By Michael
Volker
Capital
Formation, Bye Bye BBX - Hello CNQ, Easy Money, Recent Financings, and Updates
This
month's column is mainly about accessing capital, some of the new funds and
exchanges to help facilitate the raising of money, the rules associated
therewith and finally, some recent financing deals.
Capital
Formation
Just
before the summer "recess", the BCTIA Capital and Investment
Committee put out its final report of June 30, 2003 on improving access to
capital for the BC Technology industry.
Venture
capital formation in Canada has grown substantially in the past few years. As Harry
Jaako pointed out recently in Business in Vancouver, approximately
$3.9 billion has been raised each year for the past three years - just over
double the annual average for the three years prior - the so-called boom years.
Yet,
as BC CEOs lament, and as noted in a recent Financial Post article, VC's
are behaving more like bankers and Angel investors are behaving more like
venture capitalists - taking fewer risks and investing at later stages of
development.
Robin
Louis of Ventures West commented
that "we have to make sure that we are creating quality companies and then
funding them well." However, to get to an appropriate level of quality,
though, means providing early financial support to nascent firms so that they
have a shot at becoming VC-fundable.
Indeed,
we're very good in B.C. at creating new startups and we rank high in Canada and
in the USA in this regard. The question raised posed in the FP article is this:
Who's going to fund the next generation of startups?
I
was recently asked by a business reporter why I was so bullish on the
down-trodden tech sector and asked if technology still figures prominently in
Canada's economic future. It got me thinking: if technology (broadly speaking)
isn't in our future, what is? Canada's tech sector employs some 600,000 people
and generates over $125 billion a year ranking among natural resources and
automobiles on our export list.
Obviously,
the VC numbers show that there is faith in the sector's future.
In
my previous column I stated that getting companies to the VC-ready stage is a
completely different ball game than getting companies launched in the first
instance. Although some VCs say that they are early stage or "seed",
none actually do this.
Two
new funds which will do this are the BC
Advantage Fund and WUTIF
- the Western Universities Technology Innovation Fund. Both of these are
VCCs (Venture Capital Corps) that offer B.C. investors a 30% refundable tax
credit and RRSP eligibility. This is the way to get in on the ground floor of
the growing B.C. technology sector. These will begin their fund-raising efforts
this fall and will appeal primarily to retail investors like you and me. Due to
the tax leverage - i.e. almost four to one - that these offer, I'm optimistic
that they'll sell fairly well in the coming months.
Between
them, they could raise well in excess of $50 million that will go towards
developing the sought-after quality deals.
So
the answer to the question as to who's going to fund the next generation of
startups is: you and I.
Bye
Bye BBX - Hello CNQ and what's NEX?
For
many months I've mentioned the pending formation of NASDAQ's new BBX
stock market for junior companies. Well, it won't happen. NASDAQ's new
management, led by President and CEO Robert Greifeld, recently concluded
a strategic review of its business initiatives and, as a result of that review,
has announced that it will focus solely on products and services that contribute
to its mission to be the best stock market in the world for investors. As such,
NASDAQ will discontinue its efforts to launch the BBX.
Here
in Canada, the "CNQ" - the Canadian Trading and Quotation
System started trading in its listed companies last month on July 25, 2003 after
receiving recognition from the Ontario Securities Commission to operate a
quotation and trade reporting system. This new equity market for emerging
companies offers lower costs, a streamlined regulatory process and a unique
market model that maximizes liquidity by offering the best features of both an
auction market and a dealer market.
Meanwhile,
the TSX Venture Exchange (TSX-V) announced the start of trading on its
newest exchange, the "NEX" this past Monday. So what's NEX?
Essentially, it's the leper colony of companies - that's where inactive shell
companies will get bumped to if they no longer meet the standards of the TSX-V.
NEX,
also called the "Inactive Board" will provide an (active?) trading
forum in the form of a separate and distinct board of TSX Venture companies that
have been listed on TSX Venture and have been declared inactive, or CPCs
(Capital Pool Companies) that have failed to complete a Qualifying Transaction
in accordance with TSX Venture requirements.
