Many junior and small cap companies have seen a resurgence in market caps as well as investor confidence. For public companies and their shareholders, however, one recurring question is – does where a security is listed make a difference to either the degree to which it will trade (i.e. liquidity) or to the amount of money that it can raise?
Based on data detailing financing and trading activity on Canada’s most popular small/junior cap exchanges, the TSX Venture and the Canadian Securities Exchange, the answer appears to be a resounding no.
Starting first with capital raised, the following table summarizes the amount of money raised as a proportion of the total market cap of the exchange on both the TSX Venture Exchange and the Canadian Securities Exchange in January and December of 2016. This metric provides a measure of effectiveness for a particular company at raising capital relative to its market value.
Table 1: Capital raised divided by market capitalization of CSE and TSX Venture listed securities
TSX Venture Listed
While January 2016 was a tough month for small cap entities raising capital, December 2016 was much better. For CSE listed companies, the dollars raised in December 2016 as a portion of the total market cap worked out to be 2.85% – more than double the 1.14% for TSX Venture listed companies.
Despite external market conditions, in both December and January of 2016, CSE listed companies were able to raise a greater percentage of their market capitalization from investors than TSX Venture listed companies were. This implies that investors were more interested in the deals taking place on the CSE rather those on the TSX Venture.
In terms of liquidity, data once again demonstrates that where securities are listed does not appear to determine whether or not investors wish to trade in those particular securities.
As shown in the following table, for both December 2016 and January 2017, the aggregate trading value divided by the total market cap was about two percentage points higher for CSE listed companies than those listed on the TSX Venture.
Table 2: Trading value divided by market capitalization of CSE and TSX Venture listed securities
TSX Venture Listed
Clearly, the perception that trading is more liquid or that companies are more readily financed if a company is listed on a larger exchange is not borne out by the data. Although a fraction of the size of the TSX Venture, the relative outperformance of the Canadian Securities Exchange shows that ultimately it is the companies and their respective investors that drive interest in deals and liquidity.
Nevertheless, as awareness of the choice available to publicly listed securities in Canada improves, factors such as total value to shareholders will become the more important benchmark for publicly-listed companies to consider when evaluating which venue to list on. As trading, financing and listing data have shown, however, an increasing number of companies and their shareholders are being rewarded for listing on the CSE.
With trading volume, capital raised and listings on the CSE achieving their highest levels in the exchange’s 13-year history, the Exchange for Entrepreneurs continues to prove that small-cap companies, as well as those who invest in them, benefit from having real choice in the Canadian securities landscape.
And, while the numbers themselves are impressive, the numerous examples of continuous innovation this past year at the CSE demonstrate why they are committed to making 2017 even better.
Strength in Numbers
From a trading perspective, 2016 was the best year on record for the CSE. Order flow came through at 6.4B shares worth a total value of over $1.5B – the highest amount ever since launching in 2003 and a 159% increase over 2015. In addition to the secondary market, investors were also interested in directly funding CSE listed companies. CSE-listed companies participated in 364 deals raising over $400 million in 2016.
While these figures are a great endorsement of companies being able to raise capital on the CSE, the bigger win for companies as well as their investors is that more of that capital could be used for their own growth plans rather than go towards the ‘middlemen’. As shown in the image below, unlike competitor exchanges, the CSE does not take a percentage of the funds raised which means more money in the hands of entrepreneurs as well as their shareholders. For additional information on why companies are choosing to list on the CSE, click here.
On the listings front, the CSE saw a record high number of listed securities in the summer of 2016, reaching 328. In addition, the CSE’s commitment to innovation meant that, despite a relatively challenging IPO market, five companies elected to go public on the CSE and 38 listings joined the exchange in 2016. The CSE saw the composition of securities listed on the exchange shift to include firms participating in emerging industries like drone transportation, fintech as well as medical marijuana.
Finally, with regards to performance, the CSE Composite Index, a benchmark of performance of the CSE, finished 16.1% higher compared to 2015 and the 103 firms (as of December 19th) that constitute the index had a collective market cap of over $2.3B.
The Value of a Handshake
Part of what has contributed to this record-breaking year has been a consistent focus on the entrepreneurs, companies and investors that choose to work with the CSE. Despite the realities of operating in an increasingly digital world, the CSE made a concerted effort to reach out in person to entrepreneurs and investors across the globe.
From coast to coast across Canada, as well as throughout the US, Europe and even as far away as Mongolia, the CSE team members attended, sponsored or hosted over 40 events throughout the year. In those travels and conversations with many entrepreneurs, it was abundantly clear that modern capital markets are global in nature and that the CSE has an increasingly global reach. Many of the chronicles of the CSE team’s travels from 2016 can be found on the CSE Facebook page here.
Another important outcome of talking to entrepreneurs in person was the discovery that many of them were curious to understand the requirements and realities of taking a company public. As a result, this past year marked the launch of the first ‘Going Public’ boot camps in 2016.
These one day workshops were held in Vancouver and Toronto and brought together capital markets professionals and entrepreneurs for an intensive and informative session on what it takes to succeed as a growing company.
Both sessions were met with an overwhelmingly positive response, indicating that, regardless of what stage they may be at with their respective businesses, entrepreneurs value learning about the path to going public. For those who missed it, recordings from the Vancouver session are available on the CSE YouTube channel here.
Committed to Innovating
Capital markets are rapidly evolving and becoming increasingly reliant on technology to power all parts of the capital formation ecosystem. In 2016, the CSE implemented a number of enhancements to the overall technology infrastructure that helped pave the way for expansion and improved service delivery.
In April of 2016, the CSE rolled out its newly designed responsive website. Rebuilt from the ground up, this new website streamlined the user experience to enable visitors from screen size to access data on the CSE as well as the companies listed on it. In addition to the design and layout changes, the addition of integration with social media, such as Twitter, enabled website users to stay updated on the latest developments and activities at the Exchange for Entrepreneurs.
Another important development to the CSE’s digital evolution in 2016 was the increased focus on digital communication, specifically across social media.
