Tag Archives: Richard Carleton

CSE Performance

Canadian Securities Exchange CEO Richard Carleton’s Year-End 2024 Interview

One of the reasons financial markets never lose their vast audience is that they constantly evolve. Whether the change makes investors happy or not, there is always something new taking place, and one day is never the same as the next. It is a dynamic that was on full display once again in 2024.

Large-cap stocks remained strong, with broader indices setting dozens of daily closing records. And while not fully keeping pace, small-cap stocks finally caught a break in 2024, with those in the Canadian market benefiting from several months during which it seemed like gold was reaching a new all-time high every day. Retail trading staged a resurgence in the second half of the year, and institutional investors returning to the Canadian junior market became a frequent topic of conversation.

The Canadian Securities Exchange continued its evolution as well, and in May, celebrated its many successes over the 20 years since it became recognized as a stock exchange by the Ontario Securities Commission. The Exchange also undertook policy and other adjustments to business lines, joined an important global organization for exchanges, and went into the end of the year positioned to take advantage of renewed interest in cryptocurrencies and other digital assets.

With 2025 just around the corner, Richard Carleton, CEO of the CSE, shares his thoughts on Canadian market performance during 2024, the outlook for the year ahead, and previews important new initiatives that issuers and investors will surely want to watch.

In 2024, the CSE celebrated its 20th year as a recognized exchange. Issuers raised more than $26 billion in capital over the course of those two decades, and the CSE became one of the fastest-growing exchanges in the world. What does this milestone mean to you and to the broader CSE team, many of whom have been with the Exchange for a large part of their careers?

Our team takes a lot of pride in the success that the organization has experienced, and particularly in the last 10 to 12 years. It’s fair to say that the first 10 years were quite challenging, as we fought to become a meaningful part of the Canadian capital markets.

We are extremely pleased, not just with the achievements of the organization itself but those of CSE issuers as well. Companies have raised more than $26 billion through the facilities of the CSE, and being part of that means we have helped to foster the creation of new industries in Canada, the United States, and beyond.

The CSE has been part of several key investment themes over the last 10 to 15 years, whether it was the development of the cannabis industry in Canada and the U.S., or as is the case in the current market, the mining industry. The mining industry is vibrant, both in the so-called battery metals sector, which hopes to provide the needed materials to support the decarbonization of the economy as well as the precious metals group, which is riding the wave of record highs in the price of gold this year.

We’re very happy that we have made it this far, but our work isn’t done by a long shot. We look forward to continuing to help Canadian entrepreneurs, and entrepreneurs from around the world, tap into the Canadian public capital markets.

In June, the CSE announced that it had been recognized by the World Federation of Exchanges (WFE), the world’s foremost group for exchanges and clearing houses. What benefits do you anticipate membership will bring?

I’m actually just back from the annual meeting and general sessions of the World Federation of Exchanges in Kuala Lumpur, Malaysia, so I’ve had a chance to witness the organization operating first-hand.

Our move to join the WFE reflects the reality that a lot of our issuers are looking beyond Canada for capital. We see issuers going to the United States, the U.K., Europe, Australia, and South Asia for money. Raising money locally is a challenge in Canada.

As our issuers look beyond Canada, we need to be out there ahead of them to explain to local investors and investment funds that we are part of the Canadian capital markets framework, and one of the aspects of that is undergoing the process we did to become a member of the World Federation of Exchanges.

Our policies, procedures, and rules were vetted by three exchanges: the Warsaw Stock Exchange, B3 in Brazil, and the Johannesburg Stock Exchange, to ensure that we meet global standards for issuer regulation and investor protection. That provides overseas investors looking to trade or invest in companies listed on the CSE the assurance that we meet the standard that the WFE represents.

CSE issuers have been noticeably more active raising capital in 2024. Which industry sectors led the way, and have investors shifted priority with regard to the sectors they are most interested in?

As I mentioned before, the mining industry, and in particular precious metals exploration companies, have been the leaders in terms of the number of financings completed. They tend to be on the smaller side because the needs of early-stage exploration companies are certainly not the same as companies looking to do significant expansions, so they are not looking for hundreds of millions of dollars at one time.

