Following the Money: Panel Discussion on Raising Capital in Canada

If there’s one thing common to companies of all sizes and structures, it’s that they all need capital to grow and thrive. The ecosystem of how and where raising capital takes place, however, has recently been undergoing rapid evolution.

Whether or not this ecosystem and its stakeholders are moving in the right direction was the central theme of a panel discussion at the 2014 Canadian Investor Conference entitled: “Financing Methods: Where is the Money?”

Organized by Cambridge House International in Toronto, the panel included distinguished members from across the investment industry landscape and was moderated by BNN anchor and reporter Andrew Bell.

The panelists included the CEO of the CSE, Richard Carleton; President of the TSX Venture Exchange, John McCoach; President, and CEO, OTC Markets Group, Cromwell Coulson; President and CEO of BoardSuite, Oscar Jofre; and Co-Founder and Managing Director of WoodsWater Capital LP, David Franklin.

The discussion was a lively one offering a number of perspectives related to the availability and accessibility of capital for early-stage companies in Canada. Among the topics that the panel covered were why retail investors have been reluctant to participate in resource investment markets, the viability of equity-based crowdfunding and the challenges facing early-stage companies in raising capital.

For ease of reference, the following is a list of topics that Richard Carleton spoke to as part of the panel. To view his sections of the talk, simply click on the urls below:

As was shown in the panel discussion, there are many different options now available to firms interested in raising capital. In spite of their differing positions on which direction or platform would be the most viable, what all the participants agreed upon was the high degree of change the capital raising landscape is experiencing.

From the CSE’s perspective, the positive growth and continued interest by companies to list on the Exchange are an important signal from the market. This interest is a validation that the CSE plays an important role in helping entrepreneurial firms attract and obtain the kinds of capital required to grow their business.

While this panel highlighted the uncertainty as to where the money is, it also hinted that a marketplace that efficiently connects capital to innovators is likely to be the place where that money will be going.

Click below to watch the video of the full panel discussion.

How to Make a Market: CSE Provides Comments on Proposed Changes to NI 21-101 and NI 23-101

When it comes to running a successful enterprise, savvy entrepreneurs understand the value of being an effective listener.

This lesson is one that the CSE has witnessed time and again from the growing numbers of entrepreneurial companies listing on the exchange. It is also a lesson that has helped shape recent comments made by the CSE’s CEO, Richard Carleton, on the difficult task of crafting effective policy for current and future Canadian securities marketplaces.

Along with other major stakeholders across the Canadian securities landscape, the CSE has contributed its insights on the proposed changes to the securities rules: National Instrument 21-101 Marketplace Operation (NI 21-101) and National Instrument 23-101 Trading Rules (NI 23-101).

One of the biggest challenges common to all market stakeholders is how to respond to rapidly changing marketplaces and technologies.

Issues such as data center location and data stream distribution structures may seem innocuous to many observers however the consequences of the decisions made on these ultimately influence the answers to questions such as: Who gets market trading information first? What kind of downtime the market can expect in case of a disaster? And who can access the most detailed trading information (and for what purpose) being generated by marketplace activity?

In reviewing responses received by the Canadian Securities Association (CSA), as part of their request for comments, it is fascinating to note the degree of complexity that arises from many different opinions on so many of the issues being raised.
It is no small feat to sort through these differing opinions let alone create sound, balanced policies that address the needs of today’s marketplace while also leaving room for tomorrow’s marketplace to evolve. And yet, this is the challenge that lies before Canadian securities regulators.

For its part, the CSE continues to demonstrate its commitment to the needs of the current market as well as to the marketplace of the future. Philosophically and operationally, the CSE has strategically pursued creating a fair and efficient environment for entrepreneurial organizations and investors to come together. Reducing operating burden and reduced fees are certainly no coincidence.

When it comes to setting the rules for such a complex and dynamic marketplace, the devil is most certainly in the details. Stepping back for a moment, though, it is precisely the regulatory and administrative details that the CSE understands can be a challenge to the speed at which many companies can grow.