A photo posted by Canadian Securities Exchange (@canadiansecuritiesexchange) on
The CSE added another digital channel, Instagram, into its stable of digital social media channels. Over the past year, followers of the CSE as well as listed issuers and investors were able to get an increasingly detailed view of the work of the CSE as well as exclusive access to what goes on behind the scenes at the Exchange for Entrepreneurs.
Finally, one of the big technology projects of 2016 was the rollout of a new trading engine that improved performance, decreased latency as well as enhanced stability all the while consuming less resources than the previous system.
Looking Forward to 2017
With such a strong performance in 2016, the bar has been set high for 2017. While it is difficult to predict exactly what the year ahead will bring, the CSE will continue to stick to its winning formula of putting entrepreneurs first, committing to innovation and providing real value to public markets.
2016 will officially go down as one of the best years in the Canadian Securities Exchange’s history.
At the outset of the new year, CEO of the CSE, Richard Carleton, sat down with Peter Murray of Kiyoi Communications to discuss and reflect on the achievements of the CSE in 2016 as well as to provide insight on the capital markets ecosystem and what’s around the corner for the CSE in 2017.
Below is the full text from both parts of their interview (for ease of navigation, links to each part and topic have been provided).
The first portion of the interview focused on the performance of the Canadian Securities Exchange in 2016, including the record trading and capital raising efforts from companies listed on the exchange. In addition, Richard Carleton highlighted a number of important operational and technical investments that were made to facilitate future growth and enhance investor experiences at the CSE.
Peter Murray (PM): The year 2016 was a particularly good one for the CSE and the financial community is interested to learn what the exchange’s plans are as we enter 2017. I’ll begin by asking you to walk us through some of the milestones and accomplishments at the CSE during the year just finished.
Richard Carleton (RC): The headline event would be the performance of our overall market, where we enjoyed record trading volume, trading value and number of trades for our CSE listed companies. We saw very strong momentum begin to build about halfway through the year and it grew to a crescendo in the month of November. For all members of the team, and perhaps particularly those of us who have been working with the organization from near inception, it was tremendously gratifying to see the investing public accept our issuers to the extent they did. From an external perspective, I think that is the headline story.
At the same time, I would say some of the things we did behind the scenes were equally important. We invested very heavily in our infrastructure in 2016. The first tangible evidence of this effort was the new website launched early in the year. Though we received plenty of positive feedback on the improved look and usability of the website, we worked to further refine it on a continuous basis over the balance of the year. I think the website presents a clean, professional and complete view of the Canadian Securities Exchange to all visitors.
We also invested in our trading infrastructure. In mid-December, we completed the final stage in launching a new trading system that is approximately 11 times faster than our former system but requires considerably less hardware to operate. For us, that means we are offering a higher level of service at a lower operating cost.
In addition, we bundled the new trading system with order routing solutions, compliance and risk management services. For example, we provide features such as “fat-finger” protection, credit limits, risk limits, and risk tolerance limits to assist dealers trading on our exchange with meeting their risk management obligations to clients. Basically, it gives dealers new tools that enable them to provide a higher level of service to their clients. Back to top
PM: You mentioned new volume and value records. Statistics released by the CSE during the year showed year-on-year volume growth of over 100% in some months. What drove these increases?
RC: There clearly was a lot of investor interest in the legal cannabis sector, both in Canada and the United States. With propositions on the ballot during the US election in eight states to either permit medical marijuana or legalize it outright, the belief was that companies active in the US market could have a tremendous increase in business opportunities available to them. In the run-up to the election we saw a big increase in trading and price performance for names in the sector.
Canada-focused cannabis companies were also caught up in the investor interest given the posture of the federal government toward liberalizing laws in this country.
But I’d hasten to point out that cannabis-related companies weren’t the only ones fueling the growth. A number of natural resource issuers and technology companies also traded heavily in the latter half of the year. The result was a string of monthly records for share turnover, value traded and number of trades as we went from September through November. Back to top
PM: On the oversight front, there is an ongoing effort to update the rules companies must abide by while on the exchange, as well as during the listing process. Where do things stand currently?
RC: Most of the work has been taken up in two specific areas: original listing requirements and continued listing requirements. The new requirements for original listings have been implemented. We increased a number of the thresholds, which essentially had not been adjusted since the exchange began business in 2003. In the intervening 13 years, some of the numbers came to need a reassessment. Still, I would say that all of the companies approved for listing prior to the adoption of the new requirements would have made it under the new rules as well.
If you consider this together with the work we did in 2015 on plans of arrangement, we are trying to communicate to the investment community that we need to see companies with a business plan and sufficient capitalization to meet financial requirements for that plan over a 12 to 16 month period prior to listing.
To assist companies in meeting their disclosure obligations, both as they list and subsequent to listing, we retained two very important individuals in 2016. Dr. Francis Manns is now our consulting geologist working with prospective issuers to provide expert-level peer review of 43-101 reports, or in the case of oil and gas issuers 51-101 reports. Francis is universally respected in the mining and financial communities and is a real asset for resource companies to work with as they list with us.
Another strong addition is John Hughes, who joined our compliance team in a management capacity. John is a consulting accountant who advises firms on the impact of IFRS and other contemporary accounting issues. John reviews financial statements and other disclosure documents from prospective and current issuers with a view to helping companies meet the highest standards when it comes to financial reporting and disclosure.
For companies listing with us, having Francis, John and the other experts on our team to turn to is a real benefit.
We are still working on the continued listing requirements and the idea there is to establish minimum criteria a company must meet to remain listed on the exchange. The objective of the exercise is to ensure companies on the exchange are actively pursuing the business they have set out in their disclosure materials and listing statement. If a company decides that it needs to raise additional capital or find another business, it has a period of time in which to do that, but we are not going to allow inactive companies to reside on the exchange indefinitely. Back to top
PM: Quite clearly, 2016 was a year of progress on multiple fronts. What is the CSE team preparing to focus on as we enter 2017?
RC: Now that we’ve got the new trading system running we are really going to shift our attention to improving market making and overall market quality for our issuers. We have been working with several dealers on ways for market makers to deepen liquidity and reduce the choppiness in prices by contributing buy and sell orders to the CSE book. Ensuring that companies have a continuous two-sided market is quite important for issuers and their investors.
