The Way I
See It… by Michael C. Volker
Will a TSE
owned CDNX work for Tech Companies?
The biggest single challenge facing technology
startups is raising capital. It’s tough enough for companies to attract investors
these days without the added burden of dealing with archaic securities
regulations.
Although the number of angel investors and venture
capitalists has been increasing steadily, there is a far more greater number of
small investors willing to gamble a few thousand dollars on a startup. The
easiest, and probably only, way to tap this huge investor base is by becoming a
public company on a junior stock exchange such as the Canadian Venture Exchange (“CDNX”). I’ve been a big fan of the CDNX (and its progenitors,
the Alberta and Vancouver Stock Exchanges) for many years because it may
present emerging companies with the only means of accessing small
amounts of risk capital from a large number of investors.
There are many examples of companies which started
out this way. We tend to forget that companies like B.C.’s QLT Inc., Westport Innovations, and Burntsand Inc. were penny stocks on the CDNX.
In the
interests of protecting the investing public – a noble objective – our
Provincial Securities Commissions have each developed their own inconsistent
set of rules and regulations. The CDNX, which is a self-regulated organization,
must comply with the rules in each Province where it intends to do business. It
also has its own policies under which companies must operate.
In its bid to become a truly
national exchange, the CDNX – which started in B.C. and Alberta – is now
heading east by becoming a subsidiary of the Toronto Stock Exchange (TSE). Will a Bay Street controlled market add even more red
tape?
It is already unnecessarily
complicated, i.e. expensive, for small companies to raise modest amounts of
capital. Presently, it costs a company about $100K to raise $1M. That's
outrageous. I doubt that any regulator, let alone any of the
CDNX’s governors, has ever been in the shoes of a startup CEO. They haven’t the
foggiest idea.
Investors betting on a CDNX
company are investing pennies - not dollars! So, why apply dollar rules to
penny situations? Why not simply make the "red herring" a little
bolder? i.e. - less regulation in favor of more disclosure and caveat emptor
warnings. Let the market take care of itself. Investors must understand that
failures are the norm, not the exception.
B.C. is one of the best
jurisdictions (this is news to many entrepreneurs) in terms of lower
sophisticated investor thresholds and so-called financing exemptions. For
example, as little as $25,000 can be raised by a company without a full blown
prospectus level disclosure. In Ontario the entry level is over $100K! The
CDNX's “small financing exemption”, which allows companies to raise up to $1
million from retail investors in B.C., is yet another benefit for its listed
companies. There’s a real fear among Westerners that the CDNX will attempt to
unify provincial rules and go with the highest common denominator.
We've
all seen what happens with acquisitions: Big company acquires small company.
Big company culture is imposed on small company and small company is
assimilated into big company. Why will this be any different when big market
TSE takes over little market CDNX?
I'd
love to see the day when a company CFO with a few securities courses under her
belt can complete all the documents and forms for a financing - without
spending tens of thousands of dollars on legal bills. And, why not
require a single filing and allow any Canadians to participate in a startup –
regardless of their residence?
In all
the talks about the future of the CDNX, there's one sadly missing element:
input from the companies themselves. It's always amazed me how rules are set in
the complete absence of input from the customer. A rule which may make
sense to a regulator or broker may be totally unworkable from a practical
perspective.
We need radical, sweeping,
changes to securities regulations in Canada - especially as they pertain to
junior companies. We need a massive overhaul. Legislation is not keeping up
with technology. This infrastructure is impeding business progress.
The way I see it, company
executives must be at the table, along with the regulators and agents to create
an efficient marketplace for early stage capital formation. If the TSE takeover
of the CDNX doesn’t move us in this direction, it may as well shut down.
Michael
Volker is a high technology entrepreneur and director of Simon Fraser U's
University/Industry Liaison Office. He is a director of the BC Advanced Systems
Institute and the Vancouver Enterprise Forum and runs Vancouver’s Angel
Network. He may be reached at mike@risktaker.com.