Earlier this month, CEO of the Canadian Securities Exchange, Richard Carleton, sat down with Peter Murray of Kiyoi Communications to discuss a number of topics related to the progress of the CSE in 2018 so far, the investment landscape for growth-stage companies and what’s on the horizon for the CSE heading into the second half of the year.
Scroll down to read the full transcript of this interview. For ease of navigation, a list of hyperlinked topics is included below.
First Half Performance in 2018
PM: Performance at the CSE as measured by standard metrics – listings, financings, trading volume – was strong yet again in the first half of 2018. Can you recap some of the key numbers for us? And were there any trends that you feel really stood out?
RC: By every metric, we are ahead of 2017’s record pace. Whether we measure our performance by trading volume, value traded, number of trades, or financings conducted by companies listed on the Canadian Securities Exchange, the numbers are considerably ahead of where we were at this time last year.
I am particularly pleased that on a 12-month trailing basis, companies have raised almost $2 billion via the facilities of the CSE, either through an IPO or as a secondary offering once the issuer was listed with us.
And with every additional listing, we reach a new benchmark in terms of the number of securities trading on the exchange. We are above 380 securities at this point, and about 360 companies.
I’d also note that this performance comes at a time when the industry in general is not setting new records. Measures of liquidity confirm that companies listed on the Canadian Securities Exchange trade at better levels than their counterparts on other exchanges in Canada.
When assessing liquidity, we use a measure of share value traded versus market capitalization. In Canada’s large cap space, approximately 5% of a company’s market capitalization by value will turn over in a typical month. In the junior markets, that number tends to be a little higher.
On the Canadian Securities Exchange, we regularly see our companies turn over at almost twice that rate. And in January 2018, when there was an enormous amount of market activity, principally in the blockchain and cannabis sectors, our average turnover was almost 35% of a company’s market capitalization.
In previous interviews, I have talked about some of the challenges and hurdles the exchange has overcome during the last several years. There was, for some time, a persistent view in investment banking and trading circles that we might not have the liquidity which some of the other trading centres did. But the statistics now demonstrate that Canadian Securities Exchange issuers are among the most liquid traded instruments in Canada.
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Blockchain-based Clearing and Settlement – Updates
PM: In February, the CSE announced plans to launch a blockchain-based clearing and settlement facility. That was near the height of the blockchain mania and triggered a tremendous amount of discussion within the securities industry. What can you tell us about progress since the announcement?
RC: We’ve been working a lot with dealers and other entities involved in providing services to the securities processing side of the business. And we have also been working with companies who would like to issue tokenized securities. We’d like to be in a position to offer companies who are interested in raising capital by way of a tokenized security a place not only where they can list – because if the instrument is a security we can list it tomorrow, as a securities exchange – but to extend the full power of blockchain technology to the clearing and settlement process. By doing so, we can eliminate a lot of cost and friction that exists with the current processes provided by the Canadian Depository for Securities.
One of the principal issues companies deal with is the cost of processing dividend or royalty payments to their shareholders. The cost of doing this can be prohibitive to smaller companies, or to companies that wish to have a payment stream to shareholders more frequent than quarterly or semi-annual.
The other thing is that the current system is extremely inefficient when it comes to corporate governance. Shareholder documents often go through multiple hands before they get from the company issuing the document to the beneficial owner of shares. It goes to the transfer agent, to the clearing and settlement organization, and to the broker before it finally reaches the investor. What we would like to do is eliminate the middlemen who are not adding value and enable companies to seamlessly communicate with their shareholders.
Take corporate governance as an example. Proxy voting using the blockchain would be secure and inexpensive. And going back to my previous example, it would enable companies to design securities where there are regular streams of income from different types of assets that move into the hands of shareholders.
Since we announced our plans in February, we’ve had a large number of people spend time with us from different industries. For example, royalty streams are very common private equity instruments in the mining industry but less so on the public company side. Some groups would like to be able to use the power of our system to issue new types of securities to public investors, instead of just to a small group of extremely well-funded private equity participants, as is currently the case.
