CDNX
is Looking Good for Technology Companies, but....
I'm a
big fan of the CDNX - the Canadian Venture Exchange because of the valuable role
that it will play in the development of our technology sector in Canada.
Some
people, especially mainstream Venture Capitalists, argue that junior companies
should not go public and that the CDNX is not a viable "exit"
opportunity in contrast to a senior exchange. Of course not. It's an entry
opportunity - especially for smaller investors who like getting in early on
companies such as QLT PhotoTherapeutics or Westport Innovations which both
started off as "penny stocks".
A
boldly stated objective of the CDNX, as articulated by its CEO at a recent
Vancouver Board of Trade breakfast, is to graduate companies off the Exchange to
the TSE or NASDAQ. It's niche as a junior equity market is well defined.
If
you go to a junior hockey game, you know that you're going to see amateurs. You
don't expect professional action, because you know that's not the arena you're
in. And, it's no different in the corporate world. Only a few companies will
make it to the big leagues, but at least they're all given the chance.
I
recently dusted off an old video recording of the infamous 1990 episode of Prime
Time which portrayed the former VSE as a haven for scam artists. Ever since, the
VSE just couldn't be shed its tarnished image in spite of drastic reforms and
major improvements which the Exchange implemented in the mid to late nineties.
The creation of the CDNX by merging the Alberta (ASE) and Vancouver Stock
Exchanges (VSE) last November, as the first step towards a national mandate
addressed this image problem, not only in name, but also in substance.
In a
recent Globe and Mail guest column, the CDNX's chief, Bill Hess, made some good
points relating to the recent controversy around brokers' personal participation
in corporate financings and potential conflicts of interest. He argued that, as
did the Hagg Committee in 1997, a complete ban on broker participation would
make it so much harder for many small companies to raise start-up funds. The
recommendation was to improve disclosure, i.e. make more information available
to the public so that investors would be better informed and hence better
protected. Indeed, this is the driving principle in U.S. markets and it works
very well there. Unhappy investors can easily find litigation-hungry class
action securities lawyers to help keep companies honest.
I
applaud this approach. It's certainly much faster and more effective than having
a regulatory body pass judgement on the merits of a proposed deal (which,
unfortunately is still the case today). Let the investors assess the merits.
So
what's different today from a few years ago? In today's on-line internet world,
access to corporate information has never been easier. Still, there are some
gaps. A comprehensive disclosure policy, along with an expanded repository for
such information, like SEDAR (www.sedar.com) will go a long way towards ensuring
fairness in the marketplace.
We do
need more rules on what has to be disclosed. For example, complete, readily
accessible backgrounders on company directors and managers would be a good start
(including both their successes and their "learning experiences"). How
about details on broker shareholdings (along with prices paid) and more
information on holders of substantial stock positions? I recently learned of a
financing in which a broker acquired a million shares (5% of the total) at a
dime and then he opened trading in the stock at more than a dollar. He was not
identified as such in a company press release!
It's
easy for startup entrepreneurs seeking risky startup capital to get sucked in by
smooth talking financiers. These quasi-insiders often flip their stock positions
for tidy profits and then move on to their next deal leaving behind struggling
companies and frustrated investors.
With
full disclosure in place, when failures or scams do occur - and they both will -
it'll be clear who's to blame and it won't be the CDNX that takes the rap.
The
way I see it, the CDNX is a wonderful financing vehicle for emerging ventures.
It's off to a great start with a nice fresh image. Let's not blow it.
Copyright, 2000.