We are also going to be continuing our efforts to bring companies listed on the exchange to the attention of investor audiences in Canada, the United States and beyond. We are planning quite a few events over the course of 2017 designed to introduce more potential investors to our issuers. And, of course, that has the side benefit of demonstrating to entrepreneurs deciding where to list that they should choose the CSE ahead of some of the alternatives, as we quite actively support the efforts of our issuer community in markets around the world. This is going to be another important focus of our energies over the course of 2017. Back to top
PM: The CSE approach to issuers and markets has some unique aspects to it. Do you think the CSE has helped change the environment for securities listings in Canada?
RC: Well, we sure hope so. Our Senior Vice President of Market Development, Rob Cook, said the other day that when the organization launched in 2003, while we may not have been re-inventing the wheel, we certainly set out to apply a healthy degree of lubrication to the process. And in many respects we have successfully done that. We are continuing our mission to facilitate the lowest cost of public capital for small-cap companies in Canada. The principal means by which we do that is improving the listing process and the secondary trading environment, and we work with as many parties as we can to accomplish our objectives. This is our core strength and we will retain that commitment to a higher level of service for our issuers. Back to top
Part 2: Industry Insights
In the second portion of the interview Richard Carleton provided his insights on a spectrum of issues facing Canadian capital markets. In particular, Carleton provided his take on the evolving landscape for IPOs, performance of commodities markets, algorithmic trading and opportunities for Canadian listings in the US.
Peter Murray (PM): Data shows that 2016 was a slow year overall for Initial Public Offerings in Canada. What is your viewpoint on what has happened to the IPO and what is going to be its role for future public financings and listings?
Richard Carleton (RC): I don’t think there is any doubt that the decline in the number of IPOs is more than a cyclical phenomenon. We have witnessed a sea change in how early stage corporate finance is conducted in Canada. Participants are voting with their feet and avoiding the IPO process. They are doing so because of concerns about cost, concerns about delay in having their prospectus approved, and also that there are now very few dealers who have the capacity, willingness or business model to support a small-cap IPO and distribute the securities to their clients and to the clients of other members of an underwriting syndicate.
The so-called “exempt market” has really stepped into the gap. Here, I am talking about dealers (specifically “exempt market dealers”) who are able to distribute securities on the basis of one or more prospectus exemptions in the different securities acts. The most common means, the “accredited investor” exemption, where securities may be distributed to high net worth individuals and institutions without a prospectus, accounts for the lion’s share of the funds raised by early stage companies in Canada today. I prefer to think of this development as less as of an IPO crisis than as the emergence of a new dynamic, the funding of new businesses via the exempt market. Typically, a new company will conduct a reverse takeover of an existing listed company, or existing listed company management may decide to undergo a fundamental business change. In both cases, the exempt market is where 90% to 95% of the funds are being raised for new CSE companies. This development means we are working not just with the traditional IIROC dealers on their underwriting activities, but also with exempt market dealers who are the lead actors in this new access to private capital for public companies. Back to top
PM: In the last two months of 2016, investors moved out of some sectors and into others with unusual force. Many equity indices hit all-time highs as the global reach for yield unwound. Meanwhile, industrial commodity prices rose and precious metals prices fell. What is this telling you and how will this influence issuers and investors on the CSE?
RC: I am somewhat concerned about the state of the equity markets in the short term only because I think a lot of the historical correlations broke down after the US election. Everything went up, and everything can’t go up because there are some things that should be going down while others are going up, and vice versa. We have seen something of a return to normal over the last couple of weeks. But I am a little concerned about where the markets might be in three to six months.
Now, as the exchange operator we can’t let ourselves become preoccupied with shifts in the market. What we are looking to do is provide a good, safe home where issuers can raise public capital, regardless of prevailing market conditions. So, while we might see interest moving from one sector to another, at any given time there is usually something that investors are interested in supporting. As an example, we have had two oilfield services companies join the CSE in the past couple of months. This sector has been devastated over the last few years. It is very encouraging that experienced professionals in the field are of the view that it is an opportune time to get back into the business. Again, as an exchange we have to focus on the long game. Back to top
PM: A year or two ago when junior markets were having a particularly tough time, some observers criticized predatory trading practices for contributing to the weakness. Are such things as high-frequency trading and black boxes issues for companies on the CSE?
RC: We saw the first consistent participation by high-frequency trading firms on the CSE this year. These firms were pursuing a market-making strategy, which means they are significant contributors to the available liquidity in a particular stock. The firms are very competitive; they tend to narrow spreads and provide for deeper order books. I believe it has contributed in a positive way to liquidity on the CSE. There were complaints voiced about “HFTs” a few years back when there was a lot of selling pressure, but we didn’t hear so much in the way of concern when the early stage markets began to recover. Back to top
PM: Given the differences in the two markets, there seems to be an opportunity to harmonize Canada’s public venture market with capacity in the United States for deal flow and retail investing. How do you see this developing and what role can the CSE play?
RC: There is no doubt Canada is an extremely advantageous jurisdiction in which to launch a smaller public company. The economics don’t really support it in the US, UK or EU. Arguably, Australia is the only other place in the world where small companies without revenues – typically mineral exploration companies – have an opportunity to raise public capital.
We know from experience that there is a lot of interest in our companies from investors in the United States. We have a close working relationship with the OTC Markets Group in the US and in many cases we encourage issuers to obtain a quotation on one of the OTC’s regulated boards and to make sure their securities are properly registered with the clearing and settlement agency in the United States. With these measures, US-resident retail investors will be able to trade these stocks via their discount brokerage accounts.
Issuers end up enjoying the best of both worlds. They have a relatively low-cost jurisdiction in which to list their company, but at the same time can tap the US capital markets for both investment capital out of the gate and further rounds once they are trading in the secondary market. That is something several of our companies have taken advantage of. Generally, companies that obtain a US quotation have seen an immediate improvement in liquidity and it gives them additional fundraising opportunities in the US. The fact is that Canadian public companies travel very well internationally. Back to top
PM: Do you have any closing thoughts for issuers and investors, perhaps on issues we have not addressed so far?