We are in the process of working through the system we will be offering, though we’re slightly behind schedule from a technology perspective. We had a significant new release of trading system technology which consumed a little more of our resources than I had hoped. But I will say that the reception we have received from the industry – be it the investment banking side, the trading side, or the back-office side – is extraordinarily enthusiastic and supportive.
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Cannabis Sector Perspectives
PM: The CSE continues to attract new issuers doing business in the US cannabis market. What are your latest observations on the sector, and can we anticipate more listings to come?
RC: It does seem that a lot of people who were invested in Canadian MMPR (Marihuana for Medical Purposes Regulations) licensees over the last couple of years have shifted their investment focus to companies with exposure to the cannabis business in the United States. Quite a few large US-based companies have listed on the exchange recently, and more such companies are currently in the application pipeline. And, clearly, they are being funded by Canadian and US investors. Pre-IPO financings are heavily subscribed, and often oversubscribed, so we are far from being at the end of investor appetite for the cannabis space generally, and companies with a US focus specifically.
We are heartened by some of the regulatory developments in the United States. It appears that there may well be a federal bill that provides additional comfort to companies operating within the legal framework at the state level, such that they will not be subject to federal prosecution, which would obviously benefit the entire sector. We find ourselves in a situation where the Canadian public markets are funding the rise of a new and potentially quite large and interesting industry in the United States, and it really shows no signs of slowing.
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Growing the CSE Brand
PM: As noted earlier, demand by entrepreneurs to list companies on the CSE remains strong. Your fee structure and streamlined listing process are a big reason why, and it doesn’t hurt that the exchange works hard to support its issuers with outreach events, visits overseas, and recently the launch of a new magazine, Public Entrepreneur. Can you talk about why you devote so many resources to these efforts, and the feedback you receive from issuers and investors?
RC: I’ve commented before that after taking this job I learned that the brand of an exchange – brand awareness and brand identity – is extraordinarily important. In order to reach the level of acceptance we now enjoy, it’s been necessary to assure people across every part of the industry – from issuers to dealers, traders, investment bankers, and, of course, investors – that we are a well-regulated exchange, and that we are thought-leaders committed to supporting the efforts of our issuer companies to achieve the kind of investor access and visibility they might potentially get with other marketplaces. And instead of just comparing ourselves to other markets, we wanted to do a superior job so that investors interested in the types of issuers we have could get efficient access to information about them.
That’s really what has directed our efforts – awareness efforts with different brokers and in different marketplaces to provide our issuers with better access to capital and to secondary market trading liquidity. That explains, for example, the work we have done with the OTC Markets Group in the United States, and some of the work we have done internationally with brokers to increase their coverage and visibility of CSE listed companies through their networks.
We are really committed to building our brand and providing everyone with a degree of confidence that we are a responsible, reputable, accessible, fair, and cost-effective source for capital, as well as a provider of robust and cost-effective secondary market liquidity.
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Keeping Pace with Expansion
PM: The CSE’s Vancouver team just moved into a new office at the beginning of June and you’ve added some more members to the organization, as well. Tell us about expansion of the exchange on the corporate side and the benefits this has for issuers.
RC: Our focus has really been in two areas: our sales and marketing group as well as in our issuer regulation group. Let me talk about the latter first.
As noted, the exchange is growing very, very quickly and we continue to receive listing applications at a record rate. As a result, we have retained a number of additional professionals to help us maintain service levels.
Although some nasty rumours have been spread about our timelines extending, a cool-headed review of the statistics shows that our turnaround time is about the same as it was over the last three to five years. And I am pleased about that because I can assure you we are handling a significantly higher volume of business these days.
