Earlier this month, CEO of the Canadian Securities Exchange, Richard Carleton, sat down with Peter Murray of Kiyoi Communications to discuss a number of topics related to the progress of the CSE in 2018 so far, the investment landscape for growth-stage companies and what’s on the horizon for the CSE heading into the second half of the year.

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

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

First Half Performance in 2018

PM: Performance at the CSE as measured by standard metrics – listings, financings, trading volume – was strong yet again in the first half of 2018.  Can you recap some of the key numbers for us?  And were there any trends that you feel really stood out?

RC: By every metric, we are ahead of 2017’s record pace.  Whether we measure our performance by trading volume, value traded, number of trades, or financings conducted by companies listed on the Canadian Securities Exchange, the numbers are considerably ahead of where we were at this time last year.

I am particularly pleased that on a 12-month trailing basis, companies have raised almost $2 billion via the facilities of the CSE, either through an IPO or as a secondary offering once the issuer was listed with us.

And with every additional listing, we reach a new benchmark in terms of the number of securities trading on the exchange.  We are above 380 securities at this point, and about 360 companies.

I’d also note that this performance comes at a time when the industry in general is not setting new records.  Measures of liquidity confirm that companies listed on the Canadian Securities Exchange trade at better levels than their counterparts on other exchanges in Canada.

When assessing liquidity, we use a measure of share value traded versus market capitalization.  In Canada’s large cap space, approximately 5% of a company’s market capitalization by value will turn over in a typical month.  In the junior markets, that number tends to be a little higher.

On the Canadian Securities Exchange, we regularly see our companies turn over at almost twice that rate.  And in January 2018, when there was an enormous amount of market activity, principally in the blockchain and cannabis sectors, our average turnover was almost 35% of a company’s market capitalization.

In previous interviews, I have talked about some of the challenges and hurdles the exchange has overcome during the last several years.  There was, for some time, a persistent view in investment banking and trading circles that we might not have the liquidity which some of the other trading centres did.  But the statistics now demonstrate that Canadian Securities Exchange issuers are among the most liquid traded instruments in Canada.
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Blockchain-based Clearing and Settlement – Updates

PM: In February, the CSE announced plans to launch a blockchain-based clearing and settlement facility.  That was near the height of the blockchain mania and triggered a tremendous amount of discussion within the securities industry.  What can you tell us about progress since the announcement?

RC: We’ve been working a lot with dealers and other entities involved in providing services to the securities processing side of the business.  And we have also been working with companies who would like to issue tokenized securities.  We’d like to be in a position to offer companies who are interested in raising capital by way of a tokenized security a place not only where they can list – because if the instrument is a security we can list it tomorrow, as a securities exchange – but to extend the full power of blockchain technology to the clearing and settlement process.  By doing so, we can eliminate a lot of cost and friction that exists with the current processes provided by the Canadian Depository for Securities.

One of the principal issues companies deal with is the cost of processing dividend or royalty payments to their shareholders.  The cost of doing this can be prohibitive to smaller companies, or to companies that wish to have a payment stream to shareholders more frequent than quarterly or semi-annual.

The other thing is that the current system is extremely inefficient when it comes to corporate governance.  Shareholder documents often go through multiple hands before they get from the company issuing the document to the beneficial owner of shares.  It goes to the transfer agent, to the clearing and settlement organization, and to the broker before it finally reaches the investor.  What we would like to do is eliminate the middlemen who are not adding value and enable companies to seamlessly communicate with their shareholders.

Take corporate governance as an example.  Proxy voting using the blockchain would be secure and inexpensive.  And going back to my previous example, it would enable companies to design securities where there are regular streams of income from different types of assets that move into the hands of shareholders.

Since we announced our plans in February, we’ve had a large number of people spend time with us from different industries.  For example, royalty streams are very common private equity instruments in the mining industry but less so on the public company side.  Some groups would like to be able to use the power of our system to issue new types of securities to public investors, instead of just to a small group of extremely well-funded private equity participants, as is currently the case.