RC: I would more so just take the opportunity to state again that the two things we will focus on in 2017 are working more with market-making and other groups to improve liquidity, and secondly that issuers should expect opportunities to work with us to promote both the exchange and their companies on an international basis. We are going to be very active in the US, in Europe and potentially in Asia as well.
Really, what this is all about is proving the value of a listing on the CSE, and in so doing make the challenge facing our issuer companies of raising funds significantly easier. Back to top
CSE is proud to present its most recent quarterly update video and press release below highlighting the record third quarter of the year at the Canadian Securities Exchange:
Multiple Industry Sectors Push CSE Trading Volume, Financings to New Records in Third Quarter of 2016
CSE Posts Record Activity in Q3 of 2016
The Canadian Securities Exchange (CSE) today released performance metrics for the third quarter of 2016 highlighting continued strong growth, particularly in trading volume and capital raised by CSE listed companies. Both measures rose to the highest levels ever recorded by the exchange.
Trading volume in CSE listed securities climbed 138% compared to the third quarter of 2015 to 1.27 billion shares;
Companies listed on the CSE conducted 85 financings for gross proceeds totaling $109 million, an increase of 222% over the same period a year earlier;
The CSE finished the July-September quarter with 315 listed securities, 13 more than at September-end 2015;
Trading on the CSE platform in securities listed on other exchanges totaled 811 million shares, higher year on year by 59%.
Metrics for January through September also set records, with the 3.27 billion shares traded in CSE listed securities outpacing the total for all of 2015 (2.48 billion shares). CSE listed companies raised $226 million in the first nine months of the year, compared to $195 million in full-year 2015.
Trading volume continues to gain momentum in the fourth quarter, with a record 99,704,073 shares trading in CSE listed securities on October 6. Over the past 30 days the CSE has set new records for both daily trading volume and number of trades on seven occasions.
Several CSE issuers ranked among the most actively traded public companies in all of Canada during the quarter as investor interest increased across most industry sectors, and particularly for life sciences companies. The CSE also welcomed one of the few Initial Public Offerings completed in Canada this year when Glance Technologies Inc. (GET) made its trading debut on September 7.
The CSE team remained hard at work connecting with entrepreneurs, hosting events in Vancouver, Calgary, Montreal and Toronto during the quarter, as well as presenting and exhibiting at the first ever Mines and Money conference held in North America. Senior exchange staff also travelled to China and Mongolia to continue outreach efforts in growing overseas markets.
The exchange is pleased to report that it will soon implement a new trading system technology featuring execution services for all equities listed in Canada. Related to this, a commitment to heightening the visibility of companies listed on the CSE through continued investor events and publications (including the CSE Quarterly magazine), plus support for market-making and other activities, will assist with further advances in volume and liquidity.
“The CSE is firing on all cylinders, with an improved capital markets backdrop helping our issuers to meet, and in some cases exceed, their financing targets,”
said Richard Carleton, CSE Chief Executive Officer.
“Having added several talented executives to our team, the CSE is positioned even more strongly to facilitate access to growth capital for entrepreneurs at the lowest possible cost, while providing liquid and accessible trading services for investors anywhere in the world.”
This past summer, the CSE team set out to meet and greet entrepreneurs all across Canada.
From Bay St boardrooms to Alberta badlands and a few golf courses on either side , the CSE team had a great time connecting with listed issuers as well as with folks interested in learning more about how the CSE can help junior companies improve access to the lowest-cost of public capital.
Check out the highlights from this summer’s adventures below and be sure to stay on top of all of our upcoming events by visiting the new and enhanced events calendar here or by following us on Twitter or Facebook.
The CSE was thrilled to welcome a record setting crowd to this year’s breakfast (150+!), an annual institution for the CSE and its network of friends and supporters in Calgary.
Along with a healthy spread of pancakes, sausage, and other breakfast staples, the crowd was treated to a welcome address from CSE CEO Richard Carleton who dusted off his best western wear for the occasion.
Mark your calendar for next year’s occasion which is slated for July 6th! Yahoo!
Summer Golf was in full swing for the CSE in August, where amateur golfers across the organization gathered to crush drives, sink puts, and network over 18 holes of scenic golf courses.
Our team hosted the first annual Montreal Summer Golf at the members only Mr. Bruno Country Club – an event so exclusive we could not even take photos! Rumour has it that it was a competitive round highlighted by exceptional play of CSE Senior Advisor Scott Pritchard.
Toronto was also on the tour, where Senior VP Rob Cook and Director – Listed Company Services Barrington Miller showcased their game at the TechConnex golf tournament.
Finally, in Vancouver, another “first annual” golf tourney was hosted at Northlands Golf Course – where a group of 24 played a friendly round of Texas scramble on what was agreed to be “the nicest day of the year” – a claim supported by the photos included in this gallery.
Canadian Securities Traders Association Conference
A marquee event of any Summer is the annual CSTA (Canadian Securities Traders Association) Conference – held this year in beautiful Whistler, BC.
Often a productive mix of both business and pleasure, the CSE managed to strike a good balance between both.
From a business perspective, CSE CEO Richard Carleton participated on the much anticipated marketplaces panel, lending his thoughts on the status of exchanges and leading trends in the trading world.
Afterward, CSE offered up an equally substantial piece of hospitality, hosting an exclusive dinner at the renown Araxi Restaurant + Oyster Bar. A truly spectacular meal (accompanied by choice wines) was followed by an impromptu lottery and betting pool in anticipation of the Tragically Hip’s final song during the next evening’s concert.
CSE is proud to present its most recent quarterly update video and press release below highlighting the record first half of the year at the Canadian Securities Exchange:
Growth in Trading Volume and Financings Highlight Productive Q2
CSE Posts Record Activity in First Half of 2016
The Canadian Securities Exchange (CSE) is pleased to release an update on activity of the second quarter of 2016, resulting in a record first half of 2016 highlighted by record trading volume, changes to listing requirements, and initiatives to help CSE issuers build on recent positive momentum in financing and other aspects of corporate development.
