By Michael
Volker
Prescription for a Junior Capital Market,
Recent Financings, Capital Pool Corps Update and VEF Events
Prescription for a Junior Capital Market
(Rx=CNQ+BC Model)
How do you create a vibrant junior capital
market in Canada? Easy. Combine two great ideas from the West and the East. The
one from the West comes from a very established institution, the B.C.
Securities Commission which recently unveiled its prescription for
securities regulation in Canada. The "B.C. Model", as the Commission
refers to it, calls for a principles-based regulatory environment as opposed to
a fat rule-book approach such as that being adopted in the U.S. under the Sarbanes-Oxley
legislation introduced last year. The Americans haven't yet learned - as we have
here in B.C. - that rules do not make shady operators reputable. We discovered
that when we beefed up the rules in B.C. to shed Vancouver's image of "scam
capital of the world". It worked - it kept the flakes away, but it also
kept the good deals away, too, because of the excessive costs and red tape.
One school of thought is that Canadian
companies should follow the U.S. rules especially if we want to get U.S.
investors and ultimately trade in the U.S. While this may work for larger
companies, it makes little sense for the juniors that will only be burdened with
a disproportionate compliance expenditure.
The B.C. Model's recipe is simple. It's key
features are a code of conduct, the use of plain language, firm-only
registration, and a requirement to register in only one province (to get
Canada-wide access). Industry has been broadly consulted on this and the BCSC
has the support of many securities organizations such as the Investment
Dealers Association. (see www.bcsc.bc.ca/bcproposals
for details.)
The other idea, the Eastern one, comes from a
private Toronto group (some angels and others). This group is planning to start
a new junior stock exchange in Canada, called the
Canadian
Trading and Quotation System, or CNQ. It has the ring of a Canadian
junior Nasdaq. The CNQ has already received the blessing of the Ontario
Securities Commission and expects to start trading in about 50 companies by
mid-year.
Officials
from the CNQ, which is the brain-child of Ian Bandeen, were in town in
April to drum up business for the new exchange. The room was packed. Obviously
there's a great interest in this.
According
to the CNQ, it has “combined leading edge technology, a unique marketplace
construct and comprehensive regulatory oversight to create an efficient new
marketplace which facilitates integrity, transparency and liquidity. CNQ has
been designed specifically to meet the needs and characteristics of emerging
companies, their investors and dealers.” This is possible, in large part, thanks
to the internet.
This
sounds nice, but what the CNQ is saying - and what I really like about it - is
that a stock exchange should not impose an additional layer of rules that
companies must adhere to. A market, such as the CNQ, should operate primarily as
an efficient stock exchange and not pass judgment as to the investment quality
of any company. That's up to investors and it's up to company boards to make
sure that investors are fully informed on company matters. In this regard, the
prototype company datasheet (which will be on the CNQ web site for each listed
company) is impressive and should serve this purpose. The CNQ is emphasizing the
full disclosure of corporate information as distinct from trying to assess its
merits. Unlike the TSX-V and its predecessors, the CNQ will leave the
deal-making to companies and will leave it up to a company's directors to
protect shareholders' interests (they way it should be).
A
junior stock market can give companies a choice. It provides a mechanism whereby
a relatively large number of investors can pool their capital and share in the
risk and enjoy potentially high returns. After
all, this is how our resource sector’s development was fostered by the Vancouver
Stock Exchange. The VSE often got into trouble because it was trying to act
like a VC by vetting deals that often backfired. The VSE morphed into the CDNX
that was then acquired by the TSX as its venture exchange, called the TSX-V.
To
a certain extent, having another financing path also gives encouragement to
first-in investors who know that these companies aren’t at the sole mercy of
VCs. Furthermore, they also know that the junior market may offer them an exit
opportunity.
The
TSX-V enjoys presently enjoys a monopoly. Companies listed on the TSX-V are
burdened with excessive regulations that are inappropriate for their size.
Unfortunately, it’s become a costly and bureaucratic financing option.
Because
of this country’s disparate provincially based system of securities
regulation, companies that wish to trade on the CNQ must become reporting
issuers in Ontario suggesting that non-Ontario companies need to comply with
certain Ontario regulations.
The
best news for prospective technology companies is the bottom-line impact. The
cost of listing on the CNQ is only $300 per month plus a $10K initiation fee.
There are no filing or processing fees. The CNQ imposes no additional layer of
policies or rules. Company oversight becomes the responsibility – and
liability – of its Board of Directors.
Under
these circumstances even those companies that can attract traditional VC
financing may elect the pubco option as an alternative financing strategy. Each
has its pluses and minuses but it’s nice to have a choice. A
little competition is good.
Regulators
often forget that high tech is synonymous with high risk. Venture Capitalists as
a rule try to avoid risk (is this an oxymoron?), especially with respect to
early stage ventures with no proven management, customers, or technology. Yet,
we all know that some of these will pay off. This is a fact - it's a numbers
game. Almost all tech companies of any substance today were regarded as pariahs
by VCs. That's why the only option for some of these is the public
company vehicle. Get 1000 investors to jump on the bus, betting $5K each (using
their RRSPs or VCCs), and presto, you've got a tidy $5 million. It's just too
bad that there aren't many brokers that know how to get this job done (they
understand mining, but they still don't get high tech - they too, think of it as
a surer thing than resource exploration).
