Category Archives: CSE Performance

CSE 2021 First Half in Review with Richard Carleton

Stock markets around the world continued to enjoy high levels of investor participation and buoyant prices in the first half of 2021.  How happy are you with the first six months of the year, and what were some of the highlights in terms of issuer accomplishments and milestones achieved by the CSE team?

We are delighted with what we have experienced in the first six months of 2021.  First and foremost, the CSE team continues to perform at a very high level, notwithstanding the ongoing impact of the pandemic on day-to-day operations at our offices in Vancouver and Toronto, plus our team members in Calgary, Montreal and elsewhere.

What I’m particularly proud of is just how well the team has pulled together and continued to maintain a high level of service for the trading, listing and market data operations of the exchange.

One noteworthy trend we are seeing is a steady rise in retail trading activity.  The first quarter of 2021 brought record levels of turnover for the CSE, and indeed for the broader Canadian public equities market.  This is also the case throughout North America, and there has been a particular focus on smaller capitalization stocks.  Things calmed down somewhat from April but we are operating well ahead of our targets for the year.

Speaking with my colleagues, and particularly those in the discount brokerage industry, there has been a significant demographic shift in who is opening brokerage accounts these days.  In Canada, a record number of new accounts were opened last year, and they tended to be opened by people in the 20 to 40 demographic, many of whom were investing in the stock market for the first time.

Like their parents, they buy bank stocks and other large-cap Canadian and US equities.  But they’re also interested in sectors where the CSE is particularly strong – cannabis, psychedelics, e-gaming, blockchain and cryptocurrency-related securities, as well as health tech, which obviously is an industry sector that has been in focus.  And, of course, the mining industry, whether it’s precious metals exploration companies, because of the strength in gold and silver, or the “green” metals, such as copper, with the continued electrification of economies around the world.  We’ve welcomed many new companies to the Canadian Securities Exchange over the last five years in all of these categories.

One of the other important developments is a significant rebound in valuations for US cannabis companies listed on the Canadian Securities Exchange.  That has two principal outcomes for us.  One is that existing issuers have been successful in raising additional capital.  In January, we saw a record amount of capital raised by our issuers, totaling well over $1 billion.  The majority of that was cannabis issuers raising money to fund acquisitions or expand operations organically, as more and more US states legalize cannabis for medical and recreational purposes.

The other is that we saw a number of cannabis companies come to the CSE that had opted to remain private until they saw this rebound in valuations.  We’ve had some very meaningful companies join the exchange in the last little while from the United States.

As you just highlighted, it is not uncommon for CSE issuers to collectively raise $1 billion or more in a single month.  What new financing developments or trends are you seeing at the moment?  Are there any industry sectors, capital sources or modes of financing that stand out?

I just touched on some of these, but one of the trends we saw beginning to build in 2020, which has reinforced itself in 2021, is a lot more prospectuses being filed than before.  Instead of going public by way of a fundamental business change or a reverse takeover, we are increasingly seeing the traditional IPO selected as the preferred means.  That’s a positive trend because companies come to market with what tends to be better distribution of their securities, a larger shareholder base, and a shareholder base that is actually invested in that specific story.  Post-listing price performance also tends to be a little better than for companies that come to market by way of RTO.

Similarly, existing issuers are raising large amounts of new capital, and instead of being done by way of private placement – although the private placement is still an important means of sourcing funds – we are seeing issuers file shelf prospectuses to facilitate broader distribution for their transactions.  That is a very positive development because when shares are qualified under a prospectus, they are free trading immediately, and that tends to enhance the liquidity profile of the company.

Work to establish a senior market tier for larger issuers is moving forward.  What is the status in terms of steps left and an approximate timeline?  Also, what benefits will the senior tier bring for issuers on the CSE?

This project has been progressing for a while and involves not only creation of a senior tier but also the first significant rewrite of the rulebook for the CSE’s small-cap issuers.  We’ve been working for a number of months with our regulators in British Columbia and Ontario on the provisions and are close to publishing our proposals for public comment.  The comment period will likely last for 45 days and we’ll be seeking input from interested individuals, law firms, accounting firms, investment banks and, of course, our issuers. We look forward to having these new provisions in place ideally at some point in the fall.

With regard to benefits for the companies in the senior tier, there are a number of them.  I’ve spoken in the past about eligibility for margin relief under IIROC rules.  It will be up to each dealer to decide if they will recognize margin eligibility for a particular security on the basis of price history and volatility.

It also influences dealer capital structure, because dealers who have securities in inventory that aren’t margin-eligible have to maintain a capital reserve against them that’s one hundred cents on the dollar.  They get relief from that requirement if the securities are margin-eligible; that reduces the cost of financing during a bought deal, for example.

We’ll be working with the index providers to ensure that companies are eligible for inclusion in Canadian and US indices by providers such as MSCI and FTSE.  And we’ll be looking at rules around eligibility for individual stock options.  A number of companies in the senior tier would meet the Canadian Derivatives Clearing Corporation minimum standards – exceed them by a good measure, in fact – for market capitalization and liquidity to have single-stock options trade in relation to their shares.  That has the potential to improve liquidity in the cash market, and again is just part of the growth of the Canadian Securities Exchange and the companies listed with us.

What will the benefits of a CSE senior tier be for investors?

For investors, what we hope ultimately to see is the opportunity for lower costs.  We are building toward a time when people will be able to have these stocks in a margin account, though, as I say, it is up to each individual investment dealer as to whether they will permit that or not.  But at least it will create that possibility.

We also think a senior tier can attract additional institutional investors so that CSE issuers see even better liquidity, broader interest and more analyst coverage.  It really is us moving forward alongside our issuers.

The CSE welcomed some new members to its board of directors in the second half of 2020, and you’ve added to other parts of the team as well.  Is there anything new from a policies or capabilities perspective you’d like to highlight?

Our work continues on delivery of a full lifecycle of services for tokenized securities and to this end we’ve made a series of investments and established a variety of partnerships.  We’ve had very productive meetings with regulators recently which give me a high degree of optimism that we are on the right track.

To recount the specific benefits, it is really a situation where everyone has the chance to win.  We look to make a significant dent in clearing costs for investment dealers.  For investors, we look to bring new categories of asset classes into the public market as investments, and in particular we think a number of these could be income-producing investments.

Most importantly for issuers, we believe we can reduce their cost of capital.  I’ve spoken in the past about the opportunity to have mining royalties brought to a public market, which has the potential to dramatically cut the cost of capital for an issuer.  It’s an alternative to entering into private equity arrangements with one of the handful of institutions around the world that provides that kind of financing.

We are also very much looking at our market structure, which you can think of as the plumbing for our equity trading system, with particular importance on the need of dealers to cut their cost of managing buy and sell orders for CSE listed companies.

The explosion of activity and support we’ve had for our market in the latter part of 2020 and into 2021 has had a meaningful impact on the operations and cost structure of a number of discount brokers.  For example, you will see very shortly that we are making progress with Wealthsimple in adding securities to their commission-free program.  This is something we have had to work on quite carefully with Wealthsimple to ensure they can do this on a cost-effective basis.  There is a lot going on and the team is going to be very busy throughout the rest of the year.

The CSE undertook some major awareness initiatives in the first half of 2021.  The Cannabis Investor Series was broadcast each week during the month of May and followed successful multipart series on health tech and plant proteins.  Talk about the benefits and what comes next.

It’s really two-fold.  The first is that we obviously want to be seen as a trusted source of information for investors in particular market segments.  And because of the relationships we have with thought leaders and entrepreneurs, we have the opportunity to pull together some very compelling content and fill investor needs for more information about these particular industry sectors.

The other side of these series is developing closer working relationships with the executive management teams of the issuers and prospective issuers and thought leaders in different industries.  There is no substitute for a personal relationship when you are looking to overcome hurdles and build more business or attract additional listings, and the same goes for further establishing the reputation of the Canadian Securities Exchange as a trusted provider of listing services to the entrepreneurial community.
It is great to have an opportunity to provide that education and more information for investors, but we also enjoy the opportunity to work very closely with existing issuers and potential issuers.

Continuing to build the roster of issuers from overseas and make foreign capital aware of CSE companies is important for your team.  Talk about related plans, and why companies outside of Canada should consider a CSE listing.

We’ve all been working from home for a year and a half but when we are finally able to travel again we will do so extensively.  In the meantime, we have been leveraging various communications technologies to work with different industries in different parts of the world.

Clearly, in the cannabis space we carved out a great reputation – first by working with the industry in Canada, and then to share in the growth of the industry in the United States.  And because of that we attracted entrepreneurs from Israel, from South America, from Asia, from Europe, and it has cemented our reputation as the go-to place for entrepreneurial capital for the cannabis industry globally.

Because many of the issuers were backed by funds that are also prepared, for example, to look at investments in the psychedelics space, we are seeing companies in new sectors come to the CSE from beyond Canada and the United States looking to source Canadian public capital.

I’d also highlight the renewed interest in mining.  Mining was our largest source of new issuers in 2020 and that trend has continued into 2021.  It is one of the strongest, if not the strongest, individual sectors for us in terms of new listings.  Interestingly, we are seeing a lot of interest from Australia.  The Australian mining industry has a tradition of raising some of its capital in Canada, though historically it’s a bit more aligned with the capital markets in London.

What we are seeing now is junior exploration companies from Australia more seriously considering Canada as a potential source of capital, in part because the Canadian capital markets are well equipped to service exploration companies of all kinds.  As a Canadian reporting issuer you also have access to the United States through various prospectus exemptions that are hard-coded into the Securities Act in the US, as well as the opportunity to build a US shareholder base and US liquidity, that may include a quotation with the OTC Markets Group.

When we talk to issuers from outside of Canada who are looking at Canadian markets, the key thing is the expertise of the entire ecosystem for early-stage companies.  The CSE facilitates access to those markets in Canada but also the ability to bring in investors from the United States and beyond.  It really is a very powerful proposition compared with private equity alternatives or go-public transactions in countries where costs may be high and asset valuation and liquidity may not meet the requirements of the entrepreneurs.

With vaccination rates climbing quickly in Canada and provinces relaxing restrictions, what planning is the CSE doing to align with the shift back to more “normal” living conditions?

It will be a staged effort.  We are headquartered in Ontario and it has only been in the last few weeks that we have come out of hard lockdown, but serious restrictions on office occupancy remain.  We are going to maintain the work-from-home situation in British Columbia and Ontario for the remainder of the summer.  As September approaches, we’ll have a look and see where things are with the local regulations and our own staff and the level of comfort with returning to the office.

I think some of us who are fully vaccinated are likely to get back out on the road over the course of the summer and begin meeting with people on a face-to-face basis, even if it’s just on a comfortable patio somewhere.  And we’d certainly like to get back to the United States, as there is lots for us to do in that market.  We’ll obviously have to take it one step at a time as we see what governments have in store for us regarding border re-openings, interprovincial travel and other restrictions.  We’re paying very close attention to everything and considering our best path forward.

Year-End 2020 Interview With Richard Carleton

Earlier this month, CSE CEO Richard Carleton sat down with Peter Murray of Kiyoi Communications to recap an eventful 2020 and discuss the coming year for the exchange.

Scroll down to read the full transcript of Part 1 of this interview. For ease of navigation, a list of hyperlinked topics is included below.