Trading volume in CSE listed securities grew 64% compared to the first half of 2015 to 2.01 billion shares;
The CSE finished the first six months of 2016 with 328 listed securities, up 12.3% compared to the same period the previous year;
CSE companies conducted 178 financings for total gross proceeds of $123 million, up 28.4% over the first half of 2015;
Trading on the CSE in securities listed on other exchanges totaled 1.82 billion shares, an increase of 19.1%.
Growth in trading volume and financing proceeds during the first half of the year reflected both the increased number of securities listed on the CSE and noticeable improvement in Canadian investor sentiment across all sectors. The 2.01 billion shares traded in CSE listed securities in the first six months of 2016 puts the exchange well ahead of its pace of 2015, when a record 2.47 billion shares traded for the full year.
The CSE is proud to highlight a busy first half supporting issuer outreach to the financial community with a variety of activities. These include CSE Days held in major cities where executives enjoy the opportunity to present to audiences of financial industry professionals, retail investors and issuer peers.
In addition, the CSE launched a new website in April. The modern format makes it easier for investors to gather information on CSE companies, and for both existing and prospective issuers to access the resources they need to make interaction with the exchange as efficient and cost-effective as possible. The CSE’s new website can be accessed at http://www.thecse.com.
Other achievements in the first half of 2016 included a comprehensive update to initial listing requirements. Proposed changes were published for comment in February and following feedback the modified rules were submitted for regulatory approval. The new requirements will become effective in Q3 upon publication of a notice from the exchange.
In the second half of 2016, the exchange will work to finish a review of continued listing requirements for listed companies. A list of proposed amendments will be published for comment in the near future.
“The CSE team is constantly working on new and dynamic ways to drive our mandate, which is supporting entrepreneurs and lowering the cost of capital for early stage companies,”
said Richard Carleton, CEO of the Canadian Securities Exchange.
“The activities we undertook in the first half of 2016 made our offering as an exchange stronger, as evidenced by growth in both trading volume and financings closed by our issuers. We will continue to support CSE listed companies with a variety of public efforts, and by working with regulatory authorities to improve the operating environment for Canadian financial markets as a whole.”
The first half of 2016 has been eventful for the CSE as well as for early-stage securities markets more broadly. With a return in trading activity and prices in the shares of early stage companies, investors are once again shifting focus back to growth stage firms.
While price action is one part of the story of any publicly listed entity, there are also other forces that influence the health, competitiveness and overall sustainability of the growth stage marketplace.
In a recent interview with Peter Murray of Kiyoi Communications, CEO of the CSE Richard Carleton discussed some of the milestone achievements at the Exchange for Entrepreneurs thus far in 2016, as well as his take on the forces shaping capital raising structures and participants.
Below is the transcript of their interview:
(PM) Earlier this year the Investment Industry Regulatory Organization of Canada (IIROC) requested written proposals for addressing market structure issues facing small-cap issuers. What were some of the important themes identified in the CSE’s response?
(RC) IIROC asked a variety of participants in the small capitalization space – exchanges, issuers, broker dealers and other stakeholders – to comment on, and propose potential solutions to, a number of specific issues raised over the last few years within the industry. This took place on a couple of levels, one being the technicalities of such things as short sale rules, tick size and board lots.
The CSE thought it was also important to look at the bigger picture and where the industry can go over the longer term to address what we think is a significant issue, which is a noticeable reduction in buyer interest.
When we look at what has happened to the junior capital space in Canada over the last five to seven years, the decline in commodity prices has clearly had a major influence. For certain, it has encouraged some investors to look at opportunities outside the small-cap space. But we think that the problems afflicting small-cap formation in Canada go beyond the decline in commodity prices.
Broad industry change is continuing to take place, a big one being the decline of the independent brokerage firms in Canada, and a rising concentration of assets under management at bank-owned dealers. The independent firms have long been an important part of the community helping to finance resource exploration, technology research and other forms of business development important to the Canadian economy.
What we see in the current environment, however, is that many of the independent firms have disappeared, with the remaining firms experiencing extreme pressure on their business models. These firms are an important source of retail investor interest in small-cap stocks through the support of their investment advisors, where a dealer will commit to an underwriting or participate in a dealer syndicate supporting an underwriting or capital raise. And in the secondary market they support trading through stock recommendations and research.
That model has broken down to a significant extent over the past five years and instead what we increasingly see is corporate finance being conducted through the exempt market. Speaking from the perspective of the CSE, we see about 90% of the money raised by our issuers coming from the exempt market.
So-called accredited investors are the primary source of capital in the exempt market. But accredited investors in Canada only represent about 1-2% of all households. This sharply narrows the number of investors eligible to participate in small-cap financings and, needless to say, limits the amount of money available for companies to raise.
The industry has adjusted to the decline of the independent broker by leaning more and more on the exempt market. But at the CSE, we are concerned that this is far from a complete answer to corporate finance challenges moving forward.
(PM) What do you see as some of the solutions to reinvigorating the early stage capital formation process in Canada?
(RC) One of the things we really need to do is engage the next generation of investors. The industry is not doing a good job of encouraging the next generation of investors to come into the Canadian equity markets. One approach to consider is providing a very clear set of guidelines for early stage crowdfunding. It is a potential source of modest amounts of money, say around $1 million to $1.5 million, but the funds can be acquired at relatively little cost to the companies raising the money.
The problem in Canada is that we have a fragmented regulatory regime with different sets of rules dictating how crowdfunded offerings can be marketed, depending on the residency of the potential investor. This makes it confusing for people to know if they can participate or to what extent they can participate in a given offering.
It also makes it difficult for those managing the websites that people use to find out about different investment opportunities to carry out compliance activity on a national basis. The whole process becomes complicated and the likelihood of making mistakes rises significantly. You have to decide between limiting an offering to a province or group of provinces that have the same rules, or taking on the compliance risk associated with doing a national offering across Canada.
That’s a real problem that adds cost, complexity and confusion for everyone involved.
The other issue is that once a company is beyond the crowdfunding stage, there really isn’t much other than the accredited investor exemption to help companies to raise funds.