On the sales and marketing side, we are expanding to better promote the exchange within specific markets, particularly Toronto and Vancouver. We know that we need to have team members charged with the responsibility to meet with the investment banking and dealer communities to further build our core message, which is that we are the best place for companies, especially in the earlier stages of development, to seek public capital.
We’ve invested in that effort with new hires in Vancouver and Toronto and we plan to become even more active in hosting events, showing our thought-leadership, and helping our issuers tell their stories to an ever-broadening audience of investors.
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Trading Enhancements & Liquidity Growth
PM: Is there anything new on the trading platform front that dealers and professional traders should be aware of?
RC: We just had a new release of our trading system technology, and while there is nothing bold in the features and functionalities, we are constantly refining this service offering by providing different order types that can be used by the various players in the marketplace. And we do this with a view to maximizing the liquidity that issuer companies enjoy from being on the Canadian Securities Exchange.
What we are seeing with the increase in volume is the arrival of what some call a virtuous liquidity cycle, where, because there is more trading and participation, interest grows from new participants, especially internationally, and that drives more volume. The old saying in the market that liquidity begets liquidity is something we have definitely been seeing. The pace we are at now is roughly 10 times where we were just two years ago. It is magnificent progress that we have managed to make in a relatively short period of time.
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Share Structures and US Issuers
PM: The listing of subordinated voting shares by MedMen Enterprises and FSD Pharma during the half generated a lot of comment. Can you walk us through the issues involved and give us some perspective on how to interpret those decisions?
RC: There are two ways of looking at it. The first is that subordinated voting shares have been a feature of the Canadian public equity markets for a few generations. And the fact that they are now showing up on the Canadian Securities Exchange is probably as strong an indication of our maturity as any I can cite.
If you go back in Canadian corporate finance history, they were used when there was a founding individual or family that wanted to retain a control position in a company but raise equity from outside investors at the same time. Really, we have the same dynamic in play with the companies who have listed these subordinated shares.
The second component is that US issuers are essentially required to have a majority of their shares issued outside of the United States in order to not become reporting issuers in the United States, which for a number of cost reasons they would prefer to avoid. Directors and officers insurance premiums are considerably lower in Canada, legal and civil liability risks are lower, and audit fees are less because in Canada you don’t have Sarbanes-Oxley compliance in addition to your regular public audit. Regulatory fees are higher in the US, too.
If you can avoid having to become an SEC (US Securities and Exchange Commission) filer, that is a positive thing for a company from a cost perspective. And if they issue the majority of their shares outside of the country, that is a legitimate way to not be required by the SEC to become a US reporting issuer.
I think it is a structure you are likely to see more of with companies we have looking to list in Canada.
Now, we need to make sure that the holders of those securities have a variety of protections in the event of mergers and acquisitions activity and some other issues, but we are aware of these concerns and are working with securities regulators and the companies on those questions.
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What’s Next for 2018
PM: The CSE is clearly coming off a very successful first half. What initiatives are on the go for the balance of 2018 to maintain the momentum?
RC: With assurance, we know we will continue to be listing companies at a fast pace because of the number of applications and conditional approvals we are working on at the moment. We have more than six months of business in the queue, if you will.
We will continue to work on developing the clearing and settlement system for tokenized securities. That will be a key focus. We also expect to welcome our first Israeli companies in the second half of 2018. I have visited Israel twice in the past six months with a view to tapping into one of the world’s most dynamic start-up cultures and to provide these companies with a very cost-effective means of coming to North America, becoming a reporting issuer, getting a listing on a recognized stock exchange, and also building a shareholder following and profile in the United States by way of a quotation on the US OTC market.
We think that is very powerful, not just for Israeli companies but also for other international issuers looking to access public capital. For example, we expect to visit Singapore later in the year, and we have also had discussions with companies located in Jamaica, in Colombia, and recently met with a delegation from Barbados on some listing opportunities there. In summary, we’ll do more of the same, but I would expect to see an increasingly international flavour among our issuer community as we progress further into 2018.
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