1. Leading through COVID-19

2. The role of Initial Public Offerings (IPOs)

3. What was funded in 2020

4. CSE’s contribution to the mining industry

Leading through COVID-19

PM: We spoke in the summer about leadership in the COVID-19 environment. Do you have any new observations to share from the past six months?

RC: The themes are basically the same as we talked about over the course of the summer in that we have done an excellent job – and not just at the Canadian Securities Exchange but the securities industry in general – to provide a high level of service while dealing with the staff dislocation caused by the lockdown orders, bans on non-essential travel, and so on.  That has certainly continued through the fall and now the winter.  We have a small team onsite in Toronto, primarily on the technology and market operations side.

We have transitioned most of our business development and education capabilities – all of them really – to virtual events.  And we concluded in late 2020 the Mining Over Canada project where we created more than 60 hours of content over the course of five or six weeks, which is available on our YouTube channel and various other social media platforms.  That was a wonderful collaboration with thought leaders and issuers from the mining industry.  It was a tremendous amount of work and kudos to Anna Serin and her team for putting the program together.  I think people in the mining industry really took note of our encouragement and support for the sector and we look forward to building on those relationships in 2021.  The landscape continues to be very favourable for mining and it’s a sector of the market we have high hopes for this year.

The role of Initial Public Offerings (IPOs)

PM: IPOs have gone from being very infrequent just four years ago to a listing approach of choice today.  Talk to us about how companies are coming to market and what the CSE feels the most efficient approaches are.  Also, are there any misconceptions that need to be set straight?

RC: The IPO was almost dead three or four years ago, and as you mentioned we now see the IPO as an increasingly common route to market.  I think there are a few drivers behind that, but every situation is unique, and for me to say the IPO is superior to the RTO in all circumstances would not be accurate.  Each company has to figure out in the context of their financing what the lowest cost of capital is, what approach will provide the best post-listing liquidity profile – there are a lot of considerations that go into it.

But historically, the concern has been that the IPO takes longer, costs more and introduces significantly more risk into the transaction because of the time it takes from the decision to launch the IPO to actually getting there.  There is also the side benefit that if you do an RTO and are able to get the growth capital required through a private placement supported by a relatively small number of investors, the management team is not having to lose focus on the day-to-day business of the company as they might spending time on the road selling the securities being qualified by the prospectus.  That is a significant consideration for some companies when they decide to do an RTO.

I think it is becoming better understood that there are a number of dealers who are in a position to handle IPOs and they have a lot of investors in place ready to support certain types of companies.  As a result, their sales effort may not be as challenging as it has been in previous market cycles.  And I think post-listing price performance and liquidity can be better with an IPO because you have investors who considered the company and have made the decision to invest in it.  With an RTO, the target can be in a completely different industry.  We  saw a lot of companies that had been mining companies and turned into cannabis companies overnight.  The original shareholders bought into a mining company, not a cannabis company; that can create an overhang that impedes price out of the gate.

So, there are many different considerations.  I think it is healthy that we are seeing more IPOs because that gives people broader access to investment opportunities.  You don’t have to be an accredited investor to invest in securities that are being qualified by a prospectus, and the more people who are able to participate in the growth of these companies, the better off and the healthier the public capital markets will become.

What Was Funded in 2020

PM: The stock market in general was robust through much of 2020.  CSE data shows financings and trading volume in particular at strong levels for yet another year.  Walk us through some of the numbers, and also discuss some of the internal achievements that people might not necessarily be aware of.

RC: The principal takeaway from the numbers is that financing activity was extremely healthy for the year beginning around late April.  That continued through the course of the summer.  There is often a drop-off in July and August, but in 2020 there was no such effect.

As I mentioned a moment ago, from a dollar perspective the cannabis industry was the largest fundraiser on the exchange.  However, in terms of the number of individual financings, the mining industry was by far the leader.  It’s not surprising, given concerns about incipient inflation brought about by the enormous monetary creation by central banks in developed economies.  As a result, we have seen a tremendous amount of investment activity in the precious metals space.  There is also the expectation that coming out of the pandemic, governments will invest significant amounts in infrastructure, and that means commodities such as iron, copper and other components of steel are going to be in high demand.  We are already seeing spot prices of these commodities increase quite nicely.

There are also concerns about supply chains, where people would prefer to source materials from jurisdictions that are more politically stable than others.  So, people looking to rationalize supply chains and shorten their delivery cycles are encouraging a lot of activity in the North American mining space in particular.

PM: Let’s look a little more at this continuation of strong financing activity on the exchange.  Aside from mining and cannabis, was their notable investor interest in any particular sectors?

RC: For obvious reasons healthcare technologies, and telehealth in particular, are industry categories in which companies performed very well over the course of the year.  It’s not something we would have predicted to that extent going into the year, but when the pandemic began to really take off it was a timely area for these companies to be in.

As far as psychedelics go, we have around 30 companies pursuing different business opportunities in the space.  We first began to hear rumblings in 2019 that people were going to be looking to advance the cause for psychedelics, particularly as a treatment for substance abuse, anxiety and depression.  I’ve had the opportunity in my position to learn from the industry’s thought leaders and the takeaways are fascinating.

There is a meaningful body of clinical research dating from the 1920s through the 1950s for substances such as LSD, psylocibin and ketamine.  The clinical indications were incredibly positive for some of these therapies on depressive illness that had resisted other kinds of treatment.  It was really the war on drugs that pushed these substances into the background and ended research into the space for the last 70 years.  We are now in a position where researchers will be able to continue that work.  I’m confident that we will see supervised therapies involving these compounds achieve important breakthroughs on multiple illnesses that have been very challenging for traditional pharmaceutical companies to appropriately address.

PM: The growth in aggregate market capitalization on the CSE in 2020 was exceptional, and as of early 2021 it has surpassed $50 billion.  Walk us through the reasons for the increase and your thoughts on growth in the years ahead.

RC: For us, the significant increases in market capitalization are almost entirely due to the US multistate operators in the cannabis sector.  The top ten operators in the United States are listed on the CSE and they contribute a significant percentage of that $50 billion.  Curaleaf, which is our largest company by market capitalization, as well as by revenue and some other measures, passed $10 billion in market capitalization just the other day.  It’s fascinating to see the growth in these companies.

It’s going to be interesting with the political changes in the United States, with the Democrats now controlling the Senate.  A lot of these companies have been on a tremendous run on the belief that the Biden administration will oversee liberalization and potentially the de-scheduling of cannabis from the Controlled Substances Act.  My take is a little less bullish. I think there will be liberalization of banking and potentially tax measures associated with the industry, but I don’t believe that either Mr. Biden or Ms. Harris have full support from their party to make new cannabis laws a central piece of their legislative program.  I think a number of longstanding issues will be addressed, but I’m not sure we are going to see full-on de-scheduling of cannabis in the United States, certainly during the first two years of the administration.

In the meantime, progress continues at the state level, with New Jersey having voted to legalize, and New York and Connecticut appear on track to legalize cannabis for adult use in the coming year.   We’ll probably see recreational legalized in Pennsylvania at some point in the next year or two.  These are really big populous states, and the companies that have real scale will have the opportunity to expand their businesses as a result of work at the state level.  These companies will likely continue to grow at significant rates.

CSE’s contribution to the mining industry

PM: I want to go back to Mining Over Canada, as there was so much to learn from the series, and it will have significant educational value for investors for years to come. Talk to us more about how it developed internally and some of the insights that came out of it.

RC: Mining Over Canada was really the culmination of other virtual events we had done earlier in the year.  One of the things that struck us early on was that everyone is working from home, so these highly respected investors and company leaders, they are available – we can call them up and get 15 or 20 minutes for a video segment with them.  I think back to an interview that our James Black did with Howie Mandel early in the pandemic in support of Howie’s charity, which helps provide personal protective equipment to healthcare professionals in North America.  James was thanking Howie for his time and he said, “Hey, I’ll give you as much time as you want.  I’m just here, you know.”

We had a similar experience with Mining Over Canada.  We approached a number of thought leaders – whether it be analysts, investors, or leadership at our issuers – and they were extremely cooperative and generous with their time and guidance.

One of the things we really wanted to help emphasize is just how important the mining industry is to the Canadian economy, not only in historic terms but in the present day as well.  And how Canada can leverage its leadership in public finance for the industry to service the wave of demand coming from the industry.  Whether it’s significant increases in infrastructure, desire to shorten supply chains, new demand for minerals brought on by the electrification of the economy – mining is going to be at the forefront of a lot of thinking and investment in coming years.

Check out Part 2 of the interview here.

Year-End 2020 Interview With Richard Carleton Part 2

Earlier this month, CSE CEO Richard Carleton sat down with Peter Murray of Kiyoi Communications to recap an eventful 2020 and discuss the coming year for the exchange.

Scroll down to read the full transcript of Part 2 this interview. For ease of navigation, a list of hyperlinked topics is included below.

1. Changes at the board level for the organization

2. Outlook for 2021

Changes at the board level for the organization

PM: Thomas Caldwell stepped down as Chairman of the CSE’s Board of Directors in September after spending almost eight years in the role. Talk about his contribution to the Exchange as an investor and also as Chairman. How will he continue to support the Exchange’s efforts going forward?

RC: I think it’s fair to say that the Canadian Securities Exchange would not exist in its present form without Tom’s leap of faith back in late 2012 to lead an investment round that provided the exchange with the capital required to continue to offer its services.  In his capacity as chairman, Tom was a relentless advocate for the CSE in his work and with his contacts, which of course are incredibly broad in the exchange world.  He is tremendously supportive of our management team and very inspirational with his “relentless optimism” as he calls it.  His energy, his commitment and his passion for the business were an inspiration not just to me, but to the entire organization.

Tom is not far away, because he is the chairman and principal of Urbana Corporation, which is the largest shareholder of the Canadian Securities Exchange.  In that capacity, we will continue to look to Tom for the benefit of his guidance and wisdom, and his continued support for our organization in its work.

PM: Other changes were also made to the board, with four new members elected at the annual general meeting. Tell us about the new board members, why the time was right to welcome them, and what it means for the CSE.

RC: There were a couple of drivers at the annual general meeting in September, which is when these changes took place.  The first was that we entered into  new recognition orders with the Ontario Securities Commission and the BC Securities Commission, our two principal regulators, and those orders required the exchange to have an independent chairperson.  Mr. Caldwell, by virtue of the shareholding of Urbana, was not considered an independent director of the organization.  Steve Blake, a continuing member of the board, graciously agreed to take on the responsibility of serving as chair.  Steve was elected by the shareholders at the AGM and we look forward to an excellent working relationship with him in his new role.

In addition, we were shorthanded, as former board member Mary Anne Palangio had become our chief financial officer earlier in the year, so we had a vacancy to fill.  And we also had some directors who had indicated to us that they were looking for different challenges, and they moved on with our best wishes.

Our new directors include Hema Barkhouse.  Hema is in the treasury group at Canadian Tire, where she is a senior officer and  has experience in accounting and finance in a public company setting.  Hema is chair of our audit committee and we look forward to her advice in managing the financial situation of the company.

Eric Sites is a resident of Chicago.  He works with Horizon Kinetics, which is one of our significant shareholders.  In his work with Horizon Kinetics, he has overseen investments in a number of exchanges around the world, so Eric is a wonderful addition to our board, both to advise management and potentially to open doors for us as we spread our wings internationally.

Brendan Caldwell, Tom’s son, is a new member of the board.  Brendan has been very closely aligned with his father at Caldwell Investment Management as well as Urbana Corporation.  Brendan also has worked with exchanges around the world and is extraordinarily knowledgeable about the space.