We are in the process of working through the system we will be offering, though we’re slightly behind schedule from a technology perspective.  We had a significant new release of trading system technology which consumed a little more of our resources than I had hoped.  But I will say that the reception we have received from the industry – be it the investment banking side, the trading side, or the back-office side – is extraordinarily enthusiastic and supportive.
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Cannabis Sector Perspectives

PM: The CSE continues to attract new issuers doing business in the US cannabis market.  What are your latest observations on the sector, and can we anticipate more listings to come?

RC: It does seem that a lot of people who were invested in Canadian MMPR (Marihuana for Medical Purposes Regulations) licensees over the last couple of years have shifted their investment focus to companies with exposure to the cannabis business in the United States.  Quite a few large US-based companies have listed on the exchange recently, and more such companies are currently in the application pipeline.  And, clearly, they are being funded by Canadian and US investors.  Pre-IPO financings are heavily subscribed, and often oversubscribed, so we are far from being at the end of investor appetite for the cannabis space generally, and companies with a US focus specifically.

We are heartened by some of the regulatory developments in the United States.  It appears that there may well be a federal bill that provides additional comfort to companies operating within the legal framework at the state level, such that they will not be subject to federal prosecution, which would obviously benefit the entire sector.  We find ourselves in a situation where the Canadian public markets are funding the rise of a new and potentially quite large and interesting industry in the United States, and it really shows no signs of slowing.
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Earlier this month, CEO of the Canadian Securities Exchange, Richard Carleton, sat down with Peter Murray of Kiyoi Communications, to discuss the performance of the CSE in the first half of 2017 as well as to get the CSE’s perspective on a number of issues related to Canadian public markets, the evolving cannabis sector and innovation at the CSE.

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

1. State of the Canadian microcap sector
2. US companies choosing to list on the CSE
3. Migration from the CSE
4. Performance of the 1^st half of 2017 at the CSE
5. Reducing regulatory burden on small-cap issuers
6. Simplifying access to marketplace data
7. CSE marketing efforts
8. Overview of cannabis sector
9. Growing sectors
10. Digital innovation at the CSE

State of the Canadian microcap sector

PM: Media outlets have published several articles recently on the demise of the microcap issuer, pointing to reductions in IPO activity, capital raised and issuer numbers.  The CSE is doing quite well servicing this segment of the market these companies.  What are your opinions on the state of the microcap sector?

RC: There are different ways to assess the health of the sector, some of which are pretty encouraging.  One of the concerns expressed in an article published by the Globe and Mail recently was that the number of companies listed on Canadian exchanges has declined quite considerably.  What they did not refer to was that there are some 320 companies listed on the Canadian Securities Exchange, and this was not the case eight or nine years ago.

In other words, some of those missing companies are not missing at all – they are listed on the Canadian Securities Exchange.

That said, we’ve obviously gone through a prolonged slump in the mining and oil and gas exploration sectors.  This has an impact on the overall health of the Canadian markets because Canada has been very good historically in terms of creating large numbers of these types of public companies.

The bottom line is that public capital is always there, but raising that capital is never going to be easy.  Quite frankly, it is not supposed to be easy.  But with price weakness in some of the commodities that underpin the value of Canadian resource companies, applying the model of raising public funds for pre-revenue companies has been a bit of a struggle.

Fortunately, the tremendous growth in the legal cannabis space since the spring of 2014 has served as a counterbalance.  We are increasingly seeing old fashioned IPO-type deals where companies are raising tens of millions of dollars, and even into nine figures, in ways that remind one of the good old days, with Canadian investment dealers conducting a wide distribution on behalf of the issuer.

So, what we really have is a kind of dichotomy where the traditional Canadian small-cap space continues to suffer a high degree of stress.  But the sunrise industry that is the legal cannabis space in Canada and the United States has attracted a lot of attention from investors and the investment dealer community.

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US companies choosing to list on the CSE

PM: The CSE has welcomed several issuers based in the United States over the past few years.  What is the attraction for US companies in listing on the CSE, and in general what do they tell you about their listing and post-listing experiences?

RC: The reason they come to Canada is that they can raise money here.  In the United States, deals in the $20 million to $40 million range are the realm of the venture capital and private equity investment communities.  Some companies don’t want to go down that route because there can be significant drawbacks when you accept money from these types of investors.

Specifically, entrepreneurs find that venture capital funds and private equity funds exert a tremendous level of control over investee companies, as you would expect when they are investing the amounts of money we are talking about.  An important advantage to raising funds publicly is that you often retain more control over the future direction of the enterprise.

