CSE Performance

Year-End 2022 Interview with Canadian Securities Exchange CEO Richard Carleton

With 2022 drawing to a close, the global financial community is looking back on yet another year of unprecedented activity across markets. Governments relaxed pandemic restrictions and wound down historic financial support for individuals and companies, just as interest rates surged in response to inflation concerns that proved to be highly warranted. Shifts in the geopolitical and security landscapes added to the uncertainty.

As always, volatility means difficult times for some and opportunity for others. The mining industry was in the spotlight to be sure, as prices for some metals weakened modestly, while others rose or remained strong. Cannabis rode expectations for regulatory change in the US to both the upside and downside.

The Canadian Securities Exchange took this environment in stride, leveraging competitive advantages that have underpinned its success by making it a popular listing destination for entrepreneurial companies from around the world. The year 2023 looks set to be transformational for the CSE, with several major developments on the horizon that are important for investors, issuers and the financial professionals who serve them to know about.

Canadian Securities Exchange CEO Richard Carleton sat down recently to discuss key accomplishments during 2022 and their meaning for the CSE, as well as to explore some of the changes on deck for 2023.

We have a number of important topics to cover, including some substantial developments set to take place at the CSE early in the new year. But before getting to these, it’s important to set the table with some thoughts on financial markets in 2022. Markets seemed more challenging to figure out than usual. What is the view at the CSE?

Well, I guess there are a few themes. The first is that mining is really driving the bus in terms of capital raised and generating the vast majority of our new listings. And different from some past mining cycles we have seen at the Canadian Securities Exchange, there is investor interest across a range of metals.

Rather than the traditional emphasis on precious metals exploration, we have seen a focus on battery metals: nickel, copper, zinc, cobalt, as well as lithium, graphite and rare earths.

Many of these companies are exploring sites where historic drilling took place. World prices for those metals could not support or commercialization of these deposits some years ago. I think it’s fair to say that given the increases in commodity prices, particularly when we consider them in Canadian dollars, the likelihood of producing mines being developed on these properties is higher than perhaps we have seen in earlier mining cycles.

On the other hand, we are seeing lower levels of trading activity on the exchange. Far fewer people working from home at this point, and I think the increase in interest rates has put a lot of investors in defensive mode, particularly retail investors. The decline in major indices, especially those tracking large technology companies, has also made people somewhat more conservative in terms of risk profile in my view.

The amount of money raised by companies on the exchange is also smaller than we have seen for the last few years. This can be explained by the fact that early-stage mining exploration companies are coming to market with relatively modest market capitalizations; they don’t need a lot of money to fund the initial phases of drilling they are looking to carry out. This contrasts with the large, integrated US cannabis companies coming to market a few years ago where single companies were raising several hundred million dollars in one go.

Overall, financing activity is robust, but it is not accounting for anywhere near the total sums of money that we saw in the latter part of 2020 and early part of 2021.

The CSE continues to pursue issuers from jurisdictions outside of Canada: Australia, Israel and the US are prime examples. Why these markets in particular and what are the plans for 2023?

I believe that one of the best things that Canada does as an economy is to provide public venture capital to early-stage companies. When we are looking at applying the services and skills we offer, we view, in particular, Israel, Australia and the United States as three dynamic places that support start-up companies. But in Israel and the United States, there isn’t a marketplace like the CSE that services early-stage companies with the focus that we bring to the table.

In the case of Australia, we have real interest from the mining community, especially with mining very much back on the minds of investors in North America. We can help Australian companies, that have maybe raised their preliminary capital in Australia, to access more of the global markets through a listing on the Canadian Securities Exchange. This makes them more accessible to investors in Canada, the United States and Europe. What we are looking for are dynamic economies generating lots of start-up companies, but where the companies are perhaps underserved by local markets in their effort to raise public capital.

The CSE has been working on a blockchain-based system for the clearing and settlement of tokenized securities. Where does the project stand and have recent developments outside the Exchange influenced your strategy?

We’ve made good progress on the technology. In fact, this summer we tested the full cycle of a trade with one of the dealers. That would be the trade, through clearing and settlement to all of the back-office processes that need to be completed in order to finalize a transaction. From that perspective, we have continued to make good progress.

It is fair to say that the crypto winter, or whatever you might call it, has influenced how we are thinking about this effort as we move forward. We have a lot of very credible people who are looking to tokenize securities to take advantage of some of the strengths of the technology, and we are continuing to work with regulators on a framework for that.

I think regulators will be conservative in their approach to tokenized securities in view of the situation with FTX and the knock-on impact on a number of participants in the crypto space. None of these, to be honest, are all that relevant to the traditional securities world, which is what we occupy. But, as I say, I believe it will make the regulators more conservative in terms of their approach with regard to thinking about some of the things that we are looking to achieve.

There are a number of job postings on the CSE website, mostly in customer support and regulation. What specific needs will the exchange be addressing with these hires?

A lot of the growth is taking place in our Vancouver office, and it is very much tied to the changes we are looking to implement in our listings policies. We have been working with the regulators and believe we are very close to coming to terms with the British Columbia Securities Commission and the Ontario Securities Commission on the approval of these policies.