And last, but certainly not least, Michael Bluestein is a lawyer who founded a firm called Corporate Counsel just north or Toronto.  Michael has been a marvelous supporter of the Canadian Securities Exchange in his practice and he is the chair of our regulatory committee, which oversees the policymaking work of the exchange.  Michael is someone we have known well for quite a while.  We look forward to working together closely, particularly on our new listing rulebook.

Outlook for 2021

PM: Let’s look at the CSE’s plans for 2021. What goals have you set for the team? And what initiatives, both ongoing and new, will the CSE be focusing its time on?

RC: Goal setting in this space is always a little tricky.  We are subject to the whims of the market and even if we think at the beginning of the year that we are going to be focusing a lot of energy in a particular industry sector, we may find that investors decide to support different sectors in the marketplace with their investment and trading.  So, we can’t get too granular in the goals we set for the organization.

Clearly what we are seeing, though, is a significant expansion in trading activity, not just on the CSE but across Canada. Earlier in the year we were seeing roughly a billion shares a day trading across all markets.  And over the last six weeks or so we have gone to 2 billion.  What I can say, as someone who has been around this business for more than 30 years, is that this tends to be the pattern.  Canada will turn over X number of shares, and without warning it goes to 2X.  The interesting thing is that it happens without any real warning, and then it becomes the new baseline.

We had our previous record burst of activity in 2017 and 2018, which was driven by the US cannabis companies that joined the CSE and the extreme level of investment interest in them.  The other markets were not in line with those increases, but this time they are.  Everybody  has seen a doubling in turnover.  Did we see that coming?  Not really.  Volumes were healthy over the summer and we noticed increased retail participation, and that’s true on our exchange and some of the other exchanges catering to early-stage companies.  

Obviously, we are going to continue to explore and expand our use of social media platforms and virtual sessions, to get our message out and engage with as many people as we can, whether it is issuers or investors or other stakeholders.  We have learned a lot about what works and what does not work and we’ll apply that knowledge to our programs this year.  It is certainly less expensive than being in an airplane all the time and you can reach out and touch a lot more people this way as well.  It is going to be a permanent part of our programs moving forward and I think that will be the case for almost every industry.

That having been said, as we get later on in the year, I think there are a lot of folks who are going to want to see us face to face so my expectation is that we will be on the road quite a bit from October.

Overall, the picture appears quite robust from a listings perspective.  Certainly, the mining industry is in good shape, as it was our strongest sector in terms of new listings in 2020 by number of individual financings.  By dollar total the cannabis industry is still the champion by a wide measure because you have a number of issuers that raised very large sums of money last year.  We are also seeing more activity in the technology sector, some of it oriented toward health care.  Communications has obviously been a big theme.  And we have also made an impression in the growing psychedelics market.

PM: What other growth opportunities are there for the CSE over the longer term?

RC: We are going to continue to look at different international jurisdictions.  Listing on the CSE is a very cost-effective means for companies to access not just the Canadian public capital markets but the US private placement market as well.  By virtue of being a Canadian reporting issuer, without having to also undergo the pain and expense of becoming a reporting issuer in the United States, it really is one of the great bargains in our world.  We’ve had good success attracting companies from different countries from around the world.  And we’ve seen real interest from different Asian markets over the last six months.  It’s been challenging to do the kind of business development we’d like because we are all locked down.  But I can see as we move out of the pandemic that we’ll begin to capitalize on that interest from Asia.

I’d also highlight Australia, which is obviously a very large mining market.  The Australian miners have always had a lot of respect for the ability of Canada’s public markets to provide financing.  And we’ll be exploring ways to facilitate Australian company access to Canadian public markets through a CSE listing.

PM: Any final thoughts on the year ahead or topics we have not touched on so far?

RC: We are continuing to work on the delivery of a clearing and settlement system for tokenized securities.  I always caution that we are not talking about bitcoin or ether or other cryptocurrencies, but securities which use the smart contracts originally developed by those in the blockchain and cryptocurrency world and applying them to solve problems in the cash equities world.  I have been heartened over the course of the year, as we have attracted a number of partners to work with us on achieving this goal. These organizations are expert in different components of service and have existing customer relationships with issuers and the Canadian dealer community.  We’ll be talking more about this as the year progresses and hope to be in a position to get it into people’s hands later in 2021.

 Check out Part 1 of this interview here.

Interview with Canadian Securities Exchange CEO Richard Carleton H1 2020 Review

First of all, given that Canada remains in varying phases of lockdown due to COVID-19, how is the CSE team doing? Is everyone healthy and adjusted to working on a different basis for the time being?

Yes, everyone is in fact healthy and team morale is excellent. Right now, we have a small number of people at the head office in First Canadian Place in downtown Toronto – one IT person and usually two members of the market operations team, sometimes augmented by our software development group. They are all driving to the office rather than taking public transit.

The building has strict rules in terms of wearing face masks in public areas and distancing in the elevators, but very few people have come back to the office. We are definitely making good use of the various video-calling applications available, so teams are getting together on a daily basis for updates, to share information, and so on. And I’m pleased that people also get together for an occasional social event via video conference. I hear there may even be some games of chance involved one night of the week.

In any event, things have worked out well, and I say that knocking on wood furiously. There was obviously a lot of pressure on the trading systems in late March as Canadian markets experienced record levels of message traffic and close to record levels of trading activity. We weathered that storm quite nicely with a distributed workforce, which is very gratifying.

I will say the fact that many of our current team members were with the exchange during the global financial crisis in 2007 and 2008 really helped us respond to the various challenges, during March in particular. We knew what to look for and what the bottlenecks in the system were likely to be, and we had our eyes out for those issues. I can remember sending an email one Sunday in March saying we were going to see the market really come off the next day and thus needed to review our circuit breaker rules and have all the notices drafted in advance. We had some extra staff in the office that day just in case. We are very happy with the way our teams and all the machines we rely on rose to that particular challenge.

How did the exchange react in March when it became clear to Canadians that special measures would need to be taken to cope with COVID-19?

We were a little ahead of the curve in some respects. Many of us were at the PDAC mining conference in Toronto, and as it became apparent that a number of PDAC attendees had contracted COVID-19, we placed ourselves into voluntary self-isolation right away. As a result, we were about a week ahead of the official lockdown orders, and that put us in good shape because we had already done most of the things we would have been required to do later in the month.

As well, we have various protocols in place that have been rehearsed over the years. These anticipate the Toronto office not being available or the Vancouver office not being available and having to distribute the workload to people working remotely. We had a pretty good idea of what needed to be done.

Now, I don’t think any of us ever anticipated that we would be working like this over the course of many months, but, as I say, we had thought through this in advance and done some rehearsals, so it was really just a case of dusting off the plans and executing them.

The head office sounds quiet for the time being, but what do you anticipate in terms of gradually returning to “normal” or what you envision as your new normal? And what does Richard Carleton’s typical day look like?

People ask me what reopening is going to look like for us, and my answer is that we have been functioning throughout. We have been conducting business across all lines, whether it is trading services, market information, or listings. And as I mentioned, we are quite pleased with how everything has worked. Activity, particularly in corporate finance and listings, has been robust over the past couple of months, to say the least.

With things going as well as they have been, we are in no rush to have everyone return to the offices in Toronto and Vancouver. One of the issues is physical capacity in elevators, because we could undermine our productivity lining up to go upstairs and downstairs multiple times a day. Another issue is that many of our employees use public transit to get to the office, and people are uncomfortable with regular use of public transit right now. I don’t see that opinion changing until we get a better handle on infection rates, particularly in Toronto.

One other thing to consider is that some on our team have school-age children, and it’s not clear at this point what is going to happen in Ontario or British Columbia. Will school be back five days per week? Will it be a partial return? Will significant levels of homeschooling continue? Those are all things we have to be sensitive to when thinking about any return. My sense is we are going to be at less than full capacity, certainly at First Canadian Place, for the foreseeable future.

As for my day, it is kind of interesting. In normal times, I have a lengthy commute morning and night, and that has been replaced by walking to my basement to begin the workday. I have always been an early riser, and there has been no change there. I began using that extra time in March to give people a heads-up on what to expect each day. I scan the global financial press and other information sources every morning and send a note to all staff with thoughts on what we should expect and try to have that out no later than 7:30 in the morning. After that, my workday starts.

Before and After “COVID Hair”

 

How has this environment influenced activity at the exchange, in terms of trading, new issues, the new-issuer pipeline? Are there pluses and minuses?

We saw a tremendous amount of trading activity in March as stocks collapsed and then returned in record fashion in all markets. But financing was slow in April as a result of the uncertainty we saw in late March. There was a strong rebound across all of our business lines in late April and into May, and that has continued right through into July. We are trading on sunny July days at levels that I would have said you were crazy if you told me five years ago that these were the sorts of numbers we were going to be doing.

It may be a function of retail investors playing such a large role in our market. Even if people are getting out a bit more than before, they still have time on their hands, so they’re doing a lot of trading from home. That’s clear from the numbers we see on the turnover front.

On the corporate finance side, our numbers on a year-over-year basis are down a bit in terms of capital raised, and that really was a function of April being quiet. But there have been more deals. So, a little less money, but probably 25% or so more individual financing transactions being completed.

I think we can explain that in a few ways. One is that we obviously don’t have a long list of cannabis issuers raising large amounts of money, as was the case at this time last year. That having been said, I will point out that we are starting to see some of the big multistate operators listed on the CSE raise meaningful amounts of capital again, which is a good sign for the sector.

We are also seeing a lot of interest in precious metals exploration, energy metals, rare earths, and other commodities. Generally speaking, the amounts raised to fund exploration projects are smaller than those that the big cannabis issuers were raising in recent years.

I think through the end of May, CSE issuers had closed nearly 450 transactions, which is more than three per day. New listings have also remained healthy, with April being the exception. And the applications pipeline suggests a continued strong flow of new issues over the next few months. I am a little surprised by that, but we obviously are all very pleased.

Let’s talk about some of the numbers from the first half of 2020 as a whole, and then how the first quarter and the second quarter differed.

Trading volume in the second quarter was considerably higher than in the first quarter due to the market volatility. The corporate finance numbers are a bit skewed, because one of our US cannabis issuers raised US$300 million in January, so the total dollar amount favours the first quarter over the second. But since activity in general started to rebound in late April, the number of financings coming to market has really increased. I’d also say there has been a shift in capital formation from the cannabis space to the mining space, and good interest in technology as well.

I’ll point out again that these are not companies that will raise tens or hundreds of millions of dollars at a time. So, more money raised in the first quarter and really positive in terms of the number of transactions being completed throughout the first half.

One other important number I would highlight is IPOs completed in the first half. There were 17 IPOs across all Canadian exchanges, if you disregard CPCs and SPACs, and 15 of those took place on the CSE. Considering the slow pace of IPOs just a few years ago, this is great to see for Canadian financial markets. The majority of IPOs on the CSE were in the mining sector, which I think is also worth noting.

The creation of a senior tier at the CSE is a topic of importance to both existing and potential issuers. What can you tell us about progress toward establishing the new tier?