It'll
be interesting to follow a competitive development south of the border. In the
U.S. market, and arguably global market, the Nasdaq Stock Exchange has
always been regarded by technology entrepreneurs and investors as the holy grail
of all markets - notwithstanding the current slump. To be listed on Nasdaq,
companies must meet certain standards - e.g. minimum share price ($1.00 on an
on-going basis), minimum capitalization and other substantial criteria. Smaller
companies that choose to be public issuers have a choice of two markets in the
U.S. (they could, of course, also list on the TSX-V and the new CNQ). These are
the OTCBB (Over-the-Counter Bulletin Board) and the PK ("Pink
Sheets"). These, like the proposed CNQ, have minimal listing criteria, but
unlike the CNQ they've done a lousy job of helping investors get timely
disclosures and access to corporate data. The OTCBB is generally regarded as a
place where low-class companies trade and the PK is viewed as the leper colony
of public companies.
Because
of the technology market downturn, many companies (literally hundreds) have been
forced off the Nasdaq because they have ceased to meet the continuing listing
standards, e.g. many stocks have dropped below $1.00 in trading price. Nasdaq
has been talking about creating a new beefed-up OTCBB which has been referred to
as the "BBX". The BBX would ultimately replace the OTCBB. To
list on the BBX, a company would need to meet certain standards (higher than the
current OTCBB but much less than for Nasdaq). Eventually the OTCBB will be
phased out and those that don't make it to the BBX will become the PK pariahs.
This is exactly the strategy that the TSX (Toronto Stock Exchange) followed -
i.e. have a nice place like the TSX-V (economy class) to bump those who can't
make it to first class (TSX).
The
BBX was supposed to be up and running by now. But it isn't. The current target
is to get it operational sometime this year. One of the snags, among many (I'm
not sure how accurate this is because I heard it through the grapevine from a
New York based corporate lawyer), relates to the name, BBX. Apparently a beef
(meat products) company in the Midwest has a claim to the BBX brand and is
resisting the Nasdaq's attempt to use this moniker. I was thinking - wouldn't it
be amusing if the BBX changed itself to the "BBQ" - the "Q"
sounding more like Nasdaq (and CNQ, too!). That would amuse the beef marketers
and I'm sure it's a name people would remember. I can just hear the nay sayers
now: "Come to the BBQ market to get roasted!"
Some
Recent Financings
I thought it would be a
good idea to mention a little about company financings - in B.C. only - on a
regular basis to give some encouragement to those who believe that no one is
investing these days. It would be useful to highlight those companies,
especially startups, that are getting support from angels and government
sources. Unfortunately, these are usually not widely disclosed. (Readers are
invited to let us know about their deals so that hopefully others will benefit
from their experiences.)
Of course, the other
reason for mentioning these, especially those that are publicly traded entities,
is that for the adventuresome among you, they may be worth looking at for
investment purposes. Whenever a company has received financing, one can infer
that it holds some promise (at least for some investors) and has a shot at
hitting some of its milestones.
Neuro Discovery (TSX-V:NDI) announced a
$30-million fund. James Miller, co-founder of QLT Inc. (TSX:QLT)
and Inex Pharmaceuticals (TSX:IEX) has launched a new VC fund called the Neuro
Discovery Limited Partnership managed by Neuro Discovery Inc. So far the
fund has raised $20 million from its limited partners and $1.5 million from NDI
itself. Another $8.5 million is anticipated for later this year. The fund, which
will invest in Biotech companies across North America will focus on those with
neuroscience technologies.
Growthworks, B.C.'s prominent venture capital
fund (one of which is the well-known Working Opportunity Fund) managers with
$700 million in assets under management, raised $68 million from retail
investors this RSP season for its managed funds, representing the second largest
capital raising effort on the national stage for labour-sponsored funds.
VIATEC, the Vancouver Island Advanced Technology
Centre announced that the BC Government is providing it with
$150,000 to develop and administer a program that assists early-stage technology
companies to obtain necessary capital.
i3Dimensions (Private) announced a $690,000,
three-year Department of National Defence (DND) contract to provide interactive
3D training applications to the Canadian Forces School of Military Engineering (CFSME).
Under the agreement, i3Dimensions will use its NGRAIN™ technology and tools to
develop a broad range of advanced interactive 3D training simulations designed
to increase soldier preparedness and safety, while reducing training and
equipment costs.
Stressgen
Biotechnologies (TSX:SSB) and its wholly-owned subsidiary, Stressgen
Development Corp., announced the receipt of two milestones from Roche: an equity
investment of approximately US$3,000,000 and a development milestone payment of
approximately US$1,500,000.
Response Biomedical
(TSX-V:RBM) has closed $750,000 of the private placement being undertaken by the
company as announced in Stockwatch April 9, 2003.
Imagis Technologies (TSX-V:NAB) announced the
existing shareholder that has agreed to provide bridge financing by way of a
line of credit facility for up to $500,000 is Mr. Altaf Nazerali, a
former director of Imagis.