We have also seen some interest in companies that have integrated artificial intelligence solutions into their product offerings. Of course, with the increase in the price of a number of cryptocurrencies over the last six to 12 months, a lot more interest has come back into the blockchain and crypto space.

The big numbers continue to come out of the cannabis sector, but in terms of the number of financings completed, it is the mining exploration group that is leading the way at this point.

Many market participants believe the second half of 2024 provided a more encouraging operating environment for smaller Canadian public companies than the first half. What were the factors behind this and how did they influence the broader operating environment for issuers and for the CSE itself?

I would say that it was the first three quarters that really weren’t very good, from either a trading or capital formation perspective. And I think it is fair to say – and I am not being controversial in any way – that the federal government’s approach to capital gains inclusion was a significant negative for companies looking to raise capital in Canada. I mentioned earlier that we are seeing our companies go out from Canada more and very much looking to the United States, in particular, for capital.

I don’t think there is any doubt that the decrease in interest rates beginning earlier this year helped fuel both the opportunity for companies to raise capital as well as secondary market trading activity. We were at a very low ebb for the first three quarters of the year, but recently there has been about a 50% jump in trading activity across Canada, and certainly, the CSE has more than done its part in contributing to this increase in activity. The interest rate picture is one aspect of it, and the volatility we have seen in the marketplace around the U.S. election and since has been a factor.

I hope it is sustainable into the new year, as it tends to be a leading indicator of more activity on the listings and capital formation front. As entrepreneurs see more trading activity, and thus more interest in the junior capital markets, they, and investors, are far more likely to support new companies coming into the market.

The CSE’s trading and data operations are closely related but also can be viewed as separate business lines. How has each performed in 2024?

People often ask about the relationships between the different business lines at the Canadian Securities Exchange, or any stock exchange. First and foremost, it begins with the issuers. If you don’t have interesting companies that are making progress toward achieving their goals, it is unlikely that people are going to trade the stocks or be interested in the market data related to those companies. So, where it really starts is having a group of companies that investors in Canada and beyond are interested in owning.

With that, as I mentioned earlier, trading levels on the CSE and other Canadian markets have been very low, and I mean levels that we have not seen since 2013 and 2014. It was a very challenging environment.

During that time, we made some changes to our market data policies. Effectively, we have increased some prices for the first time since 2016 in the market data segment. It was a significant bright spot for the results of the organization over the course of the year, and in fact, as the team worked to implement the new pricing and policies around connectivity and access to some of the Exchange’s services, we identified additional customers. As a result, the performance of the market data business has been very strong in 2024.

The CSE welcomed Rektron Group as its second senior-tier issuer in 2024. What has the overall pace of new listings been? And how does the CSE’s new listings activity rank within the broader Canadian exchange landscape?

The pace of new listings has been quite slow. In fact, not since back into the earlier teen years of this century have we seen such low levels of activity. It has picked up somewhat but delistings over the course of the year exceeded the number of new issuers we welcomed. Unfortunately, we are in a position in the business cycle where the overall number of companies listed on the Exchange at the end of the year will be smaller than what we started with.

That said, we have seen a pickup in activity, particularly since September. Over the last two quarters, we have been listing about half of the companies coming to market in Canada, which is close to historic norms. Perhaps we did a little better in 2022, and particularly in 2021. But, as I say, I am encouraged that we are seeing an increase in the number of companies coming in, and more importantly, an increase in the number of applications that our team is receiving, indicating that we should see a little bit of strength in the new year.

It is clear from CSE press releases that the Exchange’s team has been on the road quite a bit in 2024, attending conferences and meeting foreign executives and industry leaders. The United States seems to be a particular focus. Can you discuss the strategy for international outreach at the CSE?

One of the things people need to appreciate is that a Canadian reporting issuer can access the same prospectus-exempt capital formation techniques that a U.S. reporting issuer can use in the United States. What that means is that without becoming a company that is a reporting issuer with the SEC or listing on Nasdaq or the New York Stock Exchange, you can actually do private placements in the U.S. with U.S. investors using only your Canadian Securities Exchange listing. And the same is true for the other Canadian exchanges.