The commissions are asking us to take on a larger role in overseeing a number of aspects regarding issuers listed on the exchange. For example, we will be launching a senior tier, which perhaps 80 to 100 companies will qualify for.

The way the regulations work, and exchange policies, is that these companies will be subject to closer scrutiny than the more junior companies. That is more labour intensive from the exchange’s perspective, and we have been staffing up to meet the obligations we are undertaking as a result of these policy changes.

The CSE team participated in several cannabis industry events in 2022, and you were recently named “Capital Markets Advocate of the Year” by the American Trade Association for Cannabis and Hemp. What is the exchange’s motivation to devote so many resources to the cannabis industry?  And what have you learnt about the cannabis industry that the market doesn’t know but needs to?

I think roughly 85% of the market capitalization on the exchange is in the cannabis space. They are our largest companies, our most mature companies, and they account for the vast majority of the revenues generated by companies on the CSE. So, it is a very important community for us to work with and to recognize and support.

There are also a significant number of private companies in the United States in the cannabis sector who don’t like the asset values being given in the public markets right now, especially in light of the decline in share price for many of the companies after Senator McConnell indicated that he was not going to support the SAFE Banking Act, which is liberalization of the rules around access to banking services for the cannabis industry. He suggested he would not be backing that during this session of Congress, and perhaps beyond.

In any event, there is a significant additional number of companies in the United States that we believe will be candidates for listing at some point, so we are trying to keep those relationships warm, even though valuations are not as attractive at the moment as they once were.

I will focus on some of the challenges the US cannabis industry faces in the capital markets. It is unique in the sense that, particularly for the US companies, about 97% of the shares are held by retail accounts. For a number of reasons, there is very little institutional participation in these names. For some it is because they are not listed on a national securities exchange in the United States, because their custodian refuses to keep shares of US cannabis companies in custody, because of volatility, or because they are operating in a state where cannabis is illegal. Many institutions have determined that it is not an investment they are prepared to make.

What that means is that there just isn’t the kind of long-term institutional holding of these shares, which I think has made them considerably more volatile, both up and down, than some of the other companies in their consumer-packaged goods peer group.

When people look at these big price swings, it is important to understand that this is not a Procter & Gamble or something along those lines, where you have a significant percentage of the stock held by institutions, fund managers or ETFs. This is all pretty much retail activity, and retail investors may not have the patience, investment horizon or approach that you would see from an institution. That’s fine, but people need to understand that the profile of these companies may be a little different when it comes to secondary market trading activity as a result.

Mining is another sector that is historically important to the CSE. In 2022, over 70 new mining companies have listed on the exchange. What makes the CSE such a good home for resource companies?

There are two things that I would highlight. The first one is that our team has a really good reputation with leaders in the entrepreneurial community, as well as the investment bankers and the accountants and the lawyers who service that community. We have surveyed these groups over the course of the year to get a better understanding of how they see us and our competitors. We see not only a high level of satisfaction, but a lot of repeat business from these professionals who have had a positive experience as they bring a company to market on the Canadian Securities Exchange.

That experience includes everything from the analysts reviewing files to our accountants. As one example, Francis Manns is an experienced consulting geologist who was extremely influential in the development of 43-101 reports for mining. He is now a resource at the CSE available to our issuers as they look to improve the quality of their public disclosure through technical documentation. He is a highly regarded individual and someone whom people in the industry look forward to working with.

The other piece is that our pricing is very amenable and responsive to the needs of the mining community. It is less expensive to list on the Canadian Securities Exchange than on other markets via IPOs and RTOs. We have long had a policy of providing cost certainty for companies. We are not looking to charge fees as a company raises money, for instance. We are not in the situation where we are nickel-and-diming our companies. They know at the start of the year what their budget is for maintaining a listing on the Canadian Securities Exchange and we stick to that. This is something the companies appreciate because they apply more of the money raised to advancing their projects, as opposed to putting it in the back pocket of the exchange where they happen to be listed.

I think the combination of those two things gives us a powerful leg up when it comes to attracting new business from the mining industry.

In October, the exchange launched the CSE2 trading venue. What exactly is CSE2 and what led you to launch a new venue in what appears to be a fairly crowded landscape?

This is a difficult question to answer quickly because it involves a grasp of evolving Canadian equity market structure. But I’ll give it a try.

An increasing number of brokers are providing zero-commission trading for their clients. People wonder how they get paid if they are not charging clients anything for the trading services they provide.

One of the ways is to monetize order flow from their clients. So, how do they do that?

Markets in Canada typically incent the provision of liquidity by providing a rebate to the party that posts an order that eventually trades. And they charge a higher fee to the party who accesses that liquidity by causing the trade to happen. It is known as “maker-taker” because one party makes the liquidity and the other party takes it. The maker gets a rebate and the taker is charged a fee.

All markets now have a second book which has an inverted price method in which the party who takes the liquidity receives the rebate and the party who posts the order is charged a fee. That way, the discount broker, let’s say, receives a rebate when they post a non-marketable order, and they receive a rebate in the inverted market when they trade against an order that is already there. That way they get rebates on their active orders and they get rebates on their passive orders.

Now, remember how important retail is to the Canadian Securities Exchange, and a lot of that order flow is coming from discount brokers that have reduced or eliminated trading charges over the last few years.