With some time still left before changes to NI 21-101 and NI 23-101 are finalized, there is likely room for further debate. Of the voices that have contributed to the dialogue thus far, however, there is one that warrants being listened to most carefully of all: the market. It’s a voice that great entrepreneurs tend to listen to and one that favors keeping things simple.

In Need of an Invisible Hand? Proposed Amendments to NI 23-101 Trading Rules Cause a Stir

The waters for securities intermediaries in Canada seem like they’re about to get a bit choppy.

Recently, Canadian Securities Administrators announced that some of rules that govern the transaction of securities are up for review. Specifically, amendments are being proposed to the National Instrument 23-101 (NI 23-101) Trading Rules in the areas of trading fees, data fees and most notably, the order protection rule (OPR).

Given the stakes involved, the proposed changes are almost certain to generate a spirited debate between those in favour of and those opposed to the amendments to the OPR.

One such point of view came from Jeffrey MacIntosh via the Financial Post. In his recent article, MacIntosh takes aim at the proposed NI 23-101 Trading Rules amendments and provides an insightful analysis about the potential impact they may have on the multi-marketplace model.

While there are other issues as well, OPR appears to be a linchpin, and will therefore be an important topic to continue tracking. If you have thoughts or comments on the proposed amendments to NI 23-101, we’d also love to hear them – feel free to leave a comment below.

Angels & Devils: The promise and pitfalls of crowdfunding for capital raising

The following views and opinions presented in this post are solely those of the author and do not necessarily represent those of CSE – Canadian Securities Exchange.

Crowdfunding conceptLove it or hate it, crowdfunding looks like it is here to stay. Although the debate on whether crowdfunding is ultimately beneficial or harmful is still ongoing, it appears that major stakeholders from investor groups to securities regulators are beginning to take the idea of crowd-sourced capital raising seriously.

Fairness is a Two-Way Street

Like most promising ideas, the devil, it seems, is in the details.

The spirit of crowdfunding espouses greater access to investing opportunities by smaller, non-accredited investors.  On the other hand, the rules currently in place are designed around curbing widespread participation in “risky” investments.

Striking a balance between investor participation and protection is no easy feat. This balancing act directly impacts industry’s ability to access capital while meeting disclosure requirements.

To be considered as an alternative to current methods of capital raising, crowdfunding needs to be in-line with existing controls on capital raising in a heavily regulated and highly structured capital market infrastructure. After all, the premise is that crowdfunding should increase the ‘fairness’ of market participation.  In the spirit of ‘fairness’ however, that should mean that crowdfunding doesn’t undermine the existing regulatory checks and balances put in place to protect both investors and industry.

Exactly how stakeholders will come to some consensus of balancing participation and protection is still being ironed out. One of the voices in the ongoing conversation about crowdfunding in Canada is the well-respected angel investor, Mike Volker.

A Moving Target

In a recent blog post – entitled “Crowdfunding = Going Public“, Volker presents a picture of an evolving capital-raising landscape in which crowdfunding will essentially mirror the existing landscape but in a much more fragmented way.

Volker’s article highlights the key issues confronting crowdfunding and makes several interesting points.

First, it simply is not fair to exclude investors based their economic standing (ie. the 99%), and that fundraising should be more democratic and inclusive of “non-accredited investors”. (Note the recently implemented “Existing Security Holder Exemption” is a step in the right direction).

In addition, Volker challenges the assertion that fraud is the bigger culprit for investors losing money, pointing instead to businesses failures that plague early stage companies. Simply put, the overriding risk that investors must take-on when making an investment in an early-stage company is that the company or idea simply won’t succeed.

Regardless of fairness or risk,  the main point Volker highlights is that capital is being left on the sidelines as a result of the current system. Non-accredited investors are being held out of the market, due to regulation, and not able to participate in the high-risk, high-reward investments extended to the “wealthy” 1%.