Unlike
the current practice, NEX companies will not face delisting if they fail to
reactivate within a prescribed time. They will be designated as such by the
addition of an “.H” suffix to their trading symbol.
NEX's
real purpose is to clearly separate ventures without an active business from
those with active operations, and to provide them with a listing/market
alternative with a reduced compliance burden.
At
the same time, investors will know that all companies on the TSX-V are real,
active and alive unlike some of the living dead that trade there now.
CPCs
that have not completed a Qualifying Transaction within the prescribed time
frame will be eligible to transfer to NEX provided that they have received
shareholder approval to do so. If a CPC has not completed a Qualifying
Transaction within the prescribed time, the CPC shareholders will have a choice
to either delist the CPC, cancel the principals’ shares and redistribute the
remaining cash to shareholders, or cancel the principals’ shares and transfer
the CPC to the NEX Board. I'm not sure what the logic is behind getting the
principals to cancel their shares - shares that they've paid for. Why the rush
to do a QT anyway? I can tell you from first hand experience that many CPCs I
know haven't done QTs simply because they couldn't find acceptable deals.
On
the plus side, NEX does demonstrate the TSX Group's (TSX-X) commitment to
providing a home for the smallest (including inactive shells) to the largest
Canadian public firms and between Toronto Stock Exchange, TSX Venture Exchange
and NEX, TSX Group thus facilitates the raising of capital for companies at
every stage of development.
According
to TSX Venture Exchange Senior Vice-President Kevan Cowan, "NEX
provides a valuable contribution to the process of capital formation for
emerging companies. The nature of growth companies and venture funding is that
many don't achieve their objectives with their first attempt. NEX has been
designed as a place with simplified rules where companies can trade while they
seek additional funding to pursue their business plans or reinvent
themselves."
For
more information on NEX, see www.tsx.com and click on the NEX button on the home
page.
Getting
back to the new CNQ market, how does it compare with the TSX-V?
The
TSX Venture Exchange has evolved a set of rules and regulations that is very
complex and expensive to deal with. The costs and time delays associated with
getting exchange approval of certain business transactions, not to mention the
exchange's ongoing maintenance fees, have made a TSX-V listing more of a burden
than a benefit for many companies.
There
are well over 1,000 Canadian public companies that do not trade on any stock
exchange. They may, at one time, have been listed on the TSX-V or a predecessor
exchange, but for various reasons are now not trading and no longer meet the
listing requirements of a Canadian exchange. Or, it may be too costly for them
to do so.
More
importantly, though, there are many startups that might be able to raise capital
from many small investors if they can get listed on an exchange such as the CNQ
with minimal fuss and bother. Then, if they fail, they can be dissolved rather
than preserved as public shells. After all, the main reason for keeping a shell
company is the value it carries by having a public listing.
Some
of the main benefits of listing on the CNQ, as opposed to the TSX-V, are:
1.
Lower Fees- indeed, much lower, perhaps less than half in some cases. The CNQ
charges a one-time fee (<$10K) and a monthly fee whereas the TSX-V has a
complex fee schedule that's tied to number of shares and financing activity.
2.
Fewer Regulations - CNQ listed companies need to comply with the relevant
provisions of the Company Act and/or Securities Act. The CNQ will not
impose its own layer of additional rules - such as the TSX-V has, which
effectively tell a company how to run its business.
3.
No Sponsorship Required - Companies can save an estimated $15,000 to $50,000 in
fees by not having to get under the wing of a broker/dealer.
4.
Hybrid Market to Increase Liquidity - One of the interesting features of the CNQ
is the fact that it will operate as a hybrid between an auction market and a
dealer market. Like the TSX-V, the CNQ will post the highest bid and lowest
offer on each stock, plus market depth information. However, issuers will have
the option of retaining an IDA member to act as market maker on the stock. If an
investor wants to buy or sell shares at a price between the bid and the ask,
then the investor's broker will contact the market maker who will have a choice
of either making the trade or posting the investor's bid or offer.