It is thus critical for us, if we are to maintain our price discovery role in the marketplace, to ensure that we continue to gather as many of the passive and active orders for companies listed on the CSE as we possibly we can. Yes, it is a crowded marketplace, but we are the listing exchange and we need to maintain that price discovery for determining the market value of securities at any given time. The alternative is to potentially lose that to marketplaces that are not having to absorb the expenses and regulatory responsibility to actually list the company. That is where we are coming from with CSE2.

One of the biggest developments slated for 2023 is the introduction of a CSE senior tier. How will this differentiate the exchange and what other activities are you planning to support this evolution?

There are really a few things, but I guess the first misconception I want to clear up is that this involves us somehow declaring war on other exchanges in Canada and making a pitch to a company like Royal Bank to delist from the Toronto Stock Exchange and come over to the CSE. It really isn’t that at all.

We have a number of companies on the CSE that would meet the admission criteria on senior exchanges in Canada. And we don’t want to be in a position where those companies are able to follow lesser standards of corporate governance, or longer periods to provide quarterly reporting to the marketplace as well as their annual audit results by virtue of the fact that they are listed on the CSE.

We are trying to put those companies on a level playing field with their peers that are listed on the other senior markets in Canada. We also, obviously, want to retain these companies. I sometimes speak about the Nasdaq back in the 1970s and the 1980s as one of our inspirations. They did such a good job working with Microsoft and Cisco and Oracle way back when they didn’t qualify for the New York Stock Exchange because they lacked tangible assets in the form of factories and steel mills and those sorts of things. All they had was intellectual property and engineers working to improve it.

When the New York Stock Exchange tried to attract Bill Gates and the rest of the senior leadership of the young tech companies in the United States, they told them they were not going to move because they’d had such a positive experience working with Nasdaq as public companies.

That’s the kind of approach we would like to take. We have worked with many companies that have succeeded and are growing. We want those companies to stay and continue to prosper on our marketplace and not go somewhere else simply because they qualify.

The other part is that we are interested in the opportunity to list ETFs and structured products. Looking at some of the other markets in Canada, they have robust structured product and ETF offerings that attract a lot of new listing activity. That is something that has not been available to us in years past, and we hope to open that capability and compete on a level playing field with other exchanges in Canada for that business. We think there are a number of products, such as a true cannabis ETF, that really do have a natural home on the Canadian Securities Exchange.

Let’s close on a look back and a look ahead. Talk to us about what it took to build the CSE to its current status, and what amongst your team’s accomplishments makes you the proudest. What should the financial community expect from the CSE over the next two or three years?

I’m going to work backward and start with the question about what to expect. The answer is not all that exciting, but I’d say to anticipate more of the same. That means the CSE grows quickly and we continue to be responsive to the needs of the corporate finance community in Canada, and particularly to entrepreneurs. That way, whatever industry sectors are receiving support from the investor community in Canada, we will be here to support them and provide them with fair, transparent and accessible trading markets for their securities. And then overlay that with the opportunity to compete for more structured products and ETFs.

What did it take for us to get here?  It is very much the team we built and the reputation it has earned through hard work and engagement with people across Canada, the United States and beyond. They achieve a very high level of customer satisfaction and repeat business – all of the indicators suggest that we will continue to be very competitive with our peers in bringing new companies to market, and really what it rests on is the people we have had around us for years. Our bench is deep and experienced. And we continue to add to it with people who are excited to join a group that did such a good job of building an exchange that is now a material part of the Canadian financial landscape.

There are not many other examples in the world of an alternative exchange like ours being successful and having the impact that it has had. I think that while all of us can take some pride in that, what we definitely can’t do now is to take it easy. It is still a very competitive landscape in Canada and beyond.

CSE Performance

Year-End 2021 Interview With Richard Carleton Part 2

Earlier this month, CSE CEO Richard Carleton sat down for an interview to recap an eventful 2021 and what is shaping up to be the CSE’s biggest year ever in 2022.

It is fair to say that the CSE is moving to a new level in the global exchange ecosystem – it’s like the next generation of the CSE. A senior issuer designation is part of this evolution. Can you update us on its status and the importance of the new designation, both to CSE issuers and the Exchange itself?

I think I should start by explaining that there is no such thing as an exchange designation being senior or junior. The way securities regulation works in Canada is that it is the companies that are characterized as being senior or venture issuers.

On December 9, we formally announced a project in the form of a request for comment published by the BC and Ontario securities commissions. What this entails is a significant rewrite to the listings rules of the Canadian Securities Exchange.

There are two major facets to the project. The first one is that we are updating our requirements for junior companies, both at the entry level and to continue to be listed on the Exchange. We have worked with our regulators over the last couple of years to revise these rules.

The second part, which is grabbing all of the headlines, is that we are creating a senior tier of the exchange. This is not a new exchange or separate trading facility, but a designation for a certain number of our issuers who have achieved a certain size and maturity in terms of the development of their business. Do they have revenue? Do they have significant assets? Is their sales trajectory rising? Do they have a significant market capitalization?

We’ve identified some 60 to 80 companies that would qualify to list on similar exchanges in Canada, and we’ve also seen a move by companies to dually list with Nasdaq this year. So, we are creating a rule framework that will regulate these companies, in effect as senior issuers.