We are deep in discussion with the corporate finance staff from the BC and Ontario securities commissions. I am very pleased with the progress we have made to date, and we will look to publish proposed rules for the junior and senior tiers as soon as we have come to an understanding on all of the issues with the securities commissions. When we reach that stage, there will be an opportunity for members of the public, corporate finance professionals, and our issuers to provide specific comments on the proposed rule changes. Things are going well, though, and it is pretty much the biggest undertaking we have going over the course of the summer.

Can you update us on the clearing and settlement platform? That is also a huge undertaking, and it involves a wide range of parties in the financial community who do business with the exchange or for whom the exchange facilitates business.

We have identified partners who will be extremely important in executing this project as we move into the production phase. We are doing an awful lot of work on it, and this summer will be spent getting to the point where we can engage groups from the dealer and vendor communities to work with us on testing.

Let’s discuss changes in the approach to marketing, as the CSE team spent a lot of time on the road right up until the end of February. That is not the case now, nor for the foreseeable future. What new ideas emerged to help the team adapt and ensure marketing activities remained effective?

We have been very active on a variety of social media channels and have transitioned sales and marketing efforts away from individual meetings and conferences for the time being. We have replaced that with active use of Instagram broadcasts, our YouTube channel, and other online media to engage with our audience. We are at the point where we can begin to assess what is working and what is not.

The nice thing is that these activities are considerably less expensive than the kind of work we were doing before. We can fail fast on them, without significant financial impact to the organization, and direct resources to the channels where we are getting engagement. We have been doing a lot of interviews with thought leaders in emerging areas. One of the popular ones recently has been the psychedelics space.

We have also collaborated with MNP and the Aird & Berlis law firm on a series of webinars on various subjects. We’ve done psychedelics and technology, and we’ll have a cannabis update in August. We have been able to engage several hundred people at a time and are starting to see increasing numbers of subscribers to our YouTube channel and people following live on Instagram. Barrington, Phil, Grace, James Anil, Anna – everyone is getting lots of face time on these channels and engaging with different parts of our constituency.

It has been interesting and a great learning experience, and we are definitely figuring out how to better target our efforts. And it is considerably less expensive than doing things the old-fashioned way, which has been good for our bottom line.

The leadership team at a securities exchange has a somewhat unique perspective from which to observe the national business community. What are your thoughts on diversity among small-cap public companies at the management and board levels?

There is no shortage of data to suggest that management, boards of directors, and senior advisors of Canadian small-cap companies tend to be largely male and largely white, and therefore don’t reflect society more broadly. I look at the Canadian Securities Exchange, and our board and senior management team tend to fall into that category.

I am pleased that our workforce is, generally speaking, representative of the populations of Toronto and Vancouver, so it’s very diverse. And one of our challenges is identifying how we get to a greater degree of diversity in our management ranks, and on our board as well. We need to act in ways that see the Canadian Securities Exchange, in a short period of time, represent the demographic of Canada generally, and our home markets in Toronto and Vancouver more specifically.

Is there a specific role for junior capital markets to play in helping the world overcome the COVID-19 crisis?

That’s a bit of a chestnut. Small business is the engine of economic growth and employment growth and innovation in an economy. But they get to be chestnuts because there is a kernel of truth in them. We certainly see companies looking for different applications, whether they are looking for vaccines, or to lessen the severity of COVID-19 symptoms, or to anticipate outbreaks in areas at risk using combinations of data and artificial intelligence.

There are obviously many things the small-cap community is working toward in response to the epidemic. You never know where breakthroughs are going to come from. But there clearly is no shortage of entrepreneurial energy, and significant resources have been made available to help companies try to solve some of these problems.

Interview With Canadian Securities Exchange CEO Richard Carleton: 2019 Review

The CSE is known to share milestone moments with their newly listed companies, but it also celebrated some major milestones of its own this past year. In addition to its 15th anniversary in 2019, the CSE also celebrated 129 new listings – including three Israeli companies – the signing of an MOU with the Jamaica Stock Exchange, and a growing team of over 50 employees. Scroll on for an exclusive, in-depth interview with CSE CEO Richard Carleton, as he discusses industry challenges from 2019, areas of growth for the CSE, and what’s in store for the new decade.

PM: First of all, congratulations on marking your 15th year as an exchange in 2019. We’ll review some developments in a moment illustrating how the CSE has grown in size and stature. But let’s begin by discussing what it’s like to take a concept built around superior issuer service and grow it into a securities exchange that now routinely attracts listings and capital from around the world.


RC:
The quick answer is that we are not ready to declare victory just yet. Yes, we are pleased, and in some respects, humbled, with the success we have had to date. But we know there is a lot more work to do to provide the best possible listing and trading environment for issuers and investors before we can really feel any significant level of satisfaction.

We still have a lot of work to do on improving access to the CSE from outside of Canada. We also want to engage with the institutional investor community to provide a greater diversity of shareholders for CSE issuers so we are able to expand beyond the traditional base of retail investors who have supported CSE issuers to date. There is still quite a bit of work for us to do to provide that best possible experience for issuers and the investing community.

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PM: Comment for us on market quality. The CSE team has been very successful at establishing relationships on the data side and ensuring easy access for investors to place orders. Are we seeing the hallmarks of a quality market, such as market depth, tight spreads and lower volatility? And what is the CSE doing to continue to enhance market quality?


RC:
We are constantly looking for ways to improve all of the benchmarks of market quality you mentioned, whether it’s spreads, turnover, trade continuity, or other measures. And let’s face it, it is particularly challenging in the small cap space, where companies can be subject to significant levels of volatility.

Again, we think that providing as broad access as possible to all categories of investors in Canada, the United States and beyond is key in terms of improving market quality. The more participants you have in the auction process, the better the outcomes will be for investors, as well as for companies looking for an appropriate valuation of their shares and the ability to conduct financing activities at the lowest possible cost of capital.

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PM: European retail and institutional investors often participate in North American small cap opportunities. What can you tell us about trading access for European investors?


RC:
Canadian and US small cap markets got caught up in a European securities regulator initiative a few years back to limit access to the so-called penny stock market. As a result, most of the bank- and institutional-owned advisors in Europe are unable to provide trading services for companies listed on the CSE, over the counter in the United States, and various other markets that cater to small cap companies.

That said, we have made inroads in improving coverage from the “self-directed” market in Europe, and that has assisted companies in broadening their shareholder base to interested retail and private investors on the continent. These folks have become an important source of capital for our issuers: in the cannabis space, for instance, 15% of the capital raised in 2019 came from Europe. So, people who have conviction are finding a way to trade shares from overseas.

All that having been said, the CSE team continues to work with various platforms and service providers who can manage that order flow into Canada from other parts of the world, and that will be an important area of focus for us in the coming year.

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PM: Let’s look at a few numbers: listed securities up 23% in 2019 to 569, total value of financings down 42% to $3.15 billion, trading volume down 31% to 19.8 billion shares, and  value of trading down 17% to $16.9 billion. Despite these declines in KPIs, 2019 still stands as the second best year for trading and financing in the exchange’s 15 year history. Take us behind those numbers and tell us what you saw and heard to help us make sense of it.


RC:
It’s really quite straightforward. On the finance side, 2018 was the year that the big US multistate operators came into the Canadian Securities Exchange. We saw record amounts of money raised that year, led by a handful of very large US companies. As valuations fell in 2019, companies were not in the same strong position to raise additional capital by way of a secondary offering. It would have represented considerable dilution of the original investors.

We saw a real shift in 2019.  There was a lot less capital raised in the cannabis sector and, secondly, the capital that was raised was through secondary offerings of convertible or debt-related securities issued by existing companies. And I think it’s fair to say that there were a lot of private companies in the United States that took a wait-and-see attitude in 2019 to watch whether valuations for US companies would recover. And if and when they did, those companies would be re-visiting their plans to do a  public offering.

I’m pleased to say that, from the beginning of November, the US cannabis group is up more than 20%, with the positive price performance accelerating in recent weeks. That should be a positive leading indicator for us for the coming year.

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PM: The CSE’s growth has been driven by multiple industry sectors, but far and away the most important for the past few years has been cannabis.  It’s fair to say that this sector ended 2019 with some challenges on its hands. Talk to us about 2019 in terms of the way the market transitioned for cannabis, and what are you hearing that might be of use to those trying to understand where it goes next?


RC:
The cannabis sector as a whole traded with very high correlations through 2019. What I mean is that whether the company was a Canadian cultivator, an extraction company, a US multistate operator, or another type of company, the stocks tended to trade up and down with a very high degree of correlation.

That was a source of some frustration for the management teams of US companies, as many of them were meeting or exceeding their revenue and earnings forecasts. Many are doing really well and expanding their networks into additional states. So, those companies, while they may have a different set of challenges in front of them than do Canadian LPs, have an addressable market that is already significant and will only grow going forward. We are beginning to see support for that theme, and it does look like the correlations are breaking down; companies are being judged more on specific achievements than prevailing sector sentiment.

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PM: What about other sectors? Are there any already shaping up with a particularly interesting outlook as we begin 2020?


RC:
We did a lot of outreach to the esports community last year and we have had success with some listings in that space already. It is a very interesting market. I don’t think it is clear what the most successful investment approach in the sector will be, but I believe investors accept the idea that as time goes on, people will spend more money and time on esports.

But in terms of the number of companies that joined the exchange last year, half of them were gold exploration companies. That was certainly driven by the fact that the value of the underlying commodity increased last year to well above $1,500 per ounce. And after many years of very little activity in the space, we saw a number of get funding, join the public markets and begin to pursue exploration programs. We see that continuing in 2020, in all likelihood, particularly given the backlog of applications to list on the CSE and continued strength in the price of gold. I guess it is kind of getting back to our roots in many respects, as for most of our existence the mining sector has been far and away the largest industry group on the exchange.

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PM: With mineral exploration taking on renewed importance, do you have any thoughts on the Save Canadian Mining initiative and the impact of short selling on the mining industry?


RC:
The issue is not short selling as much as it is abusive short selling. And we already have a lot of rules in place designed to curb abusive short selling. I am concerned that some of the measures proposed, regarded by many as a panacea, may not in fact be the magic bullets they are purported to be.

I think that the first step is taking a hard look at whether our current rules are being circumvented in any way. We certainly don’t lack anecdotal testimony about the evils of abusive short selling. But it is a complicated issue and I have concerns that you could materially affect share turnover and liquidity if we make well-intentioned but poorly applied changes to the short sale rules. As I say, it is a very complicated topic, and to the extent that there is abusive short selling taking place, I believe that it is likely well within IIROC’s ability to address right now without any additional rules.

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PM: The plan to create a senior tier at the CSE was revealed in 2019. What is the status, and is there any interesting feedback you can share with us from issuers, regulators or others regarding this idea?


RC:
Basically, we have completely rewritten the listings manual for the Canadian Securities Exchange in order to effectively create two tiers of issuers. This is designed to reflect the distinctions in Canadian securities law related to venture issuers and non-venture issuers.

Non-venture issuers, who are the more senior companies with larger market capitalizations and complexity of operations, have different rules around corporate governance, financial reporting and continuous disclosure. Timelines for them to report quarterly and annual audited financial statements and other burdens more appropriately borne by larger companies are a good example.

We have a significant cohort of companies which, if they were listed on two of the other exchanges in Canada, would be categorized as non-venture issuers.  We think it is appropriate to put in place a formal framework to ensure that those companies are regulated by us as non-venture issuers, as they are on other marketplaces.