Easy
Money
It's
tough enough to get investors interested in a deal without having to fuss with
all the securities rules and regulations that have to be followed by companies
accessing capital.
Fortunately
for companies, the rules (at least in some jurisdictions) are making life
easier. In an attempt to harmonize regulations across the country, securities
regulators delivered good news to companies who are looking to raise money when
they decided to adopt a new version of what they refer to as "Multilateral
Instrument 45-103 Capital Raising Exemptions (MI 45-103)". MI45-103 means
that companies in most Canadian jurisdictions can raise money without having to
meet the very onerous and costly prospectus and dealer registration
requirements. In other words, there are new exemptions to these requirements.
MI45-103,
which has been adopted in B.C., provides for the following exemptions:
1.
Private Issuer Exemption
(Note
- regulators and lawyers like to use the term "issuer" instead of
"company" to refer to an entity that can issue securities, i.e. shares
to investors.)
A
"Private Issuer" is a company that is not a reporting issuer, a mutual
fund or a non-redeemable investment fund whose shares are (i) subject to
restrictions on transfer that are contained in the issuer's incorporating
documents or security holders’ agreements, and (ii) are beneficially owned,
directly or indirectly, by not more than 50 persons or companies. A Private
Issuer can only distribute its shares only to certain types of people including:
(a)
directors, officers, employees, founders or control persons;
(b) a spouse, parent, grandparent, brother, sister or child of a director,
senior officer, founder or control person;
(c) close personal friends, or close business associates of a director, senior
officer, founder or control person;
(d) current shareholders;
(e) accredited investors (see below);
(f) companies of which a majority of the voting securities are beneficially
owned by, or a majority of the directors are, persons or companies listed in (a)
to (e) above; and
(g) people that are "not the public";
A
close personal friend is an individual who has known the director, senior
officer, founder or control person for a sufficient period of time to be in a
position to assess the capabilities and trustworthiness of the director, senior
officer, founder or control person.
A
close business associate is an individual who has had sufficient prior business
dealings with the director, senior officer, founder or control person to be in a
position to assess the capabilities and trustworthiness of the director, senior
officer, founder or control person.
2.
Family, Friends and Business Associates Exemption
Any
company can use this exemption, even companies that don’t have the
50-shareholder limitation of a private issuer. This exemption is similar to the
Private Issuer exemption. The purchaser must be either:
(a)
a director, senior officer, or control person;
(b) a close relative, close personal friend, or a close business associate of a
director, senior officer, founder or control person;
(c) a close relative of the spouse of a founder;
(d) a company of which a majority of the voting securities are beneficially
owned by, or a majority of the directors are, persons or companies listed in (a)
to (c); or
(e) a trust or estate of which all of the beneficiaries or a majority of the
trustees are persons or companies listed in (a) to (c).
If
a company is relying on either the Private Issuer exemption or the Family,
Friends and Business Associates exemption, then it should ensure that each
investor completes and signs a subscription agreement that sets out in detail
the relationship of the investor to a director, senior officer, founder or
control person of the issuer. No commission or finder's fee may be paid to any
director, officer, founder or control person in connection with a trade under
this exemption.
3.
Accredited Investor Exemption
An
"Accredited Investor" includes the following:
-
a person or company registered under the securities legislation … as a
representative of an adviser or dealer (e.g., a stockbroker);
- an individual who, either alone or jointly with a spouse, beneficially owns
financial assets (i.e., cash and securities) having an aggregate realizable
value before taxes, but net of any related liabilities, exceeding $1,000,000;
- an individual whose net income before taxes exceeded $200,000 in each of the
last two years or whose net income before taxes combined with that of a spouse
exceeded $300,000 in each of the last two years and who, in either case,
reasonably expects to exceed that net income level in the current year.
If
a company is relying on this exemption, then the purchaser’s subscription
agreement should specifically state how the purchaser meets the definition of an
Accredited Investor.
4.