The new framework will require these companies to have larger boards, bring more prescription around corporate governance procedures, plus set shorter timeframes to complete quarterly and audited annual financial reporting. There are also a few other measures that the companies will have to abide by, including more supervision of their continuous disclosure to the market.

In return, we believe there are multiple benefits for issuers designated as members of the senior tier. The first is that we have been working with IIROC to ensure these companies will be included on IIROC’s list of securities that are eligible for reduced margin when in dealer inventory. Right now, when dealers are holding CSE issuers in inventory, they have to take a charge against their regulatory capital of 100 cents on the dollar. Companies trading at more than $5.00 per share will only have to have a charge against regulatory capital of 20 cents, which is equivalent to that on other exchanges in Canada that serve as a senior company marketplace. It sounds technical, but it will have a practical impact on reducing the cost of capital for these companies when they are raising money.

We’re also working with international index providers to ensure that these companies are eligible for inclusion in different indices. For example, the US multi-state operators, which in many cases have market capitalizations in the billions of dollars, could qualify for inclusion in one of the MSCI or FTSE US indices. We have companies operating in Israel that would qualify for inclusion in the Israeli indices. We have been working with the index companies to provide for this capability.

We’ll also have, as part of the senior designation, the ability to list SPACs (Special Purpose Acquisition Companies), exchange traded funds, and structured products. And that’s important because we know that there are a number of ETF manufacturers that would like to launch products that are US cannabis-oriented, and they could launch those products on the CSE. There may not be much room left to run in the SPAC space, but we also know that there are some interesting structured products that are being developed, and we think we are the logical home for those instruments.

That is all part of the Exchange competition to come, where we will be working with the creators of these products to provide an appropriate home for their new listings.

Read Richard’s latest blog post here to learn more about issuer designations and the request for comments on the CSE’s proposal to revise its listing policies.

The senior designation is obviously going to be a very important development. Considering this, the impressive financing activity, the consistent growth in both institutional and retail investor participation, and other factors we have discussed, can you talk to us more about your views on the CSE’s evolving position within the broader global financial marketplace.

It is very much an evolution. We have been at this for 20 years and have the benefit of a very experienced team, whether it’s on the trading, market information, or listings regulation side, who understand at a very deep level what it takes to provide successful exchange services to the issuer, investor, and trading communities.

What it has really been is a series of efforts by us to eliminate all of the barriers and friction points for our issuers in the provision of those services. If I think back some years ago, we weren’t accessible by the online discount brokers in Canada. That was a huge issue that we devoted a great deal of time and energy to, and then five or six years ago, we managed to overcome that hurdle. Of course, that had a big impact on turnover, accessibility, and the appeal of a listing on the Canadian Securities Exchange.

Now that we have a cohort of larger, highly successful companies that have achieved a significant level of development in their lifecycle, we are looking at the friction points there. I talked about membership in international indices. We also need to improve access for international investors, one example being brokers who provide access to Canada for accounts in Europe, Asia, the Middle East, and other regions. We have to ensure they have access to these names.

There are institutional investors who claim they won’t invest in the small-cap space and have concluded that anything listed on the CSE is small-cap in nature. We have to work with these institutional investors to educate them about the success that many of our issuers have had, and the fact that they have attained market capitalizations in excess of a billion dollars in a number of cases.

At the end of the day, it’s a case of keeping our nose to the grindstone. It’s doing the hard work, making the trips, representing the issuers, identifying the hurdles, and developing plans to overcome those challenges.

It really sounds like 2022 is going to be one of the most important years in the CSE’s history. Let’s conclude with your thoughts on what companies listed on the CSE can anticipate in terms of service enhancements in the new year.

In the first part of the year, we are going to be working with the industry on completing the comment period for the new listings manual project. And in conjunction with that, we are going to be quite vocal across a variety of channels, explaining to people that we have succeeded with a number of very large companies, so the marketplace can expect some promotion and information related to that.

As our customer base grows and our regulatory obligations and connection with the framework for the senior issuers grows, we will be enhancing the teams who work with our issuers and their advisors, in our Toronto and Vancouver offices in particular. It is incredibly important that we continue to maintain our service levels, which is a really important part of what we do. I have received tremendous feedback over the years regarding both the personal service levels people feel they get at the Canadian Securities Exchange and the very positive problem-solving culture within our group. And we are certainly looking to maintain that as we continue to build out the team in order to provide high levels of service.

And I know we have talked about it for some years now, but we will see settlement and clearing services from the Canadian Securities Exchange in 2022. In fact, I have just come from a demonstration of the real, live system which is up and running in our testing environment. So, that is something I think will give us a significant advantage, in particular when we are working with the industry on listing structured products and taking advantage of the benefits of tokenizing their securities.

Obviously, there is lots going on. As we know, there is also motion in the global securities world. We’ve got Cboe Global Markets, which has acquired the NEO Exchange locally, and they will be closing that transaction at some point next year. And so that really leaves us as the only Canadian listing venue, along with the TMX Group, being locally owned and operated. That is an advantage we will be continuing to present to the industry in 2022.

Check out Part 1 of the interview here.