It is important that comparable companies are subject to the same level of oversight and regulation. The companies win because investors know that there is no possibility of regulatory arbitrage or differences in reporting between the CSE and other exchanges. If companies on the senior tier become eligible for margin under IIROC rules, as we are working towards, that will improve liquidity in those names because trading and corporate finance costs should go down.

We have completed the work and are now basically huddled with regulators in BC and Ontario on the final few points. We hope to get clearance from the regulators to soon publish the new listings manual for a 30-day public comment period. If all goes well, we look to implement these new rules shortly after the 30-day comment period expires, and on the receipt of formal regulatory approval from the two commissions.

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PM: What, if any, impact will this have on fees at the exchange? Your fee structure has always been a factor that differentiates you positively from other exchanges.


RC:
We have made some adjustments to our fee schedule for issuers. This is both for applications and for what we refer to internally as hosting fees, i.e. the monthly fees that companies pay over the life of their listing on the exchange. We have established four tiers, which are market capitalization-related, with different levels of fees.

Going into this exercise we knew there were a few governing principles. We knew that we wanted to maintain one of our key strengths from a pricing perspective, and that is cost certainty. So, regardless of how much activity a company engages in – whether it is secondary financings, business changes or another activity – they are going to pay the same to us regardless.

Secondly, we know that as the relatively new kid on the block, we do need to be cost-competitive with all of the alternatives, whether they be exchanges in Canada, or the over-the-counter market in the United States, or some of the venues in Europe that cater to early stage companies. We have achieved that in this exercise, but we still gain considerable resources, both from the growing number of listed companies and the fee increases that have been introduced. It enables us to reinvest in the work that we do on behalf of our issuers in a variety of ways, one of them being to help them tell their story in a number of ways to a market that is very crowded and competitive.

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PM: The second half of last year saw three companies from Israel list on the CSE, the first ones from that country. You signed an MOU with the Jamaica Stock Exchange. How important are international activities to the CSE today, and how do you see them being important in the years ahead?


RC:
Our international activities have largely been driven by our support for and involvement in the cannabis industry. The three Israeli companies that have listed are in different parts of the cannabis space, and we have the same situation with the Jamaica Stock Exchange. There is a significant legacy industry in Jamaica which is in the process of being legalized. It is a low-cost cultivation jurisdiction, but they have challenges locally from banking and other perspectives in listing and trading those stocks. Our work with the Jamaica Stock Exchange is to help Jamaican companies raise capital from Jamaican and CSE investors and have a liquid market in their securities here on the CSE, which is something we are really looking forward to.

In the case of the Israeli issuers, we have done good work with the OTC Markets Group out of New York, collaborating on what essentially amounts to access to North America in a single transaction. Companies that become Canadian reporting issuers and list on the Canadian Securities Exchange, in addition to being able to raise money from Canadian investors, are also able to take advantage of prospectus exemptions in the United States to do private placement financings with US investors. These companies are also able to access liquidity in the US through the markets operated by the OTC folks.

This is a very powerful tool. For a small Israeli company to consider the ability to work in the United States, it is a very big leap, and very expensive, and risky. We can cut a lot of this cost and risk out by providing them access to North America through a CSE listing.

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PM: The CSE does a lot of work on behalf of the issuer and dealer communities that people never hear about. Is there anything interesting going on in regulatory or other realms that the exchange is helping to shape?


RC:
We are an active and engaged participant in the ongoing debate over public capital markets policy. We routinely submit comment papers to the securities commissions and are represented on a number of stakeholder committees and industry boards to advance the interests of our listed companies.

The biggest challenge for companies who are nearly public, in reality, is coming to grips with the fact that the going-public transaction is not the goal, but rather just the beginning of the heavy lifting. Companies really do need to understand that they have to tell their story and win mindshare from investors in order to stand out from what is a very, very large group of peers.

What we’ve tried to do is give them opportunities to tell their unique stories in a number of  different ways. We initiated market opening ceremonies for our issuers, which tie in with various media outlets with whom we are affiliated to give them more exposure. We also created a podcast studio inside our head office where issuers and thought leaders from different industries have conversations about issues of interest to the CSE community. There has been great pickup on these services, as we can see how many people listen to a podcast and how many people follow us on social media. So, there is that sort of general work that we do to provide our issuers with opportunities to tell their stories.

We are going to do more work in the coming year to teach companies about the public markets. How can they boost liquidity in their shares? What are the things that work for companies? And there are questions around market-making, and marketing activities – what are the marketing activities you need to undertake, what are the trade shows you need to be at? We try to really act as a concierge to give them access to as many opportunities as we can to help them navigate what is a very complicated, confusing and difficult world.

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PM: The CSE now has over 50 employees. How do you see the continuous expansion of the CSE influencing your culture, and what is the impact on your clients, the companies who list on the CSE?


RC:
Well, so far, the growth has not come at the expense of what I believe is an enthusiastic, fun-loving, “don’t take yourself too seriously, but do take your work seriously” kind of culture. And if that comes from the top, that’s great, as it’s entirely intentional. Our employee turnover is low, and the experience level is very high. I think we do have a healthy and strong culture in the company, and I am looking forward to seeing that continue in the future.

I get tremendously encouraging feedback from our clients – the issuers, the dealer firms and others – about how positive their interactions with our team members are, and that is extremely gratifying. In fact, that is about as good as it gets. I understand that those types of compliments are not won easily. From my perspective, it is very gratifying when I get that kind of feedback.

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PM: Finally, can you share with us your expectations for the exchange in 2020? And what do the next 15 years hold for the CSE?


RC:
That’s easy – there will be another chief executive at the helm 15 years from now, I’m pretty sure.  Nearer term, we clearly have a few key projects. We’ve talked about the new rulebook that will see the introduction of a senior tier, with the knock-on effect of margin eligibility for issuers. We haven’t mentioned that the new rulebook provides for the ability for the CSE to list ETFs and Special Purpose Acquisition Corporations, which is a vehicle that has proven popular for issuers to raise capital. So that will have a positive effect for us and provide new and interesting vehicles for investors.

We also haven’t talked about our clearing and settlement initiative to list, trade, clear and settle tokenized securities. We have been quietly working away on that last year and into 2020. I expect this is the year we will be making a formal application to the regulators for that clearing facility. It is a significant undertaking and there are a lot of different people at the exchange engaged in the effort. And again, we continue to receive a lot of support and interest from the issuer community to implement this ability to use securities tokens to raise capital.

As far as the longer term, I think there are some interesting challenges ahead for public markets generally. There is a lot of competition from different forms of private equity investment. Whether that is private equity or venture capital or different sources of non-public financing. Public markets are really going to have to continue to make their case to consumers of investment capital and constantly address areas of inefficiency and cost. You don’t have to look very hard to see studies or commentary on the benefits of staying private, for the technology and life sciences industries in particular. I think that is going to be a big theme over the next few years. Essentially, is the existence of the public market assured? Is the Canadian Securities Exchange going to continue to be a venue for companies to raise capital? Or, is it instead going to be an exit for the early stage investors who are looking for public market liquidity? I think that is a hugely important debate that is already taking place, and the continued existence of the status quo is simply not assured.

CFN Media Interview with Richard Carleton

Over the last five years, the cannabis industry has undergone a period of transformative growth, and the Canadian Securities Exchange has grown with it, providing countless opportunities for innovation, expansion, and success.

In this interview with CFN host and Managing Partner of Zuber Lawler, Tom Zuber, CSE CEO Richard Carleton discusses the impact the cannabis industry has had on the CSE, the global emergence of new cannabis markets, and the advances that have happened in the industry, both technologically and economically.

Tune in to learn why Canada continues to be a leader in the cannabis industry, the challenges and successes of opening this industry up to the investment community, and the innovative organizational structures emerging from the complicated landscape of cannabis as a consumer product. Hear Richard’s take on prohibition, ancillary cannabis companies, and the future of the European cannabis market in this exclusive, three-part interview.

Interview with Canadian Securities Exchange CEO Richard Carleton: H1 2019 Review

When it comes to achieving milestones at the CSE, the Exchange for Entrepreneurs is on an extended winning streak. With capital raised by CSE-listed issuers, trading value, and number of listings (more than 500!) all reaching new heights, it’s already been a strong start to 2019. Scroll on for an exclusive, in-depth interview with CSE CEO Richard Carleton as he discusses the factors contributing to this sustained positive momentum, and provides a glimpse of what’s ahead for the next half of this record-breaking year.

The first half of 2019 saw the CSE continue to grow in terms of total capital raised by issuers, trading value and a new record for the number of companies listed. Can you start by giving us the story behind the strong performance? What is allowing the CSE to consistently grow so quickly compared to other exchanges?

It is a continuation of the trends we saw establish themselves in 2018. There remains strong interest in the cannabis sector, particularly for companies working on opportunities in the United States, and increasingly now in the Caribbean Basin, South America, Europe, the Middle East and Asia. We’ve seen a considerable amount of funds raised in the sector and an increasing pace of mergers and acquisitions activity.

We’ve also seen renewed interest in the mining space.  I was looking at our year-to-date numbers the other day and to the end of June, an identical number of mining companies have joined the exchange this year as cannabis issuers. We have also welcomed a significant group of technology companies.

These are very positive trends: the diversification in the makeup of newly listed companies is healthy, and I think the rebound in the mining sector – particularly gold exploration – is something that people are going to be very interested in as the year progresses.

I recently saw comparisons showing the CSE leading other venture-focused exchanges in several categories, including average issuer market capitalization and average financing size. What’s driving these KPIs and is it sustainable?

Again, this is largely a cannabis story. If you look at our most active stocks, they tend to be from the cannabis sector. What it speaks to, in particular, is continued retail interest in the industry. It also speaks to the appeal of the issuer community we have been able to bring to the exchange. It’s a very diverse set of companies, ranging from those involved in cultivation in Canada to multistate operators in the US, and companies looking even further afield internationally.

We are also starting to see issuers with more than just cultivation.  Examples would be companies that are looking to make improvements in extraction, others in biotechnology, and yet others building brands in specific markets. These companies, in some cases, trade for $15 or $20 per share, and that positively impacts the value of trading.

Let’s run with that theme. Last year, Curaleaf’s IPO was the biggest the CSE had ever seen, at the equivalent of some CDN$520 million, and Harvest Health & Recreation announced a financing in April of this year equal to around CDN$650 million. Those are just a few examples of financings big enough to fuel sustained national or multinational growth. What are you hearing from issuers regarding who is coming into these deals, and their general experience raising large amounts of capital on the CSE?

What is interesting about these transactions – and you didn’t mention the largest of all, which is the short-form prospectus that Acreage filed with the Ontario Securities Commission recently to raise up to US$800 million – is that they really are global efforts.

We know that Canadian retail and institutions have been long-time supporters, which seems kind of funny to say for an industry that is, at best, five years old. But they continue to be a significant and core part of large financings. And we are increasingly seeing participation from the United States. Family offices, hedge funds, and high net worth individuals are backing these raises. Parsing the information after a financing closes, we also see interest from institutions and family offices in Europe and Asia. When we totaled it up last year, we saw 103 different jurisdictions around the world represented by investors in deals on the CSE. I think on a year-to-date basis it is about 83 jurisdictions represented. Basically, every part of the globe has participated in capital raises conducted through the facilities of the CSE.

Issuers have emphasized to me repeatedly that there are no concerns with the fact that their company is listed on the Canadian Securities Exchange. We are a recognized exchange around the world for a variety of tax and pension investment purposes, and because we have achieved that status our issuers find very little resistance to investment in their transactions because of their listing exchange.