Crowdfunding Hurdles

Letting non-accredited investors participate in earlier stage deals is a key driver behind crowdfunding, but as Volker points out, implementation will be a challenge.

Three points in particular stand out:

  • Share registration and logistics of shareholder management;
  • Standardized continuous disclosure, and
  • Enabling liquidity for investors.

Volker tallies all of the above points and comes to the conclusion that innovations at the stock exchange level, similar to what the CSE has undertaken, could be a good answer to the questions that crowdfunding is trying to answer.

Specifically, with innovation, existing infrastructure can enable companies to efficiently raise growth capital from the public while enabling all investors with adequate, continuous disclosure within a regulatory framework that is fair to all parties involved.

Change is Inevitable

The writing on the wall is clear. There is an appetite by both investors and companies to connect and participate in capital flow in ways that the current system just isn’t providing. Whether this participation need is met by crowdfunding or via existing channels, it is clear that the angels and demons would be better served preparing for change rather than arguing over it.

To read Mike Volker’s full post, click here: http://mikevolker.com/crowdfunding-going-public/

Reminder: OSC Participation Fee Relief Application Deadline Coming Up

The March 31st deadline to apply for OSC participation fee relief is just around the corner.  As a reminder, earlier this year OSC Staff Notice 13-704 mentioned that certain reporting issuers (class 1 and 3C) and smaller registered companies may be eligible for OSC participation fee relief.

According to the OSC, this initiative was developed as a response to the challenging conditions faced by market participants, specifically those who experienced significant decreases in market capitalization (for reporting issuers) and revenues (for registered companies).

For reporting issuers, the fee relief may range from $160 to $13,350 and for registered firms, the range is projected to be between $235 and $17,725. The notice states that most firms will end up qualifying at the lower end of the range.

To help ensure the application process goes smoothly, it is recommended that supporting documentation be provided on how previous fiscal market cap has been calculated.

The full details on eligibility, documentation and support can be found by clicking on the following link.  There is no cost to apply.

CSE Included in CSA Notice 45-312, Exemption for Existing Security Holders

Provincial flags of CanadaThe CSE is happy to report that the Canadian Securities Administrators (CSA) have included the CSE to changes made to Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders. This rule applies in all provinces except Ontario and Newfoundland, and we are encouraging those jurisdictions to climb aboard ASAP.

It should be noted that the Ontario Securities Commission (OSC) will also be introducing several capital raising prospectus exemptions in the coming week – more to come on this topic as details emerge.

In effect, this exemption allows companies to raise funds from existing shareholders via private placements without having them meet other exemption criteria such as accredited investor status. Incumbent investors will benefit from expanded investment opportunities as a result of this exemption – a win-win for listed companies and their shareholders.

Regarding the additions to exemption, Bill Rice, Chair of the CSA and CEO of the Alberta Securities Commission (ASC), had this comment:

“Certain changes to the exemption were made in response to suggestions that were submitted, including expanding it to include issuers listed on the TSX and CSE.”

CSE is pleased to know that its comments on the matter were recognized and responded to. You can read the CSE comment letter here, originally submitted on January 17th, 2014.

The Exchange would also like to thank its community supporters, including many in the legal community that also forwarded their support of CSE’s inclusion into the exemption.

Further Information Regarding CSA Notice 45-312

To read the full press on the BCSC website please visit: https://www.bcsc.bc.ca/release.aspx?id=19338

The full exemption can be found on the BCSC website as well: https://www.bcsc.bc.ca/policy.aspx?id=19324&cat=4%20-%20Distribution%20Requirements

Medical Marijuana Stocks: A Look at the Budding Industry

Colbert_Marijuna_webThe recent interest in marijuana as an investment idea is garnering more than just a little buzz from the investment community and beyond.

As the regulatory landscape around marijuana continues to evolve in the US and here in Canada the conversation has also begun to change. The concerns, it appears, have been shifting away from whether or not it is acceptable to use, and towards understanding circumstances for appropriate use and how best to structure as well as regulate the cultivation, processing, distribution and (of course) taxation.