CSE Performance

Year-End 2021 Interview With Richard Carleton

Anyone keeping an eye on developments at the CSE over the past several years has watched the Exchange go from strength to strength, with the number of listed securities, capital raised by CSE-listed issuers, trading volume, and other performance measures climbing sequentially without interruption.

As exciting as the growth in CSE performance and services has been to date, the Exchange is preparing to take things to an entirely new level in 2022. Key to this is a senior designation for larger issuers who meet certain criteria. The new designation, and the regulatory framework that comes with it, also means that ETFs, SPACs, and structured products will be able to list on the CSE for the first time.

In an interview conducted in mid-December, CSE Chief Executive Officer Richard Carleton discussed these topics and more, giving issuers and investors a preview of what is shaping up to be the CSE’s biggest year ever.

Companies listed on the CSE have enjoyed an excellent response to their capital raising efforts in 2021, with a total of $7.74 billion in financings completed in the 12 months to the end of November. We have seen equity raises of all sizes, and debt is becoming more prominent as well; in October, Trulieve Cannabis successfully marketed US$350 million in senior notes. The listing environment at the CSE is designed to facilitate a low cost of capital for the Exchange’s issuers. As larger fundraisings take place, is that advantage being maintained?

There is a lot of ground to cover there, but I’d begin by saying that the Exchange exists to remove as much regulatory friction from the capital formation process as possible, so there are advantages for CSE-listed issuers generally when they are raising capital. As an example, we don’t charge issuers a percentage fee of the amount raised each and every time they do a secondary offering.

In large measure, the decrease in capital costs we’ve seen is also a function of changing dynamics, in that capital is being provided to large and successful companies, particularly in the US cannabis space. For instance, some of these companies were able to launch debt offerings because they now have substantial revenues to secure the debt against. As a result, they have seen the cost of capital from a debt perspective drop to levels which begin to reflect companies of similar size and growth trajectory in the consumer-packaged goods sector.

It’s thus a function of how we operate as an exchange, but also an indication of how capital providers view many of the companies listed on the CSE.

At the end of November, there were 736 listed securities on the CSE, which is 17% higher than at the same time last year. Talk to us about some of the trends you have observed in companies coming to market in 2021.

The first thing is that we are likely to achieve a record in terms of the number of new companies that join the Exchange this year. Right there, that tells you that the market is very robust for companies looking to raise capital to go public. One of the interesting things is that it has been very broadly based. We have many new themes that people have been interested in.

The sustainable food movement is a good example of a sector where a number of companies have tapped the public markets this year. Obviously, the psychedelics industry has also captured a good deal of investor attention. And then there are long-standing industries, such as mining, which is back in a big way, not only because of the robust nature of precious metals prices but also because investments are being made in various industries to advance the electrification of the economy, or decarbonization if you want to call it that. This has a significant impact on the mining space because the demand for the minerals used to produce batteries is extensive. And, of course, companies are also looking to shorten their supply chains, so investments in projects located within North America, for example, have been accelerated.

We have also had a continuing robust marketplace in the cannabis space. We have seen some new issuers in this sector join the Exchange this year and significant amounts of capital have been raised.

In addition, there has been tremendous investment in technology, which provides us with esports, gaming, and the decentralized finance companies related to blockchain. From my 30 odd years of experience in the capital markets, this is really one of the few times I can recall when virtually every industry sector is firing on all cylinders.

There is potential to challenge another listings record in 2022 and surpass this year’s total. This is a very exciting prospect for me, as it shows there is a high demand for our services.

Explain the role of retail investors in the market in 2021. What impact did they have on trading and liquidity?

In a word, huge. The junior capital markets in Canada are traditionally dominated by retail investors. Retail participants have always constituted an extremely important part of the investing and trading community that supports the work of the Canadian Securities Exchange.

It’s no secret that there was an absolute explosion of retail trading activity, particularly in the first quarter of 2021. We’ve set records in terms of daily number of shares traded, transactions, and value traded. By any measure, we are significantly above any kind of activity levels seen previously. And that growth has been principally driven by the expansion of activity from the retail space.

When we talk to our colleagues, and particularly those in the discount brokerage sector, we’re hearing that a whole new generation of investors has joined the marketplace, and really just since the beginning of the pandemic. These newcomers skew significantly younger than the traditional retail investor population who were in the 55 and up category in the past. We have seen lots of new accounts opened with significant participation from people in their 20s and 30s. These are people who are investing in the markets for the first time, and they bring a different viewpoint. They were enormously important in providing capital to the cannabis industry. They are very focused on issues around sustainability and environmental impact, diversity, and helping create a better world. They want to invest in company stories they believe in and that are helping to shape that better world.

There are a number of longer-term outcomes we will see because of this. Things such as ESG (Environmental, Social and Governance) reporting from companies, as well as companies having to pay a significant amount of attention when presenting their stories to where they sit in the world of impact investing. I think it is healthy, it’s positive, and it’s going to introduce some important changes to the way in which companies raise capital and communicate with their shareholders.

Check out Part 2 of the interview here.