The British Columbia Securities Commission is now one of your official regulators. Explain that development and what it means going forward in practical terms. Will it slow or change things in any way?

The British Columbia Securities Commission has been talking about taking on this role for as long as I have been with the Canadian Securities Exchange, and that’s about 12 years at this point. The reason is that a majority of the companies listed on the CSE are domiciled in British Columbia.

I think the commission moving now is a reflection of our relevance and continued growth in the number of listings. There are now over 250 BC companies that trade on the CSE. With so many connections to the province, I believe the commission concluded that it was in their interest to take an active role in the regulation of the exchange.

Our long-standing principal regulator is the Ontario Securities Commission; the BCSC will be working with the OSC to make sure there are not any duplicative activities. As a result, I am confident that the BCSC move will not impact the operation of the exchange in any way. We have worked very closely with the OSC and BCSC over the years and will continue to do so effectively.

I hear the CSE is planning to introduce a separate tier for senior companies. What is the thinking behind that?  What benefits will it offer companies that qualify for this tier?

We find ourselves in a situation unique in Canada. Under the National Instruments that set out how companies and exchanges are regulated, it’s really divided into two worlds: venture exchanges and non-venture exchanges. The rules for companies listed on a venture exchange have a lighter touch than for companies listed on a non-venture exchange, such as the Toronto Stock Exchange. We find ourselves in the fortunate situation of having listed companies that fall into both “venture” and “non-venture” buckets.

We are not proposing any change in the way our early stage companies are regulated. We now have a substantial number of companies that have significant market capitalizations, tangible assets, and revenue coming from a variety of jurisdictions. A regulatory framework designed to oversee the operations of a junior mining exploration company really is not up to the task of overseeing the operations of a US multistate operator in the cannabis industry with a multi-billion-dollar market cap and hundreds of millions of dollars in annual revenue.

We’ve been dealing with this to date by imposing higher standards on these larger companies as they list. So, there has been no regulatory gap, but we are now in the process of introducing changes to our listing rules designed to make these higher standards official and transparent.

When the project is complete, following a process with our regulators and a public comment period, these companies will be separately identified for the information of investors. We expect that the securities of these senior issuers will be eligible for margin under IIROC rules. It will also give the exchange the ability to list special purpose acquisition corporations, which are becoming an increasingly popular vehicle for creating public companies in Canada. It will also enable us to initiate an ETF listing program, which several parties have been very interested in listing on us. It will help address concerns that institutional investors and professional investors in Canada and the US may have had about the opportunity for regulatory arbitrage between the CSE and other exchanges in Canada.

There is a lot of interest among finance industry professionals in the blockchain-based clearing and settlement system the CSE is developing. What can you tell us about your progress?

The first thing to note is that we retained Andrew Grovestine within the past three months. Andrew is an experienced brokerage industry executive and is going to lead our effort to create a settlement and clearing service in Canada based on distributed ledger technology.

Our vision here is not really to emphasize the clearing and settlement service, although it’s certainly a key component of how we believe the future is going to play out. What we are really looking to do is to provide a safe, regulated environment for the listing and trading of tokenized securities. We think this will be of real interest to companies and investors because using these tokenized securities substantially reduces costs for issuers wanting to pay dividends, royalty streams, or other entitlements a company might want to provide its shareholders. By doing it in this way we can cut the cost of capital for issuers and incent the creation of a whole range of new and interesting instruments, whether they are in the form of common equity or debt, or other types of security instruments that will be of interest to both retail and institutional investors.

One of the pieces of that puzzle is the clearing and settlement component, which will make trading more efficient by shortening the clearing and settlement cycle. It will also make the processing of entitlements to shareholders significantly more efficient. But, as I say, the real headline here is that we want to create the best structure for tokenized securities to trade in a regulated environment.

As far as where we are with the project, we are about to initiate third-party testing with the dealer community. We’ve assembled an advisory group of dealers who will help to guide us through the process and they are excited about the opportunities that this initiative could bring to the market.

The CSE has not raised new capital for many years and on the surface would seem to benefit from a stable ownership structure.  How does this help you to serve the market?

We’ve been blessed to have patient and supportive principal shareholders over my term as CEO. I’d begin with Urbana Corporation, which is Tom Caldwell’s investment fund. Mr. Caldwell, as you know, is Chairman of the Canadian Securities Exchange. Shortly after Mr. Caldwell led the recapitalization of the company he was joined by Ned Goodman, who served as Vice Chairman for a number of years.

I can’t tell you how much credibility the investments from Mr. Caldwell and Mr. Goodman brought to the organization. I think that the CSE team was always respected in the industry, but there were concerns as to whether we had the resources to stay in the game for the long haul. With the support from Mr. Caldwell and his team and Mr. Goodman’s investment, those concerns were permanently put to rest, and laid the groundwork for the growth we have enjoyed over the last several years.

Mr. Caldwell, in his presentations, talks about Urbana being “patient capital” and that has absolutely been true with us. We have been able to make investments in a variety of aspects of our business, including in trading technology and adding personnel to meet the increased pace of applications in response to the regulatory challenges this posed. We moved into our new premises in First Canadian Place at the end of January and are in the process of building a presentation centre there that will be used to host listed companies for a ceremony on their first day of trading, and also to recognize key milestones our issuers achieve.

While these investments may have been done at the expense of short-term profitability, we are again positioning the exchange to support even higher levels of growth in the future. Our shareholders have been very, very supportive.

It is definitely the spirit at the CSE to always be looking to do things better. What are you doing to keep momentum going in terms of growth and building the brand?

As people who follow our Instagram and Twitter accounts know, we have been racking up the frequent flyer miles over the past couple of years. There is a concerted effort by the team to get out there and tell the story of the Canadian Securities Exchange to influencers, be it lawyers, accountants or investment dealers and bankers. We’ve been doing a lot of work with the community to ensure they understand who we are and what our value proposition is. We also, of course, engage in direct sales work with individual companies that are looking to access the Canadian public capital markets.

That has been a big part of our success over the last few years, but the thing that I think truly sets us apart from most securities exchanges – not just in Canada but around the world – is that we are the only start-up exchange in recent memory that has really had an impact on the local capital market. People see that and see the success we’ve had and understand that it reflects the CSE team’s experience, knowledge and commitment to customer service.

The other thing I attribute it to is the fact that we are entrepreneurs ourselves. I have noted in past interviews how most of the team here has been through the lean times and worked with us through multiple fundraising efforts. We have done exactly the same thing that the entrepreneurs who come to us to list their companies do.  We’ve done the investor pitch decks, we’ve signed the NDAs, we’ve done the presentations, we’ve had the door slammed in our face.  That gives our team insight into the challenges that an entrepreneur faces as they try to raise money to achieve their business goals. Understanding where they are and knowing that we have been in their proverbial shoes builds an energy around the organization that people sense and really take a high degree of comfort in.

We’re doing all of the other things I mentioned, such as building a presentation centre for listing ceremonies. We built a podcast studio and are releasing podcasts at a furious rate through the various media we use to distribute them. Our initiatives via the Internet and social media are developing a real following.

It’s not any one thing, I think it’s a combination of all those things that gives people the sense that we are on the right track and that this organization is really going places.

Year-end 2018 interview with Richard Carleton

Last month, CEO of the Canadian Securities Exchange, Richard Carleton, sat down with Peter Murray of Kiyoi Communications to discuss the record-breaking year for the CSE in 2018.

From major milestone achievements, to trends and updates in listings to where the CSE is looking next in 2019, scroll down to read the full transcript of this interview.

For ease of navigation, a list of hyperlinked topics is included below.

  1. Standout achievements in 2018
  2. Increased size of listed companies
  3. US cannabis companies choosing to list on the CSE
  4. Status on listings outside of cannabis
  5. Growth of institutional investment
  6. Managing margin eligibility of CSE-listed securities
  7. Updates on blockchain-enabled clearing & settlement
  8. Moving to a new office
  9. Focus on the future
PM: As we approach the end of 2018, the CSE is positioned to report another year of records in trading volume, trading value, financings, and other metrics illustrating the exchange’s success. What achievements stand out in your mind, and why are they important to your vision for where the CSE is going?

RC: Clearly, standout events have been taking place over the last few months, with the number of very large US-based cannabis issuers that have joined the CSE. It is companies such as Curaleaf, Harvest Health, Acreage, Green Brands, and more to come over the next few months. We are seeing the most rapid expansion of market capitalization and impact on the exchange since our inception.

I will say that the opportunity to work with management teams who are representing, in some respects, the pinnacle of US business is one that the CSE really values. Finance professionals and advisors are involved from bulge-bracket US brokers. And there are experts highly experienced in consumer products and the consumer packaging industry from companies such as Procter & Gamble.

The opportunity to work with people of this calibre is validation of the proposition that the CSE has been working to build and illustrates that we are headed in the right direction.

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PM: Cannabis continues to be a big driver of the growth being experienced by the CSE. In 2018, the sector brought several of the largest financings to ever take place on the exchange, and some of the issuers have market caps that place them well beyond the microcap category. Does the increasing size of the average listed company present any new opportunities or challenges?

 

RC: I don’t know that the increasing size presents any unique challenges. Certainly, what it means is that, given the size of the financings and the overall enterprise value of these companies, we are seeing, for the first time, significant institutional participation. This is a very important development, because last year and in the early part of this year the money was principally coming out of the retail space or Canadian accredited investors through private placement financings.

What we are seeing now is institutions from Europe, the United States, Canada and Asia participating in these financings. And this really is the first time we have had this community involved with the Canadian Securities Exchange.

We are being exposed to advisors in the United States who are beginning to understand that the Canadian public equity markets are in fact a viable alternative for US companies looking for growth capital. We’ve had conversations with a number of these professionals about taking what we have learned from the capitalization efforts in the US cannabis space and applying that to companies from other sectors that perhaps have not been that well served by the venture capital and private equity models that are the principal source of growth capital for early stage US companies.

That is a thesis we have had for a number of years and I think the cannabis industry is bringing the capabilities of our market to light. And not just of the Canadian Securities Exchange, but really the whole ecosystem that we represent, be it the investment dealers or the law firms that work with these issuers. We really do hope to leverage the relationships that we have built in the cannabis space to bring a whole new category of companies into the Canadian public equity markets.

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PM: The CSE remains the best choice for companies in the cannabis sector looking to list in Canada, especially those with assets in the United States. What will be the approach to protecting the CSE’s lead in cannabis listings if the US chooses to make cannabis legal on a federal level, thus opening the door to cannabis companies listing on US exchanges?

 

RC: We have been asked this question quite frequently over the last little while, and I think the answer falls somewhere along the following lines. In my experience in the exchange business in Canada, people have always looked at market share of trading for inter-listed companies between Canada and the United States and tried to think about how to change that dynamic. How do we increase market share?  How do we increase order flow from the United States?

The simple fact of the matter is that the percentage of market share is almost exactly the same as the percentage of the country of residence of the shareholders.

To illustrate, if a company has 50% of its shareholders resident in Canada and 50% in the United States, the market share of trading if the company is listed on both a Canadian and US exchange is about 50/50. There is not a lot you can do about that because of regulations that make it difficult for dealers in the United States to route client order flow to Canada, and Canadian dealers to route order flow to the United States.