Another issue is that the exit scenarios for private funds may be at odds with those of a company’s founders.  Funds may be more interested in an early trade sale, rather than continuing to finance the company to the point where it is one of the big and truly successful entities in its space.

The result is that we see companies looking to raise the smaller amounts available in Canada through the public markets.  And the cost of that capital tends to come in lower than if they were raising money privately in the United States.

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Migration from the CSE

PM: A number of companies have successfully grown their operations on the CSE but then left for other exchanges as they reached a point they felt warranted such a move.  Can you share your views on why this happens?

RC: There are two issues in play in my opinion. The first is something the team at the Canadian Securities Exchange is working to address, and that is a bias held by some members of the institutional investment community.

When companies are looking to raise large amounts of money – and again I am talking high tens of millions, or over $100 million – many institutional investors are more comfortable with the incumbent exchanges because they have worked with them before and they understand their standards and procedures.  It really is up to the CSE to better communicate our value proposition and our reliability as a partner to these institutions, because we have a lot to offer.  This is definitely something we are working diligently on.

The other issue is that if a company believes it will have sufficient market capitalization and trading turnover to qualify as an index component on the Toronto Stock Exchange, public company managers may see that as a powerful inducement to move.  Once you join the index it means the company is likely to be followed by several analysts and its shares will be included in a variety of portfolios held by investors both domestically and internationally.

Those two factors combined can create, under certain circumstances, an incentive for companies to move to another exchange.

I do believe, though, that some of this thinking is rooted in the past.

If one looks at the trading volumes and amounts of capital being raised on our exchange in the first half, a well-run company clearly can achieve its goals with a CSE listing.  Not to mention the advantages we offer from cost and other perspectives.

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Performance of the first half of 2017 at the CSE

PM: It has been a good first half for the CSE and the financial community is increasingly supportive of what the exchange and its issuers are working toward.  Can you briefly review the half for us and share some of the approaches that seem to be succeeding for issuers right now?

RC: We have a number of projects underway at the exchange and one I would highlight is the update to our listing standards.

We updated the initial listing standards last year and are now in the process of introducing continued listing standards.  Our intent is to ensure that companies listed on the exchange are active businesses, which means that the ones hanging on purely for shell value are not going to qualify for continued listing unless they can show that there is an imminent opportunity for a transaction.

We are receiving a lot of support from both the investor and issuer communities for this effort.  Last year, we delisted almost as many companies as we listed, which was almost 10% of the listed company register.  We want to assure investors that the companies that remain listed are active.

In the first six months of the year, CSE issuers raised a record amount of capital ($320 million).  I think observers would expect that it is flowing mostly into the legal cannabis space, but actually this sector accounted only for about half of the total.  We have seen a variety of companies in the financial technology space, clean technology and mining add significantly to their treasuries.

Again, although capital is scarce and companies are having to work hard to obtain it, they are certainly doing so at record levels on the Canadian Securities Exchange to this point in the year.

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Reducing regulatory burden on small-cap issuers

PM: The CSA (Canadian Securities Administrators) recently released for comment a list of proposals designed to reduce the regulatory burden on small-cap issuers.  Can you discuss the CSE’s positions on some of the key recommendations?

RC: Most of the recommendations are aimed at small- to mid-cap companies listed on the Toronto Stock Exchange.  So-called venture issuers, which covers companies on the CSE, are already afforded relief from some of the reporting requirements imposed on public companies.  Essentially, the CSA was looking to extend similar relief to some of the companies listed on the Toronto Stock Exchange.

The key measure in the discussion paper was a proposed reduction in the financial reporting cycle from quarterly to semi-annually.  Basically, only the audited annual financial statements and a half-year summary would be required from public companies.

The CSE does not support this proposal, and neither do the vast majority of companies, financial advisors and accounting firms we have spoken with.

Quarterly reporting is not burdensome, and in fact the decrease in transparency resulting from a move to semi-annual reporting would increase the cost of capital for small companies.  So, while the idea is well-intentioned, we think it would bring about the opposite of its intended goal.