Given that the U.S. is the largest capital market in the world by a substantial margin – I believe the number is currently something like 62% of the world’s equity market capitalization – it means companies listed on the CSE have a tremendous opportunity to raise money in the U.S. without the significant additional cost that would be undertaken if they were to list on one of the national market system exchanges there.

That has definitely become a real focus for us. As I say, things have been a little tough in Canada over the past year and a half, whereas the U.S. markets have been significantly more robust. There is more risk capital available in the U.S. for entrepreneurs as well. U.S. investors are very interested in the battery metals and the energy metals, and they have been supporting that investment theme for the last two or three years.

But our companies have also gone further offshore. For example, companies in the gold exploration sector, in particular, have always attracted a strong following from Germany and Switzerland. We see our issuers going there for capital formation, as well as to engage in investor relations roadshows and other activities. Many also ensure that their website and continuous disclosure materials are available in the German language.

So, again, that means that we have to be there making sure that local investors understand who the Canadian Securities Exchange is, that we are a material and meaningful part of the Canadian exchange landscape, and that they are not assuming additional risk by investing in a CSE company versus one that is listed on another Canadian exchange.

Bitcoin’s price is near a record high as we head into the end of the year. Does this signal anything about the potential for change in how capital markets operate? Are there businesses that the financial community should be taking a closer look at?

That’s an interesting question because it appears that Bitcoin and other cryptocurrencies are here to stay. And what we increasingly are seeing is those markets being pushed by the regulators in many respects to use the framework and structures that are familiar to those of us in the equity world. So, whether that is the idea that participants in these markets should be members of self-regulatory organizations like the Canadian Investment Regulatory Organization (CIRO) in Canada or that the instruments themselves should be considered securities and the distribution of those securities be done in accordance with the existing securities legal framework, there is an understanding that as these instruments become more mainstream, the traditional finance infrastructure is going to take care of a lot of the concerns people have had about participating in those markets.

It may not mean that they are listed on an exchange, but certainly that there is organized clearing and settlement and that there are regulated parties working in the space in an attempt to reduce some of the criminal aspects that we have seen with some of the companies involved in the crypto space.

As time goes on, it is likely we will see more use of tokenization or digitization of securities and utilization of some of the technologies fundamental to cryptocurrencies to facilitate clearing, settlement, and other processes underlying securities trading in North America.

It has taken a little longer than I thought it would – we were talking about this four or five years ago – but my sense is that progress continues. I think we will see some interesting initiatives in 2025.

In August, the CSE announced approval to introduce a market-on-close (MOC) facility designed to concentrate liquidity, reduce volatility, and enhance execution sizes at the close of trade each day. It comes in reaction to increasing fragmentation of trading activity across a growing number of execution venues. Can you talk about the MOC framework and its importance?

The market-on-close framework is complicated and I don’t expect people to go into the nuts and bolts of how it operates. Basically, the reason we are launching a market-on-close facility is to ensure that entities managing certain types of products, particularly exchange-traded products such as ETFs with CSE companies in them, have the opportunity to manage them in a way that ensures the tightest tracking of their portfolio to the underlying cash market.

This is a critical piece of infrastructure that we need to have in place for the CSE to both have ETFs listed on the Exchange and to make sure that our issuers have the opportunity to be in more ETFs, whether they are listed on the CSE or elsewhere. That is really the motivation – to support our move in 2025 into the ETF listing space.

What other plans does the CSE have for 2025? Can the financial community expect anything else new or different next year in the CSE marketplace and how the Exchange operates?

I’ve telegraphed that we expect ETFs containing CSE issuers to list on the Exchange at some point over the course of 2025. We think it is a great initiative because it will improve liquidity for component companies and increase the visibility of those companies as manufacturers of the ETFs market them to investors. We think there will be real interest from our issuers in wanting to be part of those ETF products, and we will be partnering with a variety of entities to bring them to market. So, this is certainly a big development that investors can anticipate next year.

We are looking to make some further adjustments to our pricing on the trading side with a view to ensure we can cut trading costs for the dealer community as much as possible, while promoting liquidity for companies listed on the Exchange or other-market securities that also trade on the CSE. We made some minor adjustments in October that led to a doubling of market activity in TSX and TSX-Venture stocks traded on the CSE. We think there is more to come in that direction as well.