There is a little bit of a closed shop operating. What we will have to do is look at which companies have a predominantly Canadian shareholder base and convince them to retain their Canadian listing as and when regulations are further loosened in the United States and cannabis is removed from Schedule 1 of the Controlled Substances Act.

One of the other things we are going to be looking to do is develop some index products early in 2019 around the US cannabis space. We are the only location globally where you see as heavy a concentration of US cannabis issuers, so we are the logical place for that index to be calculated and disseminated.

Obviously, what we would like to see is exchange traded fund products developed off that index, so that people are able to not just purchase the equities of individual companies but diversify across the entire sector with an exchange traded fund product. That is another way in which we hope to increase the stickiness, if you will, of the relationships we develop with these issuers.

And last, but not least, we want to continue to build deep relationships with the management teams of these companies and put ourselves in that situation kind of like Nasdaq back in the day, when Microsoft and Cisco and Intel and Apple and all of those companies didn’t qualify for the New York Stock Exchange. And when they did, and the New York Stock Exchange knocked on their door and said, “Hey, Mr. Gates, it’s time to move up to the Big Board,” Bill Gates said, “No thanks, we are very well served by our present exchange relationship.”  So, that is the kind of brand loyalty we would like to build with these management teams and service them well into the future regardless of how the regulatory landscape changes.

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PM: How about other industry sectors on the exchange?

 

RC: It is interesting because the cannabis space has obviously had the headlines, but we have in fact seen a significant number – and in absolute numbers almost a record – of mining companies get onto the exchange and receive funding this year.

My sense is that some of the profits from trading in the cannabis space over the last couple of years are being applied to the mining sector. Notwithstanding the fact that there is a drag on the mining sector right now because of the low price of most of the commodities, we are seeing mining companies get funded and come onto the exchange at a higher rate than in many years. And as I say, it gets a little bit lost in the shuffle of all the cannabis news, but they are getting funded in quite considerable numbers at this point.

In tech, we are seeing some struggles in the crypto space and that seems to have put a chill on the entire blockchain sector, which was red hot just a year ago. But we are also seeing a number of technology stories get funded. We would like to see more and that is one of the great focuses of our efforts with the new business relationships we are developing in the United States. Having a pipeline of companies in the tech sector from the US come public here would be very interesting for investors.

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PM: The amount of capital being raised by companies on the exchange continues to skyrocket – it looks as if the final number for 2018 is going to settle somewhere around $5 billion. You can’t reach this level without funds playing a big part. Can you comment on the changing role of institutional investors in the CSE marketplace?

 

RC: As I mentioned, we are seeing great institutional participation in financing transactions as they get larger and larger. And one headline from the Curaleaf financing, which was approximately $520 million, was that there was something like a hundred institutions, as I understand it, on the investor list. We know that institutions have increasingly participated in the space as the year has progressed. Large institutions from all over the world are beginning to participate in this space, and as I mentioned we want to work with these people, ensure they have a good experience, and that they are prepared to back CSE listed stories again in the future.

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PM: Marginability is an important issue for many large investors and the CSE has been working to achieve some changes in the way this is managed. Why is this issue important and what can you tell us about where the discussion is headed?

 

RC: The marginability issue has a number of different components to it, but you can essentially look at things in two ways. If the shares of a company are not margin-eligible, it means an investor cannot hold the shares in a margin account, and the dealer cannot lend them money to purchase the shares. Instead, the investor must use cash to purchase them.

Many higher priced securities are margin-eligible. With these securities, an investor doesn’t have to use most, or all, of the money in their account to make a purchase and can instead borrow from their broker.

The other way this impacts issuers is that the dealer is required to post capital with the clearing house against the possibility of failure on the other side of the trade. And that is what people mean when they refer to T+2: the transaction is only finally settled after two days plus the day of the trade, when it clears with securities and cash changing hands.

The dealers are required to post capital against the potential of that trade failing – in effect one side not showing up with the stock or cash to settle it.

For margin-eligible securities, they don’t have to post the full amount. The idea is that it is not volatile, there is lots of value there, the likelihood of failure is low, and if there was a default you could sell the shares to get the money.

For companies that aren’t margin-eligible, the dealers have to post 135% of the trade value with the clearing house. To be eligible, a stock has to trade at a price higher than $3.00, so there is a relatively small number of stocks trading on the CSE that qualify.

We are looking to help dealers free up capital in two ways. One is being able to provide customer service in their margin accounts. And the second way is to reduce the capital posted at the clearing house in the two-day settlement cycle.

We are working with regulators to remedy this situation as quickly as we can. And we have reason to believe that we have made a good deal of progress. When change takes place, it certainly should increase the liquidity of the stocks. It will certainly make them less expensive for people to trade. And it should bring even more participation in CSE names.

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PM: What can you tell us about the blockchain-enabled clearing and settlement facility you have been working on?

 

RC: We are in the late stages of quality assurance on the new system. We have been working with our developer to make some changes on the robustness of the system. And this is really in anticipation of questions and comments we would receive from the users and from the regulators.

We hope to get the system up in our external test environment so that dealers and some other interested parties can begin testing in their own environments before Christmas. And at that point we will be working closely with them to understand what our timelines are from an implementation perspective. We have to respect the amount of work the dealers will have to do to integrate their existing cash management systems and client reporting systems into our clearing settlement facility. We’re hopeful that the effort will not be too lengthy and we’re pleased that there is a relatively small number of vendors who provide the services. So, it’s not a case where 125 dealers suddenly have to make changes, but one where a small number of vendors have to make changes that will then be extended to the entire industry.

Dealers continue to be extremely eager to get their hands on it. They understand the business case and the client service benefits, as well as the number of companies that would like to use security tokens as a means of securing capital. We continue to be very excited about this facility and it is going to be one of the things on the agenda for 2019.

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PM: The exchange’s Toronto team is relocating to a new space early in 2019 — First Canadian Place. Insofar as you can comment, how well is the exchange doing as a business, and how does this provide you with new and/or better resources to make the organization even stronger?

 

RC: We are a private company, so our financials are not available publicly. I will say, and this should come as no surprise to anybody, that with the volume of trading and listings we’ve had this year, as well as continued strong performance from our market information businesses, the exchange is on very solid financial footing.

We will be moving to new premises early in the New Year. This was really brought on by the anticipated growth in our staffing levels, particularly in the listings regulation area. It is important that we continue to maintain high service levels for our issuers and deploy our regulatory responsibilities as an exchange.

At this point, it is a pretty tight fit for the team at our present location. As well, and I think this is one of the important incentives for us to move to new premises, we really want to provide a better listings and presentation experience for our issuers. Everybody expects a bell-ringing or market-opening ceremony with a proper backdrop. The new First Canadian Place location will give the space and a spectacular backdrop to have exactly that kind of experience for the issuers. We really want to be able to step up our game with providing companies a memorable experience on their first day of trading, or whenever they have the opportunity to visit the exchange and have their listing recognized by us and the rest of the community. We are all really excited about moving into the new premises, probably at some point toward the end of January.

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PM: As we head into 2019, what can issuers and investors anticipate from the CSE?  And looking further into the future, how is the CSE positioning itself to keep momentum going into 2020 and beyond?

 

RC: We covered the outlook in some detail already, but I’ll elaborate on a few items. The blockchain initiative will be a significant focus for the organization as we move into 2019. And it will take much of the year before it is ready. That will give us a great platform to track new and interesting securities in the marketplace.

I also mentioned new index products with a cannabis focus. Again, we are the most logical source in the world to provide those sorts of index products. And clearly our motivation there is to provide those indices as an underlying interest for ETF products. My sense from traveling in the US recently is that we have many more companies of significant size, business operations and profits who will be looking to come into the Canadian market to fund further growth and provide liquidity for their early stage investors.

Over and above that, we will be building out the CSE team. We plan to pay particular attention to the continuous disclosure program for existing companies. As we attract issuers with larger and more complex business operations, we need to do more work with them to ensure they stay on top of their continuous disclosure requirements under the Ontario Securities Act.

We hope that we can realize improvements to margin eligibility for stocks early in 2019 and we believe that would further improve liquidity in the marketplace.

We will continue to build relationships with markets around the world. As I think is well known at this point, we have a close working relationship with the OTC Markets Group in the United States. CSE issuers have had a very positive experience working with them in building liquidity, adding to the shareholder base, and as a platform for fundraising activities in the US. And we are looking to build partnerships in the UK, in Australia and the European Union to provide similar managed relationships with marketplaces in those jurisdictions.

Having a dual-listing or an over-the-counter arrangement really does help the ability of companies to raise funds in those marketplaces. And given the existence of sophisticated arbitrage trading, it can help to build an even better liquidity profile.

Building relationships with more international companies choosing to access Canadian markets for capital to expand their businesses is also an important agenda item. I visited Israel twice this year and we expect to see the first Israeli companies list toward the end of this year or early in 2019. We will see a healthy cohort of companies from Israel – some of them are in technology, some are in the cannabis space. We want to see people in different markets around the world look to Canada and our world-leading position in small-cap finance to help them secure growth capital.

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Interview with Richard Carleton First Half Review — June 2018

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.

  1. First Half Performance in 2018
  2. Blockchain-based Clearing and Settlement – Updates
  3. Cannabis Sector Perspectives
  4. Growing the CSE Brand
  5. Keeping Pace with Expansion
  6. Trading Enhancements & Liquidity Growth
  7. Share Structures and US Issuers
  8. What’s Next for 2018

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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Interview with Canadian Securities Exchange CEO Richard Carleton: Year-end Review 2017

With 2017 now officially in the record books, CEO of the Canadian Securities Exchange, Richard Carleton sat down with Peter Murray of Kiyoi Communications, to discuss the best year on record at the CSE. Included in the discussion were important developments that took place at the exchange, the evolution of the cannabis investment landscape as well as opportunities in blockchain, fintech and more that the CSE will be looking to next in 2018.

  1. Record-breaking trading volume
  2. Market participants: Proprietary traders and retail investors
  3. On tap for 2018: Cannabis, blockchain and more
  4. Growth in new listings
  5. Enabling innovation
  6. Enhanced disclosure: A better model for investors and companies
  7. Regulatory outlook for cannabis-related businesses
  8. Strength behind the bench at the CSE
  9. Hitting its stride as a full-service stock exchange

Record-breaking trading volume

PM: It has been a truly phenomenal year for the CSE in terms of growth in trading volume/value, capital raised and many other measures. This has particularly been true in the fourth quarter, with the most active issues routinely trading well over 20 million shares per day. As the exchange’s CEO, what would you point to as the highlights of 2017?  What is driving the success?

Richard Carleton, CEO of the Canadian Securities Exchange

RC: There are multiple factors working in our favour at the moment, but clearly our decision more than three years ago to welcome the original applicants for the MMPR (Marihuana for Medical Purposes Regulations) licenses in the Canadian cannabis space is one that has proven to be quite sound as far as growth and development of the exchange is concerned.These companies have caught the attention of the retail investing public in particular, although the broader investment community is beginning to support and invest in them as they mature and grow.

We have seen a tremendous increase in trading volume in the cannabis space, and it has had a knock-on effect on technology, mining and other sectors on our exchange.

Overall, it has served to dispel a number of the incorrect, but in some cases widely held, beliefs about companies listed on the Canadian Securities Exchange in terms of liquidity and challenges to completing secondary financings. Given the trading turnover and secondary financings completed by issuers in multiple industry sectors on the CSE this year, I think we have laid those concerns to rest for good.