What we would like to see is significant change in how the exempt markets in Canada are managed and regulated.  For example, we would like to see regulation similar in nature to Regulation A+ in the United States, which gives individual investors an opportunity to invest in exempt market companies up to individual deal limits and annual limits.

What this means is that smaller retail investors would be able to participate in opportunities that at this point are only available to accredited investors and institutions.

We think this is important to engaging the next generation of investors because the average accredited investor is getting on in years.  We are concerned that younger investors are not getting the opportunity to invest in the kinds of growth stories they should.

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Simplifying access to marketplace data

PM: I know you are working on a consortium of sorts to address data fee costs for investors.  What are the specific issues at play here and what do you hope to achieve?

RC: I have some good news to share on this topic.

First, though, the background is that any professional investor looking to get a full picture of what is going on in Canadian equity markets must sign contracts and pay fees to each of the individual exchanges if they want access to real-time data.  Not surprisingly, the fees add up pretty quickly.  Canadian data can thus be considerably more expensive than in other markets around the world.  It is another resistance point we just don’t need.

The Ontario Securities Commission was successful in late June in its long-term effort to gain jurisdiction over marketplace data.  It looks as if the commission will seek to exercise that jurisdiction to address the pain points that professional data users currently suffer.  It remains to be seen what specific approaches to the problems the regulators are going to take.

This is a positive development from our point of view because there is a large transparency deficit at present.

The CSE and some of the alternative exchanges do not reach the same scale of user population that the TMX exchanges do from a data-subscription perspective.  And that means a significant transparency deficit exists in the marketplace.

It looks as if we will be asked to take a leading role in helping to define what the data delivery model, fees and terms look like in coming years for marketplace operators in Canada.

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CSE marketing efforts

PM: The CSE team has been very active in the first half of the year hosting CSE-branded events and participating in investment conferences.  Can you share with us the goals and some of the achievements on the marketing side?

RC: Our team has been extraordinarily busy this year, literally traveling all over the Northern Hemisphere – Europe, Asia, and across North America.

We always pursue two goals: to explain to the international and domestic investing public what the value proposition of the Canadian Securities Exchange is, and to meet with issuers, investors and advisors so that we continue to build the list of companies we present through our facilities.

The favourable reception we receive at virtually every stop is extremely gratifying.

I am amazed when I sit back on a given day and try to figure out where the various members of the CSE team are, because we have literally crossed the northern half of the globe several times over the course of the first half of 2017.

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Overview of cannabis sector

PM: Cannabis companies have experienced some ups and downs since entering the public markets a few years ago but the sector in general seems to be getting itself on a steadier track now.  While most of the early movers focused on opportunities in Canada, many of what one might term the “second wave” of issuers seem set on operating in the US.  What is next for the cannabis sector in your opinion?

RC: I actually think of the US companies as the third wave.  The first wave was the licensed medical marijuana producers in Canada.  Next, we saw entities in ancillary industries – extractors and alternative delivery systems are good examples.  The third wave is clearly companies that have business interests in the United States and are ramping up to address the coming legalization for adult use in very large jurisdictions.

We speak to people in this industry on a regular basis and the numbers are mind-boggling.

California’s population is roughly that of Canada, and they are on a similar timeline as Canada to legalization.  Cultivators there are looking to raise billions of dollars to build the operations necessary to supply the state’s legal market.

Given that one of the objectives of government policy in every jurisdiction is to displace the black market, it is critically important to the success of those policy directions to enable the legal market to meet the demand from the adult-use side.

It is fair to say that we have not seen anything yet in terms of how big this is going to become.  There will be a steady stream of companies in this space with solid business plans looking to build out and meet the dawn of a significant new industry in North America.

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Growing sectors

PM: Are there any market sectors right now that remind you of what cannabis felt like in 2014?

RC: In the sense that the legal cannabis market is one of the most significant new business opportunities to hit public capital in a long time, I can’t really say I sense anything up and coming of the same magnitude.

As I mentioned before, we see a lot of different stories getting funded, but I think we are going to continue to see the legal cannabis space driving a substantial percentage of our growth as we make our way through the rest of 2017.

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Digital innovation at the CSE

PM: The infrastructure supporting securities trading and information exchange is predominantly digital these days.  How has the CSE navigated the rapidly evolving digital landscape?

