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.

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.

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.

It is fitting that in an Olympic year, the motto of faster, stronger, higher could also characterize the year that was at the Canadian Securities Exchange.  After an exceptional performance in 2015, the CSE managed, yet again, to finish 2016 on a record-breaking note.

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 19^th) 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.

We are excited for the launch of the National Angel Capital Organization’s new publication! Here is James Black of the #CSE with Yuri Navarro, CEO of NACO.

A photo posted by Canadian Securities Exchange (@canadiansecuritiesexchange) on Oct 5, 2016 at 12:13pm PDT

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.

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.