The CSE is looking very carefully at new legislation in the United States that has come into force just recently under the JOBS (Jumpstart Our Business Startups) Act. The objective in that case was to provide a relatively simple means of raising equity capital from the public that eliminated the necessity of having to file a prospectus with the Securities and Exchange Commission (SEC) or become a reporting issuer with the SEC.
In the United States, companies will be permitted to raise up to $50 million per year and to market these offerings to individual investors subject to participation limits of $1,500 per opportunity and an aggregate of $10,000 per year for each investor. These rules are in place across the United States and require a relatively limited amount of work on behalf of an issuer. For companies on the CSE it would be a very cost effective means of raising capital from individual investors because our companies already meet most of the requirements to participate in such offerings. They file quarterly financial statements, their audits are subject to annual review, secondary trading is monitored by an independent third party, plus they have continuous disclosure requirements and are regularly providing updates to the investing public.
With all of those benefits available, CSE companies are positioned well to take advantage of such funding opportunities. In fact, we already have one company in the process of marketing an offering under the JOBS Act right now.
We would really like to see a similar mechanism put into place in Canada because it would provide a bridge between crowdfunding and full-blown prospectus-led offerings, which have to be reasonably large before the associated cost begins to make sense.
One of the key things to understand here is that instead of limiting participation to accredited investors – people with large investment portfolios or substantial annual incomes – the new rules actually present the opportunity to engage a whole new generation of investors in the equity market. And really it is that generation that we have to bring into the market in order to provide a successful and healthy ecosystem for capital formation in the coming 15-20 years.
When I go to industry events, I am often surprised at the average age of people in attendance. The average is quite high and that is not a sign of an industry positioned to continue supporting the needs of growing enterprise in Canada for the next generation. We need more young people engaged and we feel that a clear-cut means of permitting them to invest in companies directly and trade the shares afterward is very important.
(PM) What specifically is the CSE doing to help ensure this new environment is fostered?
(RC) I think one of the challenges we have in Canada is the fragmented regulatory regime when it comes to equities. It is pretty clear if you look where we are with crowdfunding rules and how different they are across Canada that we don’t have an awful lot of commitment to broadening access to the equity markets from the various securities commissions. I think what we are going to have to do is engage the political side.
When you look at any of the provincial governments, and certainly the federal government, they frequently talk about supporting innovation, new technology development and entrepreneurship. You can’t read a press release from any of the governments over the last little while without seeing those ideas held up as a means to promote economic growth in Canada.
The problem is that none of this is going to happen if these new companies can’t get funding. And there is a limit to the amount of public funds that can be devoted to the space, so we are going to have to figure out ways to engage the private investor in these companies.
This is a long-winded way of saying I think we are going to have to actively engage the political side, which is exactly what happened in the United States with the JOBS Act. That in fact was not an initiative of the Securities and Exchange Commission, but something that came from Congress as a means of promoting investment in early stage enterprise in the United States. We think there would be substantial political will for a similar approach at the provincial and federal levels in Canada. I think that is the path to genuinely reforming the investment process here in Canada.
(PM) The CSE recently launched a new website that clearly was created with a specific vision in mind. How has the reaction been so far?
(RC) The response has been almost universally positive. People really like the modern, clean design and particularly how easy it is to navigate on the website using a mobile device.
We are learning a lot about where visitors go and what types of information are most important to them. This enables us to be responsive in making sure it is easy to get to the most popular types of information. You can plan all you want, but when the real-life data comes in you always see things you were not aware of.
I’m also excited by our greater use of social media, which includes promoting our blog through Twitter plus posting photos, and sometimes even real-time video, of specific events. That is an area where I think we will continue to extend our presence as the website evolves.
Actually, social media is a topic worth discussing further. Most, if not all, dealers in Canada prevent their investment advisors from using Twitter, Instagram and other social media platforms for communicating with existing and potential clients. From a compliance perspective, they want the ability to control and edit messages before they go out, but the immediate nature of social media makes it a difficult fit for that type of tightly controlled environment.
Now, contrast that with the US JOBS Act provisions, which allows securities to be marketed over the Internet. That is something perhaps the older generation may not be so comfortable with, but it is how younger people get their information and shop and interact with the rest of the world. If we as an industry are not prepared to engage with people using social media, we’re in trouble.
(PM) The new website and social media are not the only ways in which the CSE interacts with its audience. You are doing quite a bit to help issuers tell their stories via the CSE Quarterly magazine, company-specific articles, video opportunities, an extensive blog and person-to-person interaction at CSE Days. What is the ultimate objective of these activities, as they obviously require the exchange to commit significant resources?
(RC) We want to provide multiple platforms on which issuers can tell their stories. One of the challenges you have as an early stage entrepreneurial company is that there are not usually a lot of specialized public relations and investor relations professionals around to help out. Everybody at the company is too busy trying to build the business. Whether it is development of a technology, or if it is to advance an exploration program if you are a resource company, they often don’t have the time or resources necessary to engage with those in the community who are potentially interested in their story.
As an exchange, we can help our issuers to help themselves by providing all of these different vehicles for conveying their excitement about their businesses to a broader community than they might otherwise reach.
(PM) Toward the end of February, the CSE requested comment on proposed changes to its listing requirements. What kind of feedback have you received and how close is the exchange to implementing some of its ideas?
(RC) We received approval from the Ontario Securities Commission in late June to implement the proposed changes, so you’ll be seeing them take effect shortly. We had not amended our listings criteria since we launched in 2003. With the benefit of over a decade of operating the exchange, and also given the price inflation that has taken place over that time frame, we felt it appropriate to update a number of the financial measures in the original rules. We have also provided a lot of guidance around certain types of transactions, whether it be reverse takeovers or companies creating reporting issuer subsidiaries through plans of arrangement. We want to provide very clear guidance about what our approach is to all types of prospective applicants.
We first worked with the securities commission on the proposed amendments, and then put them out for public comment. The comments were quite supportive and we also received some questions that were addressed through minor amendments to the proposals.
I would point out that we expect to shortly be proposing further amendments to our listings policies and requesting comment on them as well. The new proposals will mostly focus on continued listing requirements so that we have certain financial and other measures companies have to meet if they are to remain listed on the exchange.