RC: There are a variety of things I would like to see happen faster than they are today.

One of them relates to information released by issuers, where I would like a more aggressive implementation in Canada of a protocol called XBRL (eXtensible Business Reporting Language).  This basically refers to digitally tagging news and company filings with the regulator.  The practical impact is that an analyst can download a company’s financial history directly into spreadsheets.  At the present time, an analyst wanting to initiate coverage on a CSE company has to manually key its financial history into a spreadsheet.

To put it mildly, that is a massive time commitment, with significant potential for error involved.

I would really like to see the Canadian exchanges and regulators get together on a taxonomy of XBRL for reporting financial information for public companies in Canada.  It has already been mandated for use in the United States.

We have also implemented a new trading system and a variety of new technologies around that system.  Although it was a significant investment for us, the benefits have been immediate, including lower operating and data centre costs.

We don’t describe ourselves as a technology company but we do certainly avail ourselves of those tools in a significant way and they up our game from a customer service perspective while helping us to manage costs.

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Part 1: Look Back on 2016 & Look Ahead to 2017

• CSE milestones in 2016
• Increased trading volume
• Enhanced listing requirements
• What’s next in 2017
• Driving change in the securities landscape

Part 2: Industry Insights

• Future of IPOs
• Equity market trends
• High frequency trading on the CSE
• Advantages for listing in Canada
• Closing thoughts

Part 1: A look back on 2016 & look ahead to 2017

Peter Murray (PM): The year 2016 was a particularly good one for the CSE and the financial community is interested to learn what the exchange’s plans are as we enter 2017.  I’ll begin by asking you to walk us through some of the milestones and accomplishments at the CSE during the year just finished.

Richard Carleton (RC): The headline event would be the performance of our overall market, where we enjoyed record trading volume, trading value and number of trades for our CSE listed companies.  We saw very strong momentum begin to build about halfway through the year and it grew to a crescendo in the month of November.  For all members of the team, and perhaps particularly those of us who have been working with the organization from near inception, it was tremendously gratifying to see the investing public accept our issuers to the extent they did.  From an external perspective, I think that is the headline story.

At the same time, I would say some of the things we did behind the scenes were equally important.  We invested very heavily in our infrastructure in 2016.  The first tangible evidence of this effort was the new website launched early in the year.  Though we received plenty of positive feedback on the improved look and usability of the website, we worked to further refine it on a continuous basis over the balance of the year.  I think the website presents a clean, professional and complete view of the Canadian Securities Exchange to all visitors.

We also invested in our trading infrastructure.  In mid-December, we completed the final stage in launching a new trading system that is approximately 11 times faster than our former system but requires considerably less hardware to operate.  For us, that means we are offering a higher level of service at a lower operating cost.

In addition, we bundled the new trading system with order routing solutions, compliance and risk management services.  For example, we provide features such as “fat-finger” protection, credit limits, risk limits, and risk tolerance limits to assist dealers trading on our exchange with meeting their risk management obligations to clients.  Basically, it gives dealers new tools that enable them to provide a higher level of service to their clients.
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PM: You mentioned new volume and value records.  Statistics released by the CSE during the year showed year-on-year volume growth of over 100% in some months.  What drove these increases?

RC: There clearly was a lot of investor interest in the legal cannabis sector, both in Canada and the United States.  With propositions on the ballot during the US election in eight states to either permit medical marijuana or legalize it outright, the belief was that companies active in the US market could have a tremendous increase in business opportunities available to them.  In the run-up to the election we saw a big increase in trading and price performance for names in the sector.

Canada-focused cannabis companies were also caught up in the investor interest given the posture of the federal government toward liberalizing laws in this country.

But I’d hasten to point out that cannabis-related companies weren’t the only ones fueling the growth.  A number of natural resource issuers and technology companies also traded heavily in the latter half of the year.  The result was a string of monthly records for share turnover, value traded and number of trades as we went from September through November.
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PM: On the oversight front, there is an ongoing effort to update the rules companies must abide by while on the exchange, as well as during the listing process.  Where do things stand currently?