At the end of the day, our success in 2017 was simply a case of presenting companies to the marketplace that the investment community was interested in, and the community responded accordingly.
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Market participants: Proprietary traders and retail investors

PM: Looking at just trading volume for a moment, are program traders, algorithmic trading and high-frequency traders accounting for a considerable percentage of the activity?  Some people in the markets don’t like their presence, whereas others appreciate the liquidity they bring. What is their status on the CSE?

RC: We have a pretty good idea where the trading volume is coming from, and we have seen increased participation from proprietary traders, which I would define as people who tend to pursue relatively short-term strategies such as market-making or cross market arbitrage. By and large, that activity is not driven by computers but by actual human traders pursuing these strategies in the market.

But far and away the largest percentage of participants are in fact investors and individual traders. It is human beings hitting the enter button, and doing that, generally speaking, through the facilities of one of the discount brokers in Canada.
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On tap for 2018: Cannabis, blockchain and more

PM: How do you follow up on a successful year like 2017?  What is the 2018 game plan?

RC: We certainly think the cannabis space has a way to run, and we see that in our pipeline of applicants seeking to list on the CSE. We expect to see additional companies looking for growth capital to serve a particular segment of that market, whether it be recreational cannabis in the United States, cultivation internationally, or some aspect of the therapeutic market.

And, of course, with legalization anticipated at some point in Canada during 2018, it will be interesting to see how the industry develops specifically here at home.

We are also seeing a tremendous number of companies with some component of blockchain technology in their business development mandate, many of them looking to address some inefficiency, cost or risk for people on the payment side. There are quite a few interesting applications of blockchain technology to reduce the cost and risk of the payments process both for the customer and for companies.

We have a number of blockchain companies on the exchange already, there are more coming, and based on the funds raised and the interest in existing issuers, I think we will see a continuation of the high level of trading activity witnessed in the latter part of 2017.
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Growth in new listings

PM: The CSE welcomed over 50 new issuers in 2017. What is the pipeline looking like as we begin 2018, and where are the issuers coming from in terms of sectors?

RC: The interesting thing is that even as the pace of listings reached record levels in the fourth quarter, each month we received more applications than companies listed. In other words, even though we were listing more companies than we ever had before, the pipeline was growing.

As a general observation, the companies listing now tend to be larger, more mature and better capitalized than at any other time in the history of the Canadian Securities Exchange.

I mentioned the cannabis and financial technology sectors, with a particular focus on blockchain, but a number of the more traditional sectors are also seeing investor attention. There is certainly interest in the mining space. We have seen a number of transactions funded for later-stage mining projects, often with a clear path to initiating production. Those companies do tend to be larger and are looking to raise substantial amounts of capital to complete their business programs.

It really is a situation where, with the possible exception of the oil and gas space, we are firing on all cylinders.
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Enabling innovation

PM: Cannabis is a relatively new business sector for public markets and the CSE deserves credit for providing a platform enabling a substantial number of these companies to obtain the funding needed to carry their businesses forward. We now see a similar dynamic with companies in the blockchain space. Does the CSE have a unique proposition for these companies and is the exchange itself looking at opportunities with this technology?

RC: Let me begin with the first part of the question. The CSE’s proposition is really the same for all companies looking to access the public markets. We seek to facilitate the lowest cost of public capital for these companies, principally by providing a very streamlined listings process, and then once the company is listed to provide cost certainty in the form of fixed fees, regardless of how active the company is in secondary financings, changing its business, making acquisitions and other activities.

Our promise is that those companies will be able to conclude those transactions with more disclosure to the marketplace, but with less interference and second-guessing of their business plans from the exchange as their principle regulator.

Fundamental to the DNA of the CSE is that we believe the marketplace is best suited to price the risk and benefits of management’s business decisions, and not somebody at the exchange. To ensure this is the case, we must make sure the companies are providing the best possible disclosure to the marketplace so those decisions can be made.

I think it is interesting to see how fintech, and blockchain in particular, has come to the public markets. In past years I have talked about the challenges the public markets in Canada have had in attracting technology companies. These types of companies have often elected to raise their capital from private equity and venture capital firms as opposed to seeking a public market listing.

The fintech and blockchain space seems to have taken on a different dynamic, as these companies are in fact coming into the public markets, and to be fair it is probably a result of the capabilities demonstrated by the public markets in funding the cannabis space. Entrepreneurs in the fintech and blockchain space look at the public markets and acknowledge that we were able to back the creation of an entirely new industry with significant amounts of capital at competitive costs vis-a-vis private alternatives.

As far as the CSE goes, we are very much interested in looking at the potential to apply new technologies to reduce cost and risk. We have a number of experts looking at smart contracts and in effect tokenizing a security with a view to a potential listing on the exchange. We are going to have more to say about that in the very near future and are looking carefully at the potential to adopt a number of those technologies.

I will say that our systems developers have deep experience in the space and as a result we do have some excellent partnerships already developed that will give us a real leg up if we choose to become early adopters.
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Enhanced disclosure: A better model for investors and companies

PM: One of your competitors suggested recently that the CSE’s suitability standards for officers and directors might be too lenient. What would you say to this opinion?  And what about disclosure of issuers listed on the CSE in general?

RC: To be blunt, I was confused by that statement. I have no idea what that person was referring to. The rules in place for suitability for officers and directors are essentially identical across all exchanges operating in Canada, whether it be the NEO Exchange, the CSE, the Venture Exchange or the Toronto Stock Exchange. The spokesperson from the Toronto Stock Exchange would have no idea what our policies and procedures are in administering the rules. We can, and do with some regularity, exercise our discretion to prevent individuals being involved with particular companies. I think that was not an informed opinion being voiced by the spokesperson from the TMX Group.

The CSE believes that in return for the exchange not being as involved in a company’s decisions as perhaps other exchanges are in Canada, the company must agree to adhere to higher disclosure standards.

In addition to the work we do on a company’s initial listing statement, as well as their legal obligations to provide continuous disclosure, companies are required to file monthly reports that are effectively an update to the Management’s and Discussion and Analysis from the listing statement or prospectus. Companies find that it is a helpful part of their investor relations activities, and not a burdensome extra piece of exchange regulation.

That disclosure record builds for the companies and it is easy for people to see which companies are executing against the plan they set out, and which companies are not making the progress they set for themselves in their business plan.
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Regulatory outlook for cannabis-related businesses

PM: There was a degree of controversy this year about Canadian stock exchanges listing companies that operate cannabis-related businesses in the United States. Can you comment on the CSE’s policies and how your regulatory model held up in the face of this debate?   Do you foresee policy at the CSE changing at all in 2018?

RC: The answer to the latter question is that I do not see our policies changing. We may learn things as time goes on from the legal position in the United States, but this to us was a relatively straightforward call.

The basic principle is that all companies listing on the Canadian Securities Exchange, and for that matter any exchange in Canada, must provide a positive representation that they are operating in accordance with applicable law in the jurisdictions in which they conduct business.

To that end, and particularly with companies in the cannabis space in the United States, we can and do require the company to provide a legal opinion and analysis demonstrating how it is that they are operating in accordance with the licensing regime in place in the particular state or states in which they do business.

From an investor’s perspective, clearly there are risks in investing in these companies given the uncertainties in the legal framework in the United States. That is why companies who have come to us with US exposure, either in the listing statement or in a prospectus cleared with one of the provincial regulators, must spend a lot of time explaining the legal position of the company, and what the position of the company would be assuming various changes took place. Investors need to know what the impact on the company would be if the rules changed in the US.

This was formalized by the Canadian Securities Administrators in a guidance notice a couple of months back and it’s an approach, because it’s based on disclosure, that is entirely in line with the one we’ve taken to these companies coming into the public markets.

So, again, we see that there is considerable investor interest in these opportunities, there is considerable interest from entrepreneurs based in the United States to raise growth capital from the Canadian public markets, and we expect to see more of these companies, not fewer, coming to us in the months ahead.
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Strength behind the bench at the CSE

PM: The CSE’s largest shareholder is Urbana Corporation, which holds just under half of your common equity. This is different to the other major Canadian exchange groups, which often have a wider base of shareholders. Is there a benefit to having a concentrated ownership structure and, presumably, the relative independence it provides for?

RC: I don’t know if I can speak to the benefits of having a relatively concentrated shareholding. What I can speak to is the benefit of having Urbana Corporation as our principal shareholder, and that of course is that Urbana made its name some years ago for its successful investments in the exchange space, not just in Canada but around the world.

The team there, led by Tom Caldwell, who is also our chairman, is regarded as one of the most knowledgeable there is when it comes to the business of exchanges. Tom has access to many different types of people in the industry. Whether it be senior management at other exchanges or analysts and investment bankers, they all know Tom and if we need to meet these people, the opportunity is there because of our chairman and Urbana Corporation.

I believe we are very fortunate to have an engaged, supportive and extremely knowledgeable main shareholder. We really couldn’t have wished for anything more.
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Hitting its stride as a full-service stock exchange

PM: In some respects, the CSE is fighting a two-front war with other exchanges, both in attracting exciting young companies and in retaining your maturing issuers. Do you think it makes sense for companies to leave the CSE if they qualify for a “senior” exchange?  Conversely, does the CSE still maintain its advantages as an exchange suited for early-stage companies?  Can you realistically cater to both?

RC: Branding is obviously extremely important in the exchange world, and probably more than I understood when I became CEO. There is very little difference in what we do versus the so-called senior exchanges. The access that we provide, the systems that we deploy, the rules governing the companies and so on – there is an awful lot of commonality among us.

However, some institutional investors and retail investors believe, for some reason, that these senior markets will provide higher multiples, better liquidity, more access to investors both in Canada and internationally, and a better experience for the issuer.

I think that is a very difficult proposition to support, especially on a cost-benefit basis, when somebody looks at the increased costs of being, for example, on the Toronto Stock Exchange versus the Canadian Securities Exchange. It would be difficult to justify on an objective basis in a lot of cases.

The one area that really is one of the last mountains for us to climb as an organization is the institutional investment community in Canada. Some institutions have hard-coded into their mandate the requirement that a public equity in the portfolio must be listed on one of the TMX Group exchanges, or specifically on the TSX. They don’t mention the Canadian Securities Exchange and they don’t mention the NEO Exchange.

When we hear from a company that an interested investor has said they would invest in them but for the fact they were listed on the CSE, those are barriers that we need to continue to work to knock down. That is not just perception but a genuine issue that exists.

Our challenge as an organization is to try to reduce the number of institutions with those restrictions in their investment mandates. Our goal is to provide an identical or better experience than the other exchanges, where companies are going to pay considerably more for the privilege of being listed.

One other concern is that if a company believes it is on its way to joining one of the major indices on the Toronto Stock Exchange, there is a rule that to be in the long-established national indices, those stocks have to be listed on the Toronto Stock Exchange. It is sort of like back in the day on the S&P 500 when you had to be listed on the New York Stock Exchange. And as a result, companies such as Microsoft and Apple and Cisco and Intel didn’t qualify for the S&P 500 for a number of years because they were on Nasdaq. Eventually it got to the point where S&P had to do the right thing and permit companies from exchanges other than the NYSE into the index.

Our goal is to have companies stay on the CSE and get big enough and relevant enough to the broader market that people lean on the S&P and TSX to allow them into the indices. I think we may have our first billion-dollar company relatively soon, and with that achievement we might then have investors lobbying Standard and Poor’s to change the rules.

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