Layer 7 Technologies (Private) announced it
closed $3M USD in seed financing from two of Canada's leading technology
investors, Working Opportunity Fund (EVCC) Ltd.
Gemcom Software (TSX:GCM) announced the
completion of a $300,000 convertible loan financing with the Working Opportunity
Fund Ltd. The financing consists of a $300,000 term loan repayable on September
30, 2004.
Cardiome Pharma (TSX:COM) has completed its
previously announced private placement, resulting in gross proceeds to the
company of $8 million.
Stockgroup Information Systems (TSX-V:SWB) a
financial media and technology company, reports that they have retained First
Associates Investments Inc. as investment banker and have signed a term sheet
for the underwriting of a C$2.0MM best efforts offering.
Vigil Health Solutions (TSX-V:VGL) successfully
completed its Public Offering of $2 million on April 8, 2003, completing its
Qualifying Transaction and acquiring Vigil Health Management Incorporated.
(note: This is a "CPC" deal - see article following on CPCs.)
Photochannel (TSX-V:PNI) announced that the TSX
Venture Exchange has accepted for filing documentation with respect to a private
placement of the PhotoChannel Networks LP in the amount of $115,000.
Burcon Nutrascience (TSX-V:BU) intends to issue,
on a private placement basis, up to 500,000 units at $1.50 per unit for gross
proceeds of $750,000. (note - this was also originally a CPC deal.)
Norsat International Inc. (TSX:NII) announced it
has completed a financing agreement worth US$2 million.
Strategic Technologies Inc. (TSX-V:STI)
announced that the Company has completed a previously announced Private
Placement raising $650,000.
AVCORP Industries (TSX-V:AVP) announced that it
has arranged additional short-term financing with a Canadian chartered bank.
Serebra Learning (TSX-V:SBR) has completed a
private placement of 2.75 million units.
Carmanah Technologies (TSX-V:CMH) has announced
that it has closed the private placement of 2,000,000 common shares of the
Corporation at a price of $0.74 per share, for gross proceeds of $1,480,000.
ZIMTU Technologies (Private) has arranged a
private placement of up to 900,000 units at a price of 23 cents per unit for
gross proceeds of $207,000.
Capital Pool Corporation (CPC) Comments and
Update
In this column, I keep 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.
Check our Capital
Pool Corporation chart (in .pdf format) for a complete list of the TSX-Venture
Exchange's CPC companies, thanks to
David Ing of Pacific International Securities. This list is
updated on a regular basis. It is now current to the end of April, 2003.
Although I was a big fan of these CPCs and very hopeful
for their use in developing tech companies, I (and others in the industry) and
beginning to think that they've run their course.
One brokerage industry expert notes that "they
still work for some companies, notably resource companies and select tech or
industrial companies for whom alternative sources of financing are not viable
(either not available or valuation terms not acceptable). They still work for
groups who have a deal in place already (i.e. Qualifying Transaction identified
previously or non-arm's length) - if the measure of CPC success is getting a
deal done quickly after the CPC IPO, then this model is ideal. I think the
slowdown in new CPCs is indicative of how the street feels about them. They are
still being done, but the whole process of finding an arm's length deal and then
facing the tough process at the TSX Venture Exchange is grueling. However, the
Exchange has certainly made things a lot better with the January policy changes.
Time will tell whether these changes will help revive the market."
An introductory
article explaining CPCs may be found at http://www.bctechnology.com
VEF Events
This
month's Vancouver Enterprise Forum
event, to be held on May 27th, will be titled, "Founder/CEO War
Stories" featuring Alexander Fernandes of QImaging and
Steve Munford of ActiveState. Both of these companies were sponsored
by local angel investors less than four years ago and both have become
successful tech ventures, notably QImaging which was sold not long ago to a US
corporation for US$12 million. I'm sure that both will have some valuable
insights to share with budding entrepreneurs.
In
addition to its traditional monthly events (held on the fourth Tuesday of each
month), the VEF is now also involved - in partnership with other organizations -
in sponsoring additional seminars. A good example of this is one that's coming
up on May 14th - is on "New Financing Sources for Technology
Entrepreneurs" (see
details). Finding equity financing has always been one of the biggest
challenges for technology entrepreneurs, whether it's early stage financing or
mezzanine investment to fund continued corporate growth. In light of recent
reductions in provincial sources of financing, the hunt for new sources of money
has become critical to the future growth of the technology industry in British
Columbia. This seminar will provide some guidance as to who's doing what in this
area.
First Forward's fourth Venture Capital
Matchmaking event which will be held in Vancouver B.C. on 8-10 June 2003. First
Forward Matchmaking attracts IT and Biotech Venture Capital investors from
throughout North America. Voyager Capital, OVP and Comerica
are amongst the top U.S Venture Capital firms attending this year. First Forward
Matchmaking is a major, three full day event featuring a "boot camp"
for companies, a golf tournament and networking event exclusively for investors
and a whole day function where pre-selected, top quality companies meet
professional Venture Capital investment companies face-to-face for pre-arranged
meetings. See www.FirstForward.org
for more information.
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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