RC: Most of the work has been taken up in two specific areas: original listing requirements and continued listing requirements.  The new requirements for original listings have been implemented.  We increased a number of the thresholds, which essentially had not been adjusted since the exchange began business in 2003.  In the intervening 13 years, some of the numbers came to need a reassessment.  Still, I would say that all of the companies approved for listing prior to the adoption of the new requirements would have made it under the new rules as well.

If you consider this together with the work we did in 2015 on plans of arrangement, we are trying to communicate to the investment community that we need to see companies with a business plan and sufficient capitalization to meet financial requirements for that plan over a 12 to 16 month period prior to listing.

To assist companies in meeting their disclosure obligations, both as they list and subsequent to listing, we retained two very important individuals in 2016.  Dr. Francis Manns is now our consulting geologist working with prospective issuers to provide expert-level peer review of 43-101 reports, or in the case of oil and gas issuers 51-101 reports.  Francis is universally respected in the mining and financial communities and is a real asset for resource companies to work with as they list with us.

Another strong addition is John Hughes, who joined our compliance team in a management capacity.  John is a consulting accountant who advises firms on the impact of IFRS and other contemporary accounting issues.  John reviews financial statements and other disclosure documents from prospective and current issuers with a view to helping companies meet the highest standards when it comes to financial reporting and disclosure.

For companies listing with us, having Francis, John and the other experts on our team to turn to is a real benefit.

We are still working on the continued listing requirements and the idea there is to establish minimum criteria a company must meet to remain listed on the exchange.  The objective of the exercise is to ensure companies on the exchange are actively pursuing the business they have set out in their disclosure materials and listing statement.  If a company decides that it needs to raise additional capital or find another business, it has a period of time in which to do that, but we are not going to allow inactive companies to reside on the exchange indefinitely.
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PM: Quite clearly, 2016 was a year of progress on multiple fronts.  What is the CSE team preparing to focus on as we enter 2017?

RC: Now that we’ve got the new trading system running we are really going to shift our attention to improving market making and overall market quality for our issuers.  We have been working with several dealers on ways for market makers to deepen liquidity and reduce the choppiness in prices by contributing buy and sell orders to the CSE book.  Ensuring that companies have a continuous two-sided market is quite important for issuers and their investors.

We are also going to be continuing our efforts to bring companies listed on the exchange to the attention of investor audiences in Canada, the United States and beyond.  We are planning quite a few events over the course of 2017 designed to introduce more potential investors to our issuers.  And, of course, that has the side benefit of demonstrating to entrepreneurs deciding where to list that they should choose the CSE ahead of some of the alternatives, as we quite actively support the efforts of our issuer community in markets around the world.  This is going to be another important focus of our energies over the course of 2017.
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PM: The CSE approach to issuers and markets has some unique aspects to it.  Do you think the CSE has helped change the environment for securities listings in Canada?

RC: Well, we sure hope so.  Our Senior Vice President of Market Development, Rob Cook, said the other day that when the organization launched in 2003, while we may not have been re-inventing the wheel, we certainly set out to apply a healthy degree of lubrication to the process.  And in many respects we have successfully done that.  We are continuing our mission to facilitate the lowest cost of public capital for small-cap companies in Canada.  The principal means by which we do that is improving the listing process and the secondary trading environment, and we work with as many parties as we can to accomplish our objectives.  This is our core strength and we will retain that commitment to a higher level of service for our issuers.
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Part 2: Industry Insights

Peter Murray (PM): Data shows that 2016 was a slow year overall for Initial Public Offerings in Canada.  What is your viewpoint on what has happened to the IPO and what is going to be its role for future public financings and listings?

Richard Carleton (RC): I don’t think there is any doubt that the decline in the number of IPOs is more than a cyclical phenomenon.  We have witnessed a sea change in how early stage corporate finance is conducted in Canada.  Participants are voting with their feet and avoiding the IPO process.  They are doing so because of concerns about cost, concerns about delay in having their prospectus approved, and also that there are now very few dealers who have the capacity, willingness or business model to support a small-cap IPO and distribute the securities to their clients and to the clients of other members of an underwriting syndicate.