CSE Performance, Industry Insights

Promoting a Level Playing Field for All Publicly Traded Companies in Canada

By Richard Carleton, CEO of the Canadian Securities Exchange

One of the very best aspects of the Canadian capital markets is our ability to provide funding to early-stage companies. With a successful history of financing mining and oil and gas exploration, the industry has applied its skills in more recent years to support innovation in a broad range of sectors such as technology and life sciences. This has resulted in notable recent success for companies in the legal cannabis sector. 

Canada is a world leader in the provision of capital to companies from around the world in these fast-growing new industries. Recent investment themes include the development of medical applications for the treatment of mental health issues with psychedelic compounds, and backing for the rise of cryptocurrencies and supporting technologies that are driving efficiencies in the payments sphere and the provision of financial services.  

As with any industry, competition in the provision of stock exchange services in Canada have benefited issuer companies and investors alike. 

The Canadian Securities Exchange (CSE) launched 18 years ago with a mission to provide public issuers with a streamlined, lower-cost alternative to the Toronto Stock Exchange and TSX Venture Exchange. We succeeded. The CSE is now home to more than 700 active listings and has attracted more global issuers of greater size and maturity over the last few years than at any other point in its history. 

Greater competition, including other new exchanges launched after the CSE, has clearly benefited Canada’s investment community, as well as the companies and investors that it serves.

That said, we can and should be doing a much better job of enabling competition in the provision of exchange services to companies, brokers, and investors. Here are a few examples of the challenges faced by new entrants, and some potential solutions. 

Market Data

In the United States, an industry consortium collects and processes real-time market information from the stock exchanges and then provides access to the data for all the securities listed on each exchange (Nasdaq, NYSE and NYSE American) for a single fee. In other words, regardless of where a particular security trades, and at last count there were 16 venues, an interested investor can “see” every trade and current quotation. 

This is not the case in Canada. In an environment where almost half of the trading in TSX and TSX Venture Exchange stocks occurs on different marketplaces, investors are forced to deal with the venues individually to see the full picture. Many people, who either don’t understand our convoluted market structure, or do not want to pay these separate fees, opt to take the data from the incumbent exchange only. This leads to a series of issues:  

  • When trading is disrupted for any reason on the TMX Group exchanges, Canadian liquidity dries up precipitously. In the United States, when the major exchanges have technical issues, the other markets pick up the slack without missing a beat. Canadian markets are not nearly as resilient as they could be.
  • With large segments of the industry not having access to meaningful market data, and this group includes the professional retail advisors at the national investment dealers, the lack of transparency does little to enhance confidence in the functioning of Canada’s stock markets. People naturally assume that if they can’t see trading activity, that something unwholesome is going on. This lack of transparency breeds a lack of confidence in the operation of the markets.               

Index Membership

I again refer to the experience of exchange competition in the United States. The tech giants we now know so well were essentially forced to go public on Nasdaq, because NYSE’s listings qualification rules during the 1970s and 80s required a company to have significant tangible assets. In other words, the exchange didn’t give credit to the important intellectual property assets held by the rising technology sector. 

This subtle form of discrimination extended to membership in the benchmark US indices such as the S&P 500 and the Dow Jones Industrial Average: companies were required to be listed on the NYSE to be eligible for inclusion in these indices. It took many years of pressure from users of the indices to spur the index providers into changing their criteria. 

We find ourselves in the same situation in Canada years later. The S&P/TSX indices, with hundreds of billions of investment dollars measured against these benchmarks, require a listing on one of the TMX Group exchanges for a company to be eligible for inclusion. 

This has distorted the market in a variety of ways: companies that have grown to a size warranting consideration for inclusion in one of the S&P/TSX indices have left, unwillingly, a competitor exchange to move to the Toronto Stock Exchange. Make no mistake, the possibility of index membership is attractive to prospective listed companies. 

Eliminating the requirement that a company be listed on a TMX Group exchange in order to be included in one of Canada’s benchmark indices will enhance competition in our space.        

The Peculiar Meaning of “Venture Issuer”

This issue is perhaps the most subtle, yet wide ranging barrier to better competition in the stock exchange industry. Let me start with a bit of background. To promote a framework where it is cost effective for small companies to go public, regulators have created two sets of requirements for public companies: those set out in the provincial securities acts with rules for governance and reporting for larger, more mature companies, and a less prescriptive set of rules designed for so-called “Venture Issuers.” 

Unfortunately, instead of identifying which public companies are “Venture Issuers” based on objective measures like market capitalization, revenues, assets or other objective measures, the framework instead defines them as issuers listed on the TSX Venture Exchange and the Canadian Securities Exchange. 

This system worked reasonably well during the early stages of exchange competition in Canada. When smaller public companies reached a certain level of success on the TSX-V or CSE, they would typically move their listing to the TSX or a US exchange. At that point, they would shed the “Venture” label and be re-classified as “Issuers” for the purposes of their disclosure and governance rules. 