And while I think it might be premature to go into detail, the Exchange has made some outside investments over the last few years. We are particularly interested in Tetra Trust, which is Canada’s first and leading custodian for digital assets. At this point, it is providing custody services for a number of Canadian and international financial institutions in Bitcoin, Ethereum, and other cryptocurrencies.

We believe there are more services that Tetra Trust can provide to support the continued development of digital assets, in particular, to make access to trading services for those instruments more widely available to retail accounts, particularly through the traditional brokerage community. I think we will see some interesting developments in that regard next year.

CSE Performance

The “Senior” Exchange and Other Capital Market Myths

These are tough times for many publicly traded companies. Valuations have declined alongside rising interest rates, and capital is incredibly difficult to come by across many sectors.

In a challenging market like this, some boards and management teams are trying almost anything to give their valuation, trading liquidity, and capital-raising opportunities a boost, however small. Not surprisingly, one of these moves is an old standby: switching stock exchanges.

We get it. Company leaders are right to ask for better value from their stock exchange — something we at the CSE, via our innovative thinking and superior customer service, are proud to say we bring to the table. 

What is troubling, however, is when fiction overtakes fact. When market participants base their listing decisions on storytelling that is full of inaccuracies about how markets work in general, and about the CSE in particular, it not only sows confusion among investors and public companies alike, but it robs market participants of the true nature of the choices available to them. And it is obviously antithetical to fair and efficient market function.

Unfortunately, we have seen a few of these inaccuracies in the public sphere recently. So, I would like to take the time to correct a couple of myths about Canadian stock exchanges and lay out some clear truths about the CSE.

There is no such thing as a “senior” or “tier one” exchange

There are stock exchanges of various sizes in Canada. But the idea that certain exchanges are “senior” or “tier one” just isn’t so. The truth is that every stock exchange in Canada is regulated on the same basis. 

All trading activity on each stock exchange is overseen by the Canadian Investment Regulatory Organization, which also administers the “timely disclosure” responsibilities of every public issuer. We are all in the same boat and must play by the same rules. 

Referring to a stock exchange as “senior” is a misleading marketing tactic that confuses market participants about the structure and function of stock markets. It is a naked attempt to establish superiority over other exchanges that do not, in fact, exist. 

The CSE is a stock exchange. Period. What differentiates exchanges are the issuers that they list. And contrary to what may be said about the CSE, we can list all issuers.

Anyone can invest in CSE securities

From the largest investment fund to the tiniest retail investor, everyone is eligible to invest in CSE issuers. To suggest otherwise is a myth.

Now here is where securities laws make investment more complex: Every Canadian issuer is classified as either “Venture” or “Non-Venture.” “Venture” issuers are typically smaller and less liquid, and certain institutional investors have mandates that prevent them from buying these securities. That is entirely understandable. 

“Non-Venture” issuers are larger companies and face more demanding corporate governance requirements, including larger boards of directors and tighter reporting deadlines. The advantage of this designation is that they are eligible for inclusion in many more institutional funds.

The CSE offers issuers the opportunity to choose a “Venture” or a “Non-Venture” path. In fact, the CSE is uniquely positioned in the Canadian capital markets as the only exchange with regulatory approval to list both “Venture” and “Non-Venture” issuers.

CSE issuers are also eligible for membership in index funds offered by leading international providers. One notable exception is the S&P/TSX indices, which limit inclusion to companies trading on the TSX. But nothing prevents any index provider from including CSE securities if they meet the eligibility criteria for a particular index. 

Market integrity rests on clarity

The Canadian stock exchange business is ultra-competitive at the best of times and even more so in the current market conditions. This competition provides opportunities for Canadian companies to access the capital that they need. But competition cannot and should not confuse or undermine fair and efficient markets. It is important that market participants have a complete understanding of what each exchange offers to ensure that issuers select the exchange that best meets their needs.

The CSE is proud to offer issuers a client-focused, low-fee, and innovative model that has driven our success over the nearly two decades of the Exchange’s existence. It has enabled us to grow from a startup with three listings in our first year to more than 800 listings today. 

I will not call the CSE a “tier one” exchange because, again, there is no such thing. However, I firmly believe it is the leading Canadian exchange for entrepreneurs. By providing access to the Canadian public markets with exceptional service, support, and continuous improvement, we are leading the way in creating a vibrant and innovative marketplace.