Offering Memorandum Exemption
Under
this exemption, the company delivers an offering memorandum (drafted in
accordance with Form 45-103 F1) to each purchaser, and has each purchaser sign a
risk acknowledgement form. If the company is a qualifying issuer, then there is
a different format for the offering memorandum. If a material change occurs in
the company's affairs prior to closing of the offering, then the company will
need to give each purchaser an updated offering memorandum. The purchaser’s
subscription agreement should include an acknowledgment by the purchaser that he
or she has received a copy of the offering memorandum.
Payment
for the securities must be held in trust for a two-day "cooling-off
period" during which the purchaser has the right to cancel his or her
investment. In Alberta, Manitoba, Saskatchewan, Newfoundland & Labrador,
P.E.I., N.W.T, and Nunavut, unlike B.C. and Nova Scotia, if an investor wants to
subscribe for more than $10,000 worth of securities, he or she must qualify as
an "eligible investor". In Saskatchewan, N.W.T., and Nunavut, no
commission or finder's fee may be paid to anyone other than a registered dealer
in connection with a trade, under this exemption, to a purchaser in that
jurisdiction.
Filing
Requirements
If
a company has raised funds pursuant to one of the exemptions set out in sections
2, 3, or 4 above, it will need to file with the applicable securities regulatory
authorities a report of exempt distribution (Form 45-103F4) and, if applicable,
a copy of the offering memorandum, within 10 days after the closing of the
offering.
The
bottom Line - yes, it is easier - a lot easier now. These four
"exemptions" open a lot of doors. For example, by using the offering
memo, a company in B.C. can readily sell its shares to almost any willing
investor.
Recent
Financings
Yes,
B.C. firms are raising capital. Here's a sampling of some recent financings:
QLT
INC. completed its previously announced offering of US $172.5 million
aggregate principal amount of 3.0% convertible notes due 2023.
AVCORP
INDUSTRIES INC. has closed its Private Placement for 15,000,000 units at a
price of $0.30 per unit for gross proceeds of $4.5 million before expenses and
commissions.
FORBES
MEDI-TECH announced that Phyto-Source, LP has closed its US$3 million term
loan facility and US$1.5 million line of credit with Southwest Bank of Texas and
has made the US$3 million advance loan payment to Forbes.
CONTEC
INNOVATIONS has completed a third close of its private placement offering of
2,881,800 units at 25 cents per unit for gross proceeds of $720,450.
WESTPORT
INNOVATIONS INC. announced that it has entered into a bought deal financing
agreement with a syndicate of investment dealers led by Raymond James Ltd.
SMARTIRE
SYSTEMS INC. announced that it has closed two financings representing $16.7
million.
AZURE
DYNAMICS CORPORATION has announced the completion of its previously
announced financing of $2.21 million in secured convertible debentures, of which
proceeds $1.0 million is immediately available to the company.
EXTREME
CCTV has closed a previously reported private placement financing of
2,666,700 special warrants at a price of $3 per special warrant for gross
proceeds of $8,000,100.
PHOTON
CONTROL has completed the third and final closing of the private placement
announced June 9, 2003. In this closing, a total of 283,000 units were issued
for gross proceeds of $84,900.
QI
SYSTEMS has entered into a non-brokered private placement for gross proceeds
of $250,000 (U.S.), consisting of 1.65 million units at a price of 15 U.S. cents
per unit.
STOCKGROUP
INFORMATION SYSTEMS has closed its short form offering reported on May 12,
having raised a total of $1,384,836.
INEX
PHARMACEUTICALS announced the closing of its offering of 4,600,000 Common
Shares at a price of $5.45 per share, in connection with the previously
announced agreement with an underwriting syndicate led by BMO Nesbitt Burns Inc.
INFOWAVE
SOFTWARE announced the completion of the second and final tranche of $1.1
million of its brokered private placement of units. The first tranche was US$2.8
million.
NXTPHASE
CORPORATION announced that it has closed a convertible debt financing, to be
issued in 2 tranches in the aggregate amount of US $7 million, with an option
for an additional US $3 million.
INFORETECH
WIRELESS TECHNOLOGY announced that it has reached an agreement to retire
$1.25 million in convertible debt obligations to Augustine Fund, LP.