While some of the conversation on the wave of ‘ganjapreneurs’ is tongue-in-cheek (see Stephen Colbert’s recent view on the matter here), the Canadian conversation is currently focused on how marijuana for medicinal purposes can be made more widely available.

The following piece by Proactive Investors, provides some background to the recent interest in medical marijuana stocks here in Canada.  It highlights two CSE-listed companies, Enertopia (CSE:TOP) as well as Abattis Bioceuticals (CSE:ATT) as emerging players in this space.

Another recent addition to the CSE listed company roster – Next Gen Metals (CSE:N) – has also identified itself as a participant in the hemp and medical marijuana space having recently created a division to address this market opportunity. Southbridge Resources (CSE:SOU), a CSE listed company, also recently announced that they are making possible inroads into the sector with the potential acquisition of Vodis Innovative Pharmaceuticals Inc.

Without question, the road ahead on marijuana as investment appears to be paved with uncertainties. Nevertheless, entrepreneurs and investors are already at work trying to find where and when ‘budding’ opportunities in the ‘pot-com’ industry are going to present themselves next.

For further context, read the full article on the topic at Proactive Investors.

CSE Chairman Talks Regulation on BNN

CSE Chairman Thomas Caldwell went One-on-One with Andrew McCreath on his weekly BNN program to discuss regulation and the markets and most pressingly addressed the question: Is too much regulation hurting the securities industry?

Click here to watch the entire interview discussing regulation

Tom Caldwell discussed regulation on BNN
Tom Caldwell discussed regulation on BNN

Tom, a vocal advocate of improving securities regulation in Canada, lent his thoughts on the current state of “over regulation” in the Canadian securities industry, exemplified by his early comments in the interview :

“I think we’ve reached a tipping point where the volume, the mass of regulation is so great – and a lot of it is not substantive in protecting investors – but the volume is representing a massive cost, not only to independent brokerage firms, but also to companies raising money – ergo it’s impacting the economy.”

Tom then touches on the spiralling growth of regulation as illustrated by this point:

“Take a look at the Ontario Securities Act – a year ago it was 2800 pages, this year it’s 3500 pages. it’s been expanding at 20% a year.”

One issue he is particularly concerned about is the upcoming Client Relationship Model, which could have dire consequences on transactional brokers that invest in junior companies:

“Brokers will no longer recommend junior or new companies to investors. The risk is too high for the broker – it’s going to hurt that industry big time.”

From a securities firm perspective, the increasing growth of regulation is making the business model of running a brokerage unsustainable:

“The costs of regulation are now the killer… typically one third to one half of all your administrative costs relate to regulation, that is an unsustainable business model.”

Ultimately, Tom offers his thesis on where the industry needs to look to improve, for the betterment of the economy:

“I think we should take a look at securities regulation and see how we can make it better – better being simpler… because in securities regulation less is more, simpler is better. Because it is easier to police and it is easier to focus on from the broker to comply.”

Not dismissing the importance of regulation (it is very important), Tom makes the telling statement about how growth in regulation can be misinterpreted as a positive by saying:

“Sarbanes-Oxley never saved one investor one dollar!”

The second portion of Tom’s interview focuses on his market outlook.

Click here to watch hear Tom’s view on the markets

Tom_Caldwell_BNN_2

Some quick insights from the second portion of his interview with Andrew:

  • A self-identified “incurable optimist”, Tom is still positive on the markets – both in Canada and the US.
  • He still sees value in some stocks that others might not including Barrick Gold, bought as a turnaround last year (he’s a self-professed “garbage man”),  and US Banks including Citibank, Morgan Stanley, and Bank of America – who have tremendous earning power when the economy improves. He believes they will become substantial dividend payers again as they gradually reacquire stock.
  • Likes Canadian banks as an investor but not as competitor.
  • Inflation will be back and it makes sense to own stuff rather then be a lender in this type of environment.
  • Tom discusses Urbana Corporation (CSE:URB) and thinks there is a great model with closed-end funds as they are cheaper to run than a mutual fund. He attests that a lot of fortunes were made in these vehicles 60 years ago.