CSE Performance

Year-End 2023 Interview with Canadian Securities Exchange CEO Richard Carleton

It was a tale of two stock markets in 2023, with large-cap indices nearing record highs, while the shares of smaller companies struggled to find steady footing. Ongoing geopolitical uncertainty didn’t help, but if one had to name a single factor explaining the divergent performance, most observers would point to interest rates, which have surged manyfold from their pandemic trough that ended in the latter half of 2021.

History suggests that small-cap companies will again have their day in the sun. Reasons for optimism include expectations for a softening interest rate environment and the undeniable global trend toward greater electrification, which will continue to present opportunities to companies of all sizes. As is always the case with financial markets, timing is the hardest thing to predict.

Through all of this, the Canadian Securities Exchange maintained steady growth in its issuer base in 2023, while also introducing important changes to listings policies, margin eligibility, and its visual brand.

In a late-November discussion, CSE Chief Executive Officer Richard Carleton offered his perspective on markets at home and abroad, as well as his outlook for 2024, as the Exchange gets ready to mark a particularly important milestone.

Every year is different for the capital markets and in 2023 it was the interest rate environment that took centre stage. How would you characterize the capital markets in 2023 based on your interaction with issuers and others in the financial community?

It’s a tricky question and my initial reaction is that it was unprecedented, difficult, and a little strange — these are the words that come to mind. The first big issue is a lack of trading activity in all of Canada’s public markets, but particularly in the junior capital markets. The last time we saw turnover levels this low was 10 years ago. It has been a significant decline given that we were at record levels only two years ago, which was the height of the pandemic. To see declines in overall trading activity on the order of 70% to 80% is something that in my career, which dates back some 35 years in the capital markets, is unprecedented.

I think it’s fair to say that the interest rate environment and the overall economy is likely the culprit. As we know, retail investor participation is very important, particularly for the junior capital side of the markets, and there is a lot of pressure on Canadian families from an inflation perspective, housing costs, mortgage renewals, and so on. So, I think we are seeing that decrease in activity as a result.

That said, there are reasons for tremendous optimism because we have had many new companies access public capital through the Canadian Securities Exchange over the course of the year. We are not at the record levels we saw in 2021 or 2022 in terms of new companies coming to market, but we are still going to see roughly 100 companies list in 2023, which is extraordinary growth.

There has been a significant shift in the nature of those companies. In the last couple of years, we have seen a lot of investment in battery, strategic, and critical minerals, which are principally lithium, graphite, copper, nickel, cobalt, zinc, and rare earth elements.

This obviously takes place in anticipation that as the economy further electrifies and we bring new battery plants into production, there will be considerable demand for all of these minerals. Given the lack of new capacity brought on line for these minerals over the past 20 or 30 years, the belief is that there is a tremendous opportunity for Canadian companies, whether they are mining in Canada or internationally, to fill that demand.

So, as I say, we are in this kind of strange situation where we have a very robust listings pipeline and new listings cohort from 2023, but at the same time, we see participation rates and asset valuation levels that are disappointing and somewhat frustrating for company management teams.

You just described a year that had as many challenges as opportunities, yet the CSE is on pace for an impressive number of new listings across a wide variety of business sectors. What enabled the CSE to perform so well?

We attract the majority of new companies coming into Canada’s public marketplace at this time. There are a number of reasons for this, but I think that the most important factor is the excellent working relationship our listings regulation team has built up over the years with entrepreneurs and their legal, accounting, and investment banking advisors. 

People feel very comfortable working with the team, and I believe there is also an appreciation for the opportunities we provide through our listings development group to help showcase the unique stories of our issuers to a marketplace that, as I say, is challenging at the moment. So, it’s really both as the company lists on the CSE, and then as they look to grow in part through a relationship with the CSE, that we have an opportunity to help our issuers achieve their goals.

The CSE underwent a significant visual rebrand in 2023 that brought with it a new slogan: Always Invested. Why was now the right time and what does the refreshed brand represent?