This labelling is extremely important because “Issuers” and “Venture Issuers” are not treated equally in the investment ecosystem:

  • CSE-listed “Venture Issuers” are not eligible for margin relief under the rules of the Investment Industry Regulatory Organization of Canada. This means that CSE-listed companies are not permissible in client margin accounts; securities of these issuers in dealer inventory are carried at full value against the firm’s regulatory capital. This measure increases the cost of financing for these issuers and can keep some dealers out of the space altogether.
  • Investment mandates from institutional investors may not permit these asset managers to purchase the securities of “Venture Issuers,” narrowing the range of capital available for promising early-stage companies and even some larger issuers listed on the “wrong” exchange.
  • Some international index providers will not consider “Venture Issuers” for inclusion in their indices, denying companies exposure to investors and frustrating a company’s attempts to increase the range of investors in their company’s securities.

Thanks to the CSE’s recent success in attracting and retaining larger issuers, particularly in the global cannabis sector, the “normal” evolution of successful companies jumping from the CSE to the TSX has broken down. The CSE is now established as a credible home for larger, more advanced companies, which are using their CSE listings to raise serious amounts of money. The total capital raised by CSE issuers last year exceeded $6 billion, compared to about $0.5 billion in 2016. Last year’s total has already been exceeded this year. Liquidity measures also show the CSE in a superior light to the TSX-V and NEO exchanges and have exceeded the measures produced by the TSX itself for significant periods of time over the last few years.

While we are delighted that larger issuers are choosing to make the CSE their home over the longer term, the “Venture Issuer” status has become a real problem. These larger CSE-listed companies, some of which have market capitalizations in the billions of dollars, are at a significant disadvantage to comparable companies on rival exchanges that are eligible for margin relief and the other benefits I outlined above.

We could wait for the various regulators to address the competitive imbalance, but true to our nature as disruptors in the marketplace, we are tackling these problems head on. 

We are in the long process of rewriting our listing policies to create two tracks for companies listed on the CSE: one for “Venture Issuers” and another for more mature companies. Under the new rules most companies will remain “Venture Issuers.” The larger and more advanced companies will, however, get reclassified, allowing them to (hopefully) enjoy the same benefits as “Issuers” on the TSX. Accordingly, they will be formally subject to a more prescriptive corporate governance regime that mirrors the policies set out for existing “Issuers” under securities law and related exchange rules.

We have worked hard with regulators to formulate this revision of our listing policies and have published the proposed changes for public comment here: https://thecse.com/en/about/publications/notices/notice-2021-005-request-for-comments-proposed-policy-amendments 

The entire investment community should support our proposal. It is simply a matter of fairness and common sense. By addressing regulations that should have been dealt with years ago, we can enhance the competitive landscape for issuers and investors in Canada and ensure a strong and vibrant capital formation ecosystem well into the future.

CSE Performance, Industry Insights

Richard Carleton’s Interview with Highly Capitalized

CEO Richard Carleton was pleased to sit down with Greg Hasty from Highly Capitalized during MJBizCon Las Vegas to discuss the CSE’s position in the global cannabis space, how the industry as a whole is maturing, as well as M&A activity and brand building among US cannabis MSOs. Read the transcript of the interview below. 

Greg Hasty:

Hey everyone. Welcome back to our continuous coverage of MJBizCon 2021. I’m Greg Hasty here in downtown LA at the HCN studios. And I have the pleasure of being joined by Richard Carleton, the CEO of the Canadian Securities Exchange. Richard, how are you doing?

Richard Carleton:

I’m doing well. Thanks Greg. Pleasure to be back at MJBiz in Las Vegas after a couple of years off.

Greg Hasty:

Absolutely. I’m very jealous. I’m already envious of you being on the floor while I’m stuck back here in the studio in LA, but great to see you again. Great to connect with you again. 

Lots of changes, lots to talk about since the pandemic hit, but not all of them negative. Some really, really good developments in cannabis and adjacent markets. Tell us a little bit about what’s exciting you. What are you pumped about coming out of 2021?

Richard Carleton:

I think for people who don’t know who the Canadian Securities Exchange is, just a bit of a backstory, we made the fateful decision about five years ago to not just list companies from Canada in the cannabis space, but to begin to work with the industry in the US as well. And we really became the partner for the US multi-state operators to access public capital in Canada, and the United States as well. And all of the significant MSO operators who are public now are listed on the Canadian Securities Exchange. 

We have roughly 160 odd companies in the cannabis space on the exchange overall. And it’s a significant percentage of our market capitalization, and daily trading turnover. From that strength, we have levered that position in the industry to work with companies from Latin America, South America, the Middle East, in particular, Israel, as well as Asia.

So we’ve really achieved a lot for a small Canadian startup. We’re now 20 years old, in a significant position in the cannabis finance space globally. So it’s been a wild ride up to the pandemic. And of course, we all had some uncertainty in the early days. And broader markets were certainly under extreme stress. But then by June, things had recovered dramatically, not just in the broader market, but in the cannabis market specifically when it became obvious that consumers were in fact rotating their purchases in the cannabis space and really supporting the industry in a big way. 

And so, as the companies reported ever-improving results in Canada and the United States, increasing sales and moving towards profitability, that’s opened up a whole new range of opportunities for these companies to raise more capital and to begin to think about planting the flag in new states and new jurisdictions, and expanding their businesses organically.

Greg Hasty:

Absolutely. And I just love the journey that you’ve been on. I’ve been following you for at least six or seven years now and I remember even in my earliest interviews, people talking about getting involved with the CSE and how the CSE is really helping them get out there. And you really were the launchpad organization for so many businesses in the US, let alone businesses in Canada itself. 