A Chance to Do Better: Comments From Capital Ideas 2013

In October of 2013, the British Columbia Securities Commission (BCSC) held its annual Capital Ideas Conference with a particular focus on mining and venture capital markets.  A broad variety of topics were discussed such as raising capital, high frequency trading, retail investor participation.  The BCSC has put together a selection of videos of the panel discussion which is worthwhile to check out.

While it is intuitively simple, the impact of an entire economic sector losing altitude is jarring to the people and stakeholders within it.  In addition to the companies themselves, the broker dealers, financiers and even the exchanges have been impacted by the downturn in the sector.

This conference was an interesting forum for two key reasons. First, it allowed participants to confront the reality of adapting to new models of doing business. Second, and more importantly, it enabled stakeholders to think about the future of the marketplace and to challenge the existing ways of operating in the capital markets that don’t fit the current cycle for many junior mining and exploration companies.

A topic the CSE is particularly passionate about addressing is the current state of raising capital faced by many junior companies.  During a portion of the panel discussion that focused on the challenges facing public companies, CSE CEO Richard Carleton was invited to provide his thoughts on the subject.

According to Richard, despite the many challenges facing the industry, there are opportunities for positive change.

Some of the improvements to the marketplace he mentioned included:

  • Costs to be lowered for the dealers and companies that do business with exchanges
  • Promoting effective market making models
  • Levelling the playing field for access to market data

Check out the following video to hear Richards remarks on the possible opportunities to improve the marketplace for multiple participants.

CSE submits comments on CSA Notice 45-312

Originally submitted to the OSC, ASC, and BCSC on January 17th, 2014:

Re: Multilateral CSA Notice 45-312 – Proposed Prospectus Exemption for Distributions to Existing Security Holders (the “Notice”)

The Canadian Securities Exchange appreciates the opportunity to comment on these significant issues. We offer some general comments and observations in addition to our responses to the specific questions in the Notice.

Background – Canadian Securities Exchange

CNSX Markets Inc. is a recognized stock exchange in Ontario, and authorized or exempt in Quebec, British Columbia, Alberta and Manitoba.  On January 6, 2014 we began carrying on business as the Canadian Securities Exchange, or CSE.  In addition to over 200 listed securities all of the securities listed on other Canadian exchanges are also posted on the CSE for trading, making the Canadian Securities Exchange the only exchange in Canada where participants can trade all Canadian-listed securities.

General Comments

We strongly support introduction of an exemption that relies primarily on the existing continuous disclosure record of issuers and previous investment decisions of investors.  Our only concern is with a proposal that distinguishes among listing exchanges, rather than listed or unlisted issuers.  While the Ontario Securities Commission has stated general support for the proposal and will likely introduce a similar exemption in Ontario, we strongly encourage the CSA to revise the proposal to apply to issuers listed on a recognized exchange in Canada, rather than specify any particular exchange.

Responses to Specific Questions

1. If you are a TSXV issuer, will you use the proposed exemption?

Not applicable.

2. Should the proposed exemption be available to issuers listed on other Canadian markets?

The rationale for the exemption applies to issuers on any marketplace, and the investor protection considerations are addressed for any issuer listed on a recognized exchange.  The exemption should be available to all issuers listed in Canada.

3. Investors will only be able to invest $15,000 in a 12-month period unless they obtain advice from a registered investment dealer. Is $15,000 the right investment limit?

The implication of any fixed value is that all investors share similar individual risk profiles, and in that respect it may not be appropriate.  Waiving the restriction under certain circumstances, however, may address that concern.  Obtaining professional advice is an appropriate reason, and presumably the accredited investor exemption will remain available in some form to those that qualify.  If one of the reasons behind the proposed exemption is to afford all current shareholders an opportunity to avoid the dilutive effects of further financings from the company, then it is likely that the $15,000 limit is sufficient to extend the ability to participate to otherwise non-accredited investors.