I’d say there are two things. The first is that we have been involved with our partners at the securities commissions on a rebuild of our listings policies, really for the first time in the 20-year existence of the organization. There are significant changes to both tighten up the requirements for all companies listed on the exchange, as well as the creation of a senior tier which will enable us to regulate larger, more mature companies on a similar basis as they would be on larger exchanges in North America.

With that was really the recognition that we have moved past the start-up phase and are now a material part of Canada’s public markets. The visual identity of the brand is meant to convey our evolution. The logo is bold with forward momentum, it represents stability and, to a smaller degree, modernization and disruption. 

The slogan “Always Invested” is a promise to our customers and partners. A promise that we will always be invested in quality service and the future of efficient public capital markets. 

Was the decision to look at the listings policies mostly an internal one or did the broader financial community influence it as well?

The drive to update the listings policies came from a number of sources. We had feedback from the entrepreneurial, legal, and audit communities in terms of where our policies should be headed. And we work very closely with the regulators in terms of supporting investor protection and promoting capital formation and liquid markets through availability of information on companies.

We concluded that we could do a number of things to update the approach we have taken from when the listings manual was first drafted in 2003. So, with the benefit of 20 years of experience and feedback from various stakeholders, it was time to make significant changes.

The CSE will reach its 20th year as a recognized exchange in May 2024. You must already be planning a celebration of this milestone. What is in store and what can issuers and investors expect from the CSE in the next 20 years?

The first question is the easiest in that we are certainly looking to mark the event, but in ways that are sensitive to the difficult financing conditions many of our issuers are finding. Of course, times are challenging also for the investment dealers who we work with on the corporate finance and trading sides. So, I wouldn’t expect anything too over the top, but it is important that we celebrate the milestone because it is significant. 

I like to tell entrepreneurs when they are considering working with the CSE that we are an exchange that has experienced many of the same challenges and triumphs as a company that they are going through: we were a start-up that initially struggled to find an audience for its services, went through multiple pivots as we looked to find our way in an intensely competitive market, had to raise capital during very difficult market conditions but ultimately succeeded by never losing sight of our goal, which is to build a great exchange. We will be celebrating these achievements next year as we reach our 20th year as an exchange. 

As for the next 20 years, that’s a really good question. There has been a lot of criticism of traditional finance models from our peers in the crypto world: they are looking to decentralize trading facilities and disintermediation of service providers like traditional brokers, custodians, clearing agencies, and the like. From my perspective, the system we collectively operate for access to trading and capital through the traditional stock market environment has evolved to respond to a series of challenges over many years. It is actually very robust.

All of the systems and processes that had to be re-invented for crypto trading are already deeply baked into the investor protection and business processes that we have in what they call the legacy or “centralized finance” world, as the crypto community sometimes refers to it. 

My point is that the exchange trading environment is likely to look an awful lot like it does now, with more technology applications eliminating the remaining manual processes from the trading world, and facilitating the availability of better and more timely information for investors.

A visit to Australia earlier in the year brought the opportunity for new perspective on a capital market that is often compared to Canada’s. What can you tell us about the market there and the ambitions of the local financial community?

What’s interesting is that before we left for Australia, and since we returned, I saw articles in the Canadian business press suggesting that Australia is eating Canada’s lunch when it comes to embracing and supporting the new generation of companies in the strategic minerals space. When we were in Australia, we saw opinions expressed in the local financial press that Canada was eating Australia’s lunch when it came to supporting the investment and development of companies in the strategic minerals space. I’m not sure who is right or wrong, but clearly there is a difference of opinion on the point!

It’s clear that Canadian mining companies have been looking for capital from the Australian market. It appears that there are a number of Australian funds that are prepared to invest in relatively early-stage exploration companies, and also that companies from the CSE, and Canada in general, have had some success in raising capital from Australian investors.

The window seems very tight for raising additional money here in Canada so when a couple of Canadian companies had success in Australia, others followed that lead and attempted to replicate their experience.

From our perspective, we are looking to remove as many barriers and costs as we can for companies on the CSE to raising capital in Australia, and will support CSE-listed issuers seeking admission to the ASX in any way that we can.

Staying with the mining theme, can you share your thoughts with us on the sector’s outlook for 2024?

It is clear that good projects across a wide range of potential minerals are getting funding and entering the public markets. They are able to raise that first round of investment to support the first phase of exploration.

