finance business say it has gone too far now.

Mickey Fulp, who publishes the Mercenary Geologist, is an American, but favours junior mining companies with Canadian listings. He said the only speculative investments he considers are in companies that have a Toronto listing, but not because of anything the exchange is doing.

He looks for a Canadian listing, he said, because securities regulators here require mining companies to back up their resource estimates with detailed technical reports, the absence of which in the U.S. has led to numerous “scams by unscrupulous promoters.”

But apart from that, Fulp said, the Canadian capital market has become over-regulated and increasingly hostile to investors like him.

“It is increasingly difficult for U.S. investors to participate in private placements and trade stocks listed on Canadian exchanges, and has gone from being cumbersome to … a can of worms over the past three, four years,” Fulp said.

McCoach agrees that regulations on either side of the border are discouraging U.S. investors from deploying venture capital in Canada. He said the TSX is looking at ways to remove some of the barriers.

“We’ve put together an action team that’s very focused on identifying all of the things that have changed to make that more difficult for that American investor to participate here,” he said. “We’re doing our PhD on this.”

As for the TSX’s plans to diversify the venture exchange, Don Mosher, a partner at B&D Capital, believes the last thing it needs is more listings. He believes the venture exchange is already overpopulated with marginal companies.

Instead of encouraging more initial public offerings, the TSX should put a cap on them, he said.

The accredited investor: does wealth make you smart?

What is wrong with this picture?

A geologist with a PhD who makes $100,000 a year reads the drill results from a junior mining company, realizes it’s literally a gold mine and wants in on the ground floor.

Sorry, securities regulators say: you’re not rich enough to make a private placement.

But her neighbour, who knows nothing about geology or mining – but won $1 million in the lottery – can sink a small fortune into a junior mining company with a dry hole and sharp-dressed stock promoter.

Wealth does not necessarily equal sophistication, say brokers, retail investors and junior resource companies who point out that one of the biggest impediments to raising capital in Canada is the accredited-investor definition, which in Canada limits the number of people who can make a private placement to just 2%.

A private placement is one of the most important tools for raising risk capital for a publicly traded company.

Anyone can buy a company’s existing stock. But to raise the capital to finance exploration projects, new mine development, clinical trials and research and development, companies will often issue new stock.

A private placement does not require the company to issue a prospectus, which is costly and time-consuming. But in Canada only accredited investors are allowed to make private placements.

An accredited investor is anyone with at least $1 million in assets (not counting real estate) or who makes $200,000 or more per year.

Private-placement restrictions prevent buyers from immediately selling their shares. Generally, there is a four-month hold period.

So an investor who bought stock at $0.50 per share would be prevented from selling and making a profit, should the company’s stock double in value within that four-month hold period.

Junior resource companies and investors want that hold period scrapped, too.

Ralph Sultan, a former mine owner and economist with the Royal Bank of Canada, now MLA for West Vancouver-Capilano, recently took up the cause when he spoke about the state of Canada’s capital markets in the legislature. He said some of those barriers, like the accredited-investor test, need to be addressed.

“Maybe we try too hard to shelter our citizens,” he said in his address in November. “They happily invest $3 billion a year each year on lotteries, despite government taking a full one-quarter off the top. If some of them are also lured into what they hope and dream might be the next Hemlo, perhaps that’s their business.”

As an accredited investor himself, even Bob Quartermain, CEO for Pretium Resources Inc. (TSX:PVG), says the paperwork that he needs to fill out to make a private placement has become onerous.

“We have to look at the aspect of what a definition of an accredited investor is, and if someone does want to employ a small amount of a few thousands of dollars, do you need the plethora of paper that one currently has to fill out that even I – as an accredited investor – do, if I know that it’s speculative money?”

Peter Brady, director of enforcement for the BC Securities Commission (BCSC), said the commission has been building more flexibility into its rules to help venture issuers and early-stage companies raise capital from retail investors more cost-effectively.

“We’ve done a huge amount to open up retail participation through other tools,” Brady said.

In 2014, for example, it led an initiative to adopt an existing-security-holder exemption that allows existing investors to invest up to $15,000 more in a company through private placements without going through a broker.

“The company can go out to every single shareholder – with no broker involved whatsoever, no commissions, no middleman – and they can raise $15,000 per head from existing security holders,” Brady said.

The BCSC also streamlined rights-offering rules, cutting the time it takes in half.

And in mid-January, a new investment-dealer exemption came into effect. It allows a public company to raise any amount of money from anyone – regardless of whether they are accredited investors or not – provided the investors get suitability advice from an investment dealer.

But whether it ever plans to change the basic accredited-investor definition remains to be seen. Brady said the commission is monitoring other jurisdictions that are looking at the exemption rules – the Securities and Exchange Commission in the U.S., for example – to see how that plays out.

And it is reviewing the four-month hold period that prevents a buyer who makes a private placement from selling for at least four months.

“A lot of B.C. market participants have concerns with the hold period, and so staff are reviewing that,” Brady said.

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