By and large they are not focused on the price of the shares or trading activity because that can be a result of factors beyond a company’s control.
The exchange’s list of issuers continues to expand and we are seeing more and more fast-growing, high-profile companies choose the CSE as the exchange on which they want to build their business. It is important that we keep pace with this interest and expansion by continually reviewing how we operate as an exchange and make sure we are serving our user community in the best way possible.
The CSE is proud to present the latest edition of the CSE Quarterly just in time for the PDAC 2016.
This edition of the CSE Quarterly focuses on companies active in the resources and renewables spaces. The entrepreneurial firms listed in this edition showcase the diversity of opportunities that the CSE listed companies are pursuing and are great example of why the CSE is the Exchange for Entrepreneurs.
The companies profiled in this issue are:
International Wastewater Systems Inc. (CSE:IWS)
Western Uranium Corporation (CSE:WUC)
Earth Alive Clean Technologies (CSE:EAC)
Pasinex Resources Limited (CSE:PSE)
MGX Minerals Inc. (CSE:XMG)
DNI Metals Inc. (CSE:DNI)
In addition, sure to read the latest message from the Canadian Securities Exchange CEO, Richard Carleton, as well as the editorial feature by Steve Kanaval from Equities.com
To have The CSE Quarterly delivered directly to your inbox, sign-up below:
Earlier this month, Canadian Securities Exchange CEO Richard Carleton sat down for an interview with Peter Murray of Kiyoi Communications to discuss the latest developments at the CSE. Among the topics covered were the performance of the CSE in 2015, the expanding international profile of the CSE, the landscape for early-stage firms raising capital as well as the upcoming enhancements to the CSE.
Below is the full text of their interview. (Questions from Peter Murray have been placed in bold for clarity):
1. Let’s start with a review of 2015 in general. The Canadian Securities Exchange issued a press release recently highlighting continued growth in issuers listed, trading volume and other key metrics of performance. Can you comment on these and is your success a sign of companies finding that financing and other business activities became somewhat easier last year?
Actually, I think it is an article of faith in the industry that it is more difficult at the moment to raise public capital than it has likely been in a generation. And that is not just for companies that operate in the commodities space — given what we’ve heard from the entrepreneurial community it has been a challenge for companies in all sectors to raise capital over the past 12 months.
That is why I believe it is important that despite those difficult conditions we grew considerably last year over the record pace we set in 2014. We had the strongest year ever in terms of trading volume and grew the issuer base by 20%, among other achievements. I think the underlying message of the exchange, which is that we work with a broad number of industry participants to deliver the lowest cost of public capital, really is resonating with the entrepreneurial community. And frankly it is perhaps as a result of the difficult times that we have seen our business continue to grow.
2. It was encouraging to see several companies based in the United States make their public trading debuts on the Canadian Securities Exchange in 2015. Why did they choose the CSE over the alternatives and how is the listing process different for a company domiciled outside of Canada?
As with a Canadian company, an international company has to become a reporting issuer in one of the Canadian provinces before they qualify to list on the CSE. That is accomplished in one of a variety of ways, which can include an offering or non-offering prospectus. At some point in the not too distant future there will be the opportunity to do so via an offering memorandum. There are also the traditional techniques of reverse takeovers and asset purchases that have been used in Canada for years for private companies to become public.
For US companies in particular, I think it is fair to say that regulatory costs and civil liability burdens have put a significant hole in their early stage public capital markets. Much of the early stage capital is coming from venture capital and private equity sources. Companies look at the public market as an exit, not necessarily as a means of raising growth capital. So, when people who need to raise from $5 million to $50 million to build a company understand that you can do that in the public markets in Canada, it becomes a very attractive option.
Additionally, I would point out that entrepreneurs who take their companies public can often retain more control over the future direction of the enterprise than if they accept investment from a venture capital or private equity firm. You often see venture capital and private equity investors exert a very heavy hand on the future direction and management of businesses. From a cost perspective and that of the ability to control your destiny, people around the world find Canada a very compelling place to raise growth capital.
3. Can you give us some feedback on your interaction with issuers in 2015? And looking forward, what do you sense their goals and expectations are for 2016?
Let me start in more general terms by highlighting the results of a series of events we instituted in 2015 called CSE Days. These took place in Vancouver, Toronto, Montreal and New York. We invited issuers from each of the Canadian cities to spend a day with us talking in the morning about issues of specific interest to listed companies. We also focused on helping companies improve their presentation skills by having coaches work with their executives. We concluded the day with a mixer event where the corporate finance community was invited to meet the issuers and the keystone was the companies delivering two-minute pitches to the audience. Our issuers universally found these days to be helpful. They also found it worthwhile to meet not just their peers in the CSE issuer group, but to be introduced to a broader cross-section of the advisors and corporate finance professionals working in each city.
As far as what issuer goals and expectations are for 2016, I don’t think anybody is expecting conditions to change dramatically for the better in the commodities markets. The belief seems to be that it will continue to be a challenging environment for early stage companies of all kinds to raise capital. That being said, it is abundantly clear that there is more investor interest in technology, biotechnology and biopharma undertakings. Through the applications we are receiving we see what seems to be a general rotation of investor interest into those sectors.
4. Are there any other key developments from 2015 to highlight?
One of the first things the Canadian Securities Exchange decided it had to deliver was full electronic access to all of the discount brokerages operating in Canada, given that retail investors play such an important role in junior capital formation. It actually took until spring of last year to bring on board the last of the bank discount brokerage firms. And we saw as each of them came on over the last couple of years, significant enhancements in both the trading activity and market quality. That was a really important milestone, not just for the organization but for the issuers, and one I am pleased to say that we finally completed last year.
5. As we enter 2016, what are the trends you hear from the investment community, and how will these affect the CSE and its issuers? How can the CSE influence those trends?
As we start 2016 there is no shortage of concerning news. I recently heard Ian Russell, President and CEO of the Investment Industry Association of Canada, present the results of his organization’s CEO survey conducted in November, where they spoke to almost 200 of the chief executives of the registered investment dealers in Canada. The picture they painted was quite bleak. They anticipate that costs, chiefly driven by regulatory initiatives, will outstrip any revenue growth, and that there will continue to be a large number of independent dealers in financial distress as a result of difficulties in traditional strengths of the Canadian economy.