4. In what circumstances would it be suitable for an investor that is a retail security holder to invest more than $15,000 in a TSXV issuer?

The proposal to permit a greater investment with advice from a registered investment dealer is sound.  It may also be appropriate to allow investment by shareholders that have already invested greater amounts over a longer period, or already hold an investment the issuer with a current value significantly greater than $15,000.

5. Do you agree that there should be no investment limit if an investor receives suitability advice from a registered investment dealer?

Yes.  An appropriate individual limit is an integral part of the advice that is included with the advice on suitability.  This should be addressed by the dealer’s existing responsibilities rather than added as an additional requirement for the purpose of this exemption.

6. Do you agree that being a current security holder of an issuer enables an investor to make a more informed investment decision in that issuer?

We do not believe that simple ownership enables an investor to make a more informed decision, as any potential investor has access to all of the same information.  A current security holder however, with or without research or advice, has already assumed the risk of ownership of that security and may have a greater incentive to conduct research or seek professional advice.

7. What is the appropriate record date for the exemption? Should it be one day before the announcement of the offering or should it be a more extended period? If you think it should be a more extended period, what would be the appropriate period of time?

Companies may make frequent use of the exemption, which could cause administrative difficulties if the period is too long.  One day, however, is likely not sufficient. Five to ten days may be a more appropriate range.

8. We are currently proposing that the exemption be subject to the same resale restrictions as most other capital raising exemptions (i.e., a four month restricted period). However, there are some similarities between the proposed exemption and the rights offering exemption, which is only subject to a seasoning period.

  1. a.    Do you agree that a four month hold period is appropriate for this exemption?

We believe the four month hold meets the objectives of allowing retail investors to get the discounted price, avoid commissions, and acquire sweeteners, but does not provide advantages over other simple exemptions like “friends and family” or accredited investors.

  1. b.    Should we require issuers to provide additional continuous disclosure, such as an annual information form?

No.  As stated in our general comments, we support an exemption that is based primarily on the existing continuous disclosure record of a listed company.  The existing record is sufficient, supplemented by requirements of the exchanges.

  1. c.     If we were to consider a seasoning period for this exemption, should we consider some of the restrictions that apply under a prospectus-exempt rights offering, such as “claw-backs” limiting insider participation?

Yes. This should be consistent with (a) – make it similar to the rights offering, or similar to a private placement.

  1. d.     If securities offered under the exemption were only subject to a seasoning period, would there be a greater need to ensure investors are made aware of and have an opportunity to participate in the offering?

No.  The proposed exemption will provide more flexibility for issuers to raise capital from an additional source, the retail investor.  In turn, it will provide a new opportunity for retail investors.  We do not believe the intention of the proposed exemption is to create an obligation by requiring issuers to offer all shareholders the opportunity to participate in any financing.

9. We have not proposed any conditions regarding the structure of the financing, i.e., minimum or maximum price, maximum dilution, or period in which an offering must be completed. We contemplate that the proposed financing would be conducted under the standard private placement rules of the TSXV which, among other things, allow pricing at a discount to market price. Is this appropriate or are there structural requirements that we should make a condition of the exemption?

The CSE, as all Canadian exchanges, defines the prices at which exempt financings may be conducted.  If the proposed exemption were to be extended to include all listed companies, the financings would still be subject to the standard private placement rules of the listing exchange.  Just as current exemptions allow the financing and the listing exchange sets the pricing parameters, so it should be with the proposed exemption.

We thank the participating CSA members for the comprehensive review of the issues and the resulting proposal.  In addition, we thank the OSC for clarifying its position on the proposal and intentions to consider comments in developing a similar proposal.

Yours truly,

“Mark Faulkner”

Vice President, Listings & Regulation

cc:       Richard W. Carleton, CEO

Rob Cook, Senior Vice President, Market Development