NEODYM
TECHNOLOGIES has arranged a private placement for gross proceeds of $81,800
in units of the company at a price of 10 cents per unit.
AXONWAVE
SOFTWARE INC., formerly Gavagai Technologies, an SFU spin-off,
a provider of content intelligence solutions for unstructured information,
announced the completion of a $(US) 2.3 Million second round of financing.
VRB
POWER SYSTEMS INC. announced that it has negotiated, subject to regulatory
acceptance, a non-brokered convertible debenture for $850,000 CAD.
ANGIOTECH
PHARMACEUTICALS INC took in $67.4 million from 102 purchasers in a private
placement.
XILLIX
TECHNOLOGIES CORP raised $1 million from 4 investors.
DYNAMOTIVE
ENERGY SYSTEMS CORP received $386K from
16 purchasers exercising warrants.
D-WAVE
SYSTEMS INC. raised U$7.1 million in a venture capital round led by - get
this - California based Draper Fisher Jurveston, it's first-ever Canadian
investment (in its 18 year history). DJF took up $4.5 million with the rest
divided among GrowthWorks Ltd., the Business Development Bank of
Canada and various local angel investors. D-Wave is generating a bit of a
buzz with its work on quantum computing. Questair Technologies Inc
received $9.6 million from Technology Partnerships Canada.
SMARTIRE
SYSTEMS INC raised $325k from 6 purchasers.
CV
TECHNOLOGIES raised $200K.
PALCAN
FUEL CELLS raised $143K from one investor.
ZOOLINK
CORP raised $88K from 10 purchasers.
WEBTECH
WIRELESS got 3 investors to pony up $41K. Hey -it ain't nothing!
Capital
Pool Corporation (CPC) Update
In
this column, I've kept track of Capital Pool Corporation ("CPC")
companies as defined by the TSX Venture Exchange (the former CDNX)
because they may provide funding and management to, and in the process acquire,
technology companies. They provide companies with an alternative to traditional
venture capital financing. It lets the public investor get into the game.
An introductory
article explaining CPCs may be found at http://www.bctechnology.com.
These
CPCs are not as popular as they used to be and their future is somewhat
uncertain. Therefore, I'm not going to continue to track them although I'll
periodically provide readers with an update.
The
most recent update - thanks to David Ing of Pacific
International Securities - can be found by clicking on: Capital
Pool Corporation chart.
VEF
UPDATES
The
Vancouver Enterprise Forum is
taking a break for the summer. The next event will be held late in September.
A
complete calendar of local technology events can be found on T-Net's
Events page.
Footnotes
If
you're an entrepreneur looking for a place to get your company started; there's
some great space available at Harbour Centre downtown. The New Media
Innovation Centre (NewMIC) and SFU's TIME Centre have teemed up to
provide not only office space but also access to various resources, e.g. tech
advisors, access to capital, mentors, etc. Worried about the high cost of being
downtown? Well, not to worry - they'll even reduce the fees and take some
payment in the form of equity. Check www.sfu.ca/time
for contact info.
A
reminder: SFU's TIME Centre is open for business - business folks, that is. TIME
is an acronym for Technology, Innovation, Management, and Entrepreneurship.
TIME supports the growth and development of the tech industry in B.C. TIME
features a "Business Centre" (looks like an airport business lounge)
which is open to technology entrepreneurs and business people to use as a
drop-in downtown office facility. Need to plug-in? Make some calls? Do some
work? Hold a meeting? There are some great facilities for holding your company's
AGM. Why hang out at MacDonald's when you can work productively at the TIME
Centre? Drop by and check it out! It is located at SFU's downtown campus at 515
West Hastings St.
Michael Volker,
a technology entrepreneur, is Director of the University/Industry Liaison
Office at Simon Fraser University, Chair of the B.C. Advanced Systems
Institute, Chair of the Vancouver
Angel Network and past Chair of the Vancouver
Enterprise Forum. He owns shares in many of the companies he writes about. Copyright,
2003.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is
a bi-weekly column that focuses attention on new and emerging BC publicly listed
technology companies.
Contact: risktaker@volker.org
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