The so-called “exempt market” has really stepped into the gap.  Here, I am talking about dealers (specifically “exempt market dealers”) who are able to distribute securities on the basis of one or more prospectus exemptions in the different securities acts.  The most common means, the “accredited investor” exemption, where securities may be distributed to high net worth individuals and institutions without a prospectus, accounts for the lion’s share of the funds raised by early stage companies in Canada today.   I prefer to think of this development as less as of an IPO crisis than as the emergence of a new dynamic, the funding of new businesses via the exempt market.  Typically, a new company will conduct a reverse takeover of an existing listed company, or existing listed company management may decide to undergo a fundamental business change.  In both cases, the exempt market is where 90% to 95% of the funds are being raised for new CSE companies.  This development means we are working not just with the traditional IIROC dealers on their underwriting activities, but also with exempt market dealers who are the lead actors in this new access to private capital for public companies.
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PM: In the last two months of 2016, investors moved out of some sectors and into others with unusual force.  Many equity indices hit all-time highs as the global reach for yield unwound.  Meanwhile, industrial commodity prices rose and precious metals prices fell.  What is this telling you and how will this influence issuers and investors on the CSE?

RC: I am somewhat concerned about the state of the equity markets in the short term only because I think a lot of the historical correlations broke down after the US election.  Everything went up, and everything can’t go up because there are some things that should be going down while others are going up, and vice versa.  We have seen something of a return to normal over the last couple of weeks.  But I am a little concerned about where the markets might be in three to six months.

Now, as the exchange operator we can’t let ourselves become preoccupied with shifts in the market.  What we are looking to do is provide a good, safe home where issuers can raise public capital, regardless of prevailing market conditions.  So, while we might see interest moving from one sector to another, at any given time there is usually something that investors are interested in supporting.  As an example, we have had two oilfield services companies join the CSE in the past couple of months.  This sector has been devastated over the last few years.  It is very encouraging that experienced professionals in the field are of the view that it is an opportune time to get back into the business.  Again, as an exchange we have to focus on the long game.
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PM: A year or two ago when junior markets were having a particularly tough time, some observers criticized predatory trading practices for contributing to the weakness.  Are such things as high-frequency trading and black boxes issues for companies on the CSE?

RC: We saw the first consistent participation by high-frequency trading firms on the CSE this year.  These firms were pursuing a market-making strategy, which means they are significant contributors to the available liquidity in a particular stock.  The firms are very competitive; they tend to narrow spreads and provide for deeper order books.  I believe it has contributed in a positive way to liquidity on the CSE.  There were complaints voiced about “HFTs” a few years back when there was a lot of selling pressure, but we didn’t hear so much in the way of concern when the early stage markets began to recover.
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PM: Given the differences in the two markets, there seems to be an opportunity to harmonize Canada’s public venture market with capacity in the United States for deal flow and retail investing.  How do you see this developing and what role can the CSE play?

RC: There is no doubt Canada is an extremely advantageous jurisdiction in which to launch a smaller public company.  The economics don’t really support it in the US, UK or EU.  Arguably, Australia is the only other place in the world where small companies without revenues – typically mineral exploration companies – have an opportunity to raise public capital.

We know from experience that there is a lot of interest in our companies from investors in the United States.  We have a close working relationship with the OTC Markets Group in the US and in many cases we encourage issuers to obtain a quotation on one of the OTC’s regulated boards and to make sure their securities are properly registered with the clearing and settlement agency in the United States.  With these measures, US-resident retail investors will be able to trade these stocks via their discount brokerage accounts.

Issuers end up enjoying the best of both worlds.  They have a relatively low-cost jurisdiction in which to list their company, but at the same time can tap the US capital markets for both investment capital out of the gate and further rounds once they are trading in the secondary market.  That is something several of our companies have taken advantage of.  Generally, companies that obtain a US quotation have seen an immediate improvement in liquidity and it gives them additional fundraising opportunities in the US.  The fact is that Canadian public companies travel very well internationally.
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PM: Do you have any closing thoughts for issuers and investors, perhaps on issues we have not addressed so far?

RC: I would more so just take the opportunity to state again that the two things we will focus on in 2017 are working more with market-making and other groups to improve liquidity, and secondly that issuers should expect opportunities to work with us to promote both the exchange and their companies on an international basis.  We are going to be very active in the US, in Europe and potentially in Asia as well.

Really, what this is all about is proving the value of a listing on the CSE, and in so doing make the challenge facing our issuer companies of raising funds significantly easier.
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