The new issuers from 2021 and 2022 that now have a season of drilling under their belts have been generating some positive reports. Normally, you would expect to see positive price performance, but for some reason, we are not seeing it. As a result, when companies raise their second round, the funding is dilutive for their original investors because the transaction is conducted at the previous issue price, or even lower for some of them.

This is a challenge and a source of some frustration for the industry. That said, we continue to see good projects come to the CSE and there is an extensive pipeline of companies preparing to come to market in 2024.

I hope and expect that with a return to more normal levels of retail participation as interest rates begin to come down in 2024, which I think is a near certainty, you will see the cycle happen where the management teams that successfully advance projects are rewarded with better market valuations and are able to raise significant additional funds at higher prices.

The cannabis sector has gone through some adjustment of late. What has been the CSE’s experience and have you had any feedback from cannabis issuers that stands out in your mind?

Cannabis issuers in many respects are very similar to those in the mining sector right now in that there is a degree of frustration from company management over lack of support in the secondary market as far as asset valuation goes.

We have a number of companies listed on the CSE which continue to build market share in the United States, and there continue to be new states that legalize for adult recreational purposes, which opens up new markets for these companies.

But it appears that the investment community is focused on legislative progress toward either rescheduling of cannabis from a Schedule I to a Schedule III substance, which could result in significant tax relief for companies in the United States, or toward some form of outright legalization for adult recreational purposes on the Federal level.

As a result of these challenges with their equity market valuation, many of the larger companies are raising debt capital by either mortgaging tangible assets or securing lines of credit through the significant cash flow a few of these larger companies are generating. It is a very challenging time for these companies and my hope is that we begin to see more institutional participation and more long-term investors with a sophisticated understanding of the prospects and outlook for these companies. That should create the conditions for better price performance that recognizes the progress that many of them have made over the last five years.

In June, CSE issuers became eligible for margin following a decision by the Canadian Investment Regulatory Organization. How have issuers benefited since that decision was made?

It’s a benefit that flows to the investment dealers when they hold CSE securities in their own names on an overnight basis. The changes mean that, for eligible securities, they don’t have to take 100 cents on the dollar as a capital hit and will see significant reductions on that charge against their firm’s regulatory capital.

I know that sounds like deep inside baseball, but the practical benefit for an issuer is that it can significantly decrease the dealer’s cost of conducting an offering on behalf of the issuer. For many of these companies, the dealer will hold the stock in its inventory for a significant period of time. It is very expensive if they are tying up regulatory capital to hold that position.

This change should, and will, facilitate a lower cost of capital for CSE issuers.

It is always up to the investment dealer to determine if they will permit a client to hold a security in a margin account; the regulatory change does not mean that CSE securities will become eligible for margin accounts. Investors will have to ask their dealer about the issue. 

We took a 20-year look forward earlier in the discussion. Let’s shorten the timeline and conclude with your thoughts on what the CSE plans to achieve in 2024.

We’re deep in the planning stages of our forecast, our budget, and the strategic plan for 2024, and there are a few things I would highlight.

We saw tremendous growth in our staff complement in 2023 as we powered up to service our ever-growing issuer population and to administer many of the new listings policies implemented over the course of the year. We should be quiet on the “new hires” front in 2024.

There will be demand for new capital from the mining companies, in particular, who joined the Exchange over the last three years. The CSE will do what we can to assist these companies in reaching sources of capital in Canada, the U.S., and overseas. We’ve talked in past years about the preferred access Canadian public companies have to the U.S. capital markets; I believe that the U.S. could be an important source of capital for the CSE’s mining issuers in the coming years. We also want to work with the industry to assist them in any way we can to engage with a younger generation of investors looking to support the energy transition through their investment portfolios. 

Overall, we are being quite conservative in our expectations for trading and new listings in the coming year. I personally believe that interest rates will come down sooner and faster than the broader consensus, but that probably isn’t a sound basis for us to be doing our financial planning for the year! What I am certain of is that when rates do begin to come down, there will be more robust trading volumes across the markets. It is my hope that investors take the time to get to know the issuer classes of 2022 and 2023 a little better as they come back to the market.

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.