In working with that community we continue to look for ways to reduce their cost of operating wherever we can, to try to bring more business opportunities to the dealer community and ideally lower their cost of operations.
There are definitely things we can do as an exchange as well and international initiatives are a good example. When we attract companies from overseas to list in Canada, they are going to use Canadian dealers, lawyers, accounting firms and investor relations professionals to manage their go-public process. So we are bringing net new business opportunities to the local community.
In addition, we certainly are going to be part of the industry discussion about ways to try to improve the trading process in a manner that protects enterprise values for issuers and their investors.
6. Let’s discuss one of your international initiatives. The Canadian Securities Exchange signed a Memorandum of Understanding with the Taipei Exchange in November, and this comes on top of a close working relationship with the OTC Markets group in the United States. What benefits are there to the exchange itself from such international relationships? How about for issuers?
Really, the two questions are intertwined. We find that when companies list in jurisdictions in addition to Canada and have raised money in those jurisdictions, their liquidity profile improves overall. We see tighter spreads and deeper markets for domestically listed companies that are also quoted on the OTC market in the US or Frankfurt in Europe.
Many Canadians aren’t aware that Taiwan is a very dynamic economy heavily involved in precision manufacturing. Taiwan has a sophisticated material science community and in fact enjoys a large positive trade balance with the People’s Republic of China.
The issue that business people in Taiwan have, which is very familiar to Canadians, is that notwithstanding that expertise, it is a relatively small economy, with a population of some 22 million.
As a result, Taiwanese companies are looking for access to the global economy and over the years, for a variety of reasons, have looked to the United States for public capital and to establish that North American presence.
The CSE has always had a strong proposition for companies looking to access North America but at a significantly lower cost and regulatory footprint than they would see in the United States. We had an opportunity to meet with a variety of members of the Taiwanese financial community, including the Taipei Exchange, which is the medium and small enterprise exchange there. We have agreed to compare notes and look for opportunities to promote our issuers in the Taiwanese market, while also searching for opportunities for issuers on their market to potentially list in Canada and obtain access to North America.
For our issuers it is really the same thing. Taiwan has a sophisticated marketplace which is prepared to invest in early stage stories, especially in the technology space. We have a lot of companies that are looking to obtain an Asian presence, and just as we are a low-cost alternative to the United States, there are a lot of advantages for companies to use Taiwan as their stepping stone into the Asian market.
7. The regulatory landscape is constantly developing. Anything to comment on with regard to change at the CSE or ongoing collaboration with regulatory authorities?
We will be publishing proposed changes to our listings criteria in the next few weeks. Keep in mind that we have not amended the thresholds to qualify for listing since the material was originally filed with the Ontario Securities Commission in 2002. We will be raising the bar, but I don’t think the new standards would have had an impact on companies we have listed over the last couple of years had they been in place when those companies applied to us.
We will also likely introduce continued listing requirements that will entail certain enterprise value, size and business activity with the notion that the companies listed on the exchange must have a workable business plan and sufficient capital on hand to fund the programme for a reasonable length of time.
Another initiative is cooperation with the market-making community in Canada to see how we can incent their participation in our markets to a greater degree than happens currently. This will be with a view to ensuring there is a meaningful, two-sided market for every security listed on the Canadian Securities Exchange. It is a real challenge for junior markets – and this is true around the world – to provide for appropriate levels of liquidity for early stage companies, but we have a dealer community in Canada that is working with us to come up with solutions.
8. How do you continue to define the CSE in 2016? How does it differentiate itself from the other exchanges that small-cap and/or early stage companies might consider when they are thinking about going public?
It may sound like a cliché, but we always bring everything back to our overall mission, and that is to deliver the lowest cost of public capital to entrepreneurs looking to tap the Canadian equity markets. With that very clear mandate in mind we can measure all of the activities we are contemplating and if we are making progress in that direction then we know we are on the right track. We believe that not just given our fee structure but the overall cost structure for companies listing on our exchange, that they are in fact achieving the lowest cost of public capital as things stand currently.
We also need to continue to emphasize that the CSE serves entrepreneurs and that we have built an ecosystem that puts them in the middle. We are an independent exchange guided by the voice of the entrepreneur and that truly sets us apart.
Volatility in pricing and trading volumes are par for the course on any marketplace. What stood out in 2015, however, was not the usual swings in market sentiment but rather the consistency with which good news stories were able to be found on the CSE.
Despite a challenging year for many publicly listed firms, especially in the small cap space, in 2015 the Canadian Securities Exchange saw record trading volumes (2.47B shares traded), the highest number of listed securities on the exchange (316) and 273 financing deals that raised a total of $194M.
The details of the performance of the CSE in 2015 were shared as part of their latest news release. While the numbers confirm the exchange continues to grow, the figures also validate the model that the CSE offers to emerging and early stage firms who prioritize strategic growth.
CSE Achieves Major Milestones
In addition to the stats and figures, 2015 was an important year at home and internationally for the CSE.
Within the Canadian DIY investor space, the integration of all major Canadian discount brokerages meant that self-directed investors could directly access CSE-listed securities from any Canadian online brokerage.
Internationally, continued dialogue with international business leaders at the World Economic Forum sessions in Toronto and Miami, a CSE Day event with the OTC Markets Group in New York City as well as a memorandum of understanding signed with the Taipei Exchange demonstrated the CSE’s commitment to building an internationally recognized venue for listings and for innovation.
A Cause for Optimism
As the “Exchange for Entrepreneurs,” the CSE knows that key ingredients to success are resilience, innovation and of course, optimism.
Publicly listed firms who have made the switch to listing on the Canadian Securities Exchange have already reaped the benefit of lower operating costs. This, in turn, has provided these and other CSE-listed issuers with the resources to focus on strengthening their businesses.
By recognizing and responding to the need for a more efficient platform to raise public capital, the CSE looks to 2016 with a renewed sense of optimism. Like 2015, it seems that if investors and entrepreneurs are looking for good news in the markets, they may not have to look much further than the CSE to find it.