So talk to me a little bit about the current state of MSOs and Canadian businesses as well. There’s a lot of activity. M&A is a big thing right now. Tell us about the market shift and what trends you’re seeing.

Richard Carleton:

I think the important driver across the board here is a decreasing cost of capital for the large Canadian LPs and the US multi-state operators, with the number of opportunities that are opening up in new jurisdictions in the United States. We obviously have the tri-state area on the east coast. Michigan is obviously developing jurisdiction, Pennsylvania’s developing, maybe Ohio at some point in the not too distant future. They’re even talking about medical in Texas. 

So there’s still tremendous opportunities for growth in the US markets, specifically. All told, I think it’s about a hundred billion a year between the illicit and the legal markets in the US now. So we know that there’s an enormous addressable opportunity for the operators to take advantage of, and they are. What we have seen is that companies from the US space, through the CSE, have raised more than $4 billion on a year-to-date basis.

That money is pretty much earmarked for mergers and acquisitions activity, as well as to build out in some of the states where they’re currently already operating. And again, there’s a significant cost of capital advantage. We’ve seen debt capital raised by a number of these companies that are now down in the single digits from a coupon perspective. 

A year or two ago, companies were looking at 15% interest on debt. We saw last week an issuer raised debt at a 7% coupon. And the difference, of course, is that they have cash flows to secure that debt financing against, and so, the cost of capital has come down. They will use those advantages, as I say, to be very active in mergers and acquisitions activity, and they will continue to expand their footprint in the United States in particular.

Greg Hasty:

Do you see any difference in how MSOs are approaching M&A activity compared to what they were doing pre-pandemic? We saw a lot of MSOs build themselves up. And sometimes, it was a little “cart before the horse” in a lot of cases, and sometimes they would tackle almost too much in activity. 

Are you finding that these MSOs that you’re working with and have partnerships with are being a little bit more strategic in their approaches? What’s kind of top of mind for them right now when they’re looking at different M&A opportunities?

Richard Carleton:

I think we understand well now where the value in the chain is highest. With cultivation assets, I think this is what you were saying was a big focus of investment in the early stages. And we now see over-capacity in a variety of regions in the United States, particularly California. Clearly that’s not going to be a source of margin for these companies moving forward. 

It’s all about building brands, rationalizing your supply chain, and getting more and more product on the shelves, whether you own the dispensary, or through license agreements or agreements with recognized retailers, to get your high margin products in the hands of consumers. And I think that’s a sign of the increasing maturity of the industry, and understanding where future revenue and margin growth is going to come from.

Greg Hasty:

I’m personally really excited by that as a marketing and branding guy, to see people focus on consumer experience, on brand loyalty, on proper brand stewardship in cannabis, and not just cannabis-adjacent markets. You have psychedelics that are coming online. You even have technology companies that are now focused on the consumer experience and quality and stuff like that. So it’s really nice to see that maturity come into the industry, and it sounds like it’s just going to be more and more of a benefit for our partners moving forward.

Richard Carleton:

That’s absolutely right. And when we look at, for example, the Canadian LPs, they have real challenges in building brands because of the marketing and advertising restrictions that are placed on those companies. 

That’s actually why you see the Canadian LPs wanting to invest into the US business lines, because that is where you’re able to develop those brands, and build consumer loyalty. Because again, this isn’t really the same as any other consumer packaged goods where you’re trying to build a brand from scratch because you know there’s an addressable market. You’re trying to win back share from the illicit market. 

And so to do that, to command a bigger and bigger share of that brand loyalty and a successful consumer experience, it’s obviously going to be absolutely critical in winning that share.

Greg Hasty:

Wonderful. Well, Richard, I really appreciate your time. I love chatting with you. We can go so much deeper in the flow of the markets, but what’s wonderful about cannabis is that it’s always exciting and there’s always something going on. So every time we talk it’s a new and amazing adventure.

But that being said, the trend of maturity keeps going. Seeing these markets come online stronger, seeing these companies come back stronger is such an exciting thing. But thank you again, Richard, I love the chance to talk with you, and I hope you enjoy your time on the floor. Always make sure to check out the Canadian Securities Exchange on their website, and Richard, I believe you also have CSE TV, which is your social media outlet, correct?

Richard Carleton:

That’s correct. That’s our YouTube channel. We encourage everybody to subscribe. Through the pandemic, we’ve been doing a lot of our shareholder and company education through the medium of YouTube, as well as LinkedIn and Twitter and Facebook and so on. But we really like YouTube. 

Greg Hasty:

Beautiful. So make sure to go on YouTube, check out CSE TV. Really great quality content. And they’ve really put in the work, especially over the pandemic. Richard, thank you again. It was great to see you. Make sure to also check us out on highlycapitalized.com to stay up to date on today’s events and all the interviews you may have missed, as well as the upcoming interviews. And make sure to follow us on LinkedIn and Facebook to stay up to date on our broader services. We’ll be right back. Stay tuned. See you for the next interview.

Richard Carleton:

Thank you.

 

To watch the full video interview, click here.

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.

CSE Performance

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.

CSE Performance

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.

CSE Performance

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.

CSE Performance

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.