Tech Futures:
Aug 27, 1999
By Michael
Volker
Beware of OTC Stocks, IPO Performance,
Portfolio and VCP Updates
Beware of OTC Stocks!
You have likely noticed that there
appear to be many new BC companies which trade on the U.S. over-the-counter
bulletin board market (OTC-BB).
One such company, Starnet Communications
(OTC-BB: SNMM), has been in the news lately because of police investigations
into its activities. Purportedly an internet company, the firm may have
been involved with illegal gambling and pornography. Starnet's shares closed
today at just over US$5.00 but have recently traded as high as $29 and
as low as pennies.
Companies like Starnet have opted
to trade on the OTC instead of seeking a listing on an exchange like the
VSE. Many claim that the "red tape" and the favorable US market exposure
has driven them there. Whereas the latter claim is justifiable, the former
should sound an alarm. In fact, a lot of OTC companies would not meet VSE
standards. The VSE's tarnished reputation often surfaces as another reason
to go with the OTC (but then, why not the ASE?) in spite of its massive
overhaul of the past few years (bad reputations die hard). Of course, to
counter this, we'll have the about-to-be merged ASE and VSE operating under
a classy new name (hopefully something like "National Venture Equities
Exchange").
I am amazed at the many misconceptions
which investors and others have about this market. I suspect that many
promoters actually rely on, and believe, many of these misconceptions.
Beware!
What really irks me is how many companies
which trade on the OTC-BB call themselves junior NASDAQ companies. Many
go so far as to say that they are "listed" on NASDAQ's OTC market. There
is no such thing. NASDAQ (the National Association of Securities Dealers
Automated Quotation System) operates a senior board featuring tech companies
like Microsoft, Apple, Sun, and our local leader, PMC-Sierra. NASDAQ also
operates a "small-cap" market which lists smaller, but still substantial,
firms. For example, small-cap companies must have a market cap of at least
$50 million (US) and begin trading at $4/share and maintain an ongoing
minimum price of at least $1/share.
Why am I making a big deal about
this? A listing on a recognized exchange implies that certain standards
are being satisified and that a certain level of disclosure (information
from companies) is readily available to investors.
The OTC is not an exchange.
It is simply a mechanism by which shares in companies can be traded. There
is little or no surveillance or regulation of any kind associated with
the OTC-BB. There are no standards. An OTC company can be a real, viable,
highly respectable company. An OTC company can just as easily by a flaky,
fly-by-night, disreputable company. No organization attempts to separate
the good from the bad. This is up to investors. And that is why it is risky.
On a regulated exchange, like NASDAQ,
the TSE, or the VSE, companies have to meet certain standards pertaining
to their financial health and quality and they are obligated to report
regularly (in prescribed formats) to the public investors. On the OTC-BB
these standards do not exist. If you don't believe me, try to obtain detailed
financial statements on some of your favorite OTC firms!
Of course, even on these exchanges,
there will still be bad apples (the TSE listed Bre-X). Junior markets are
better targets for crime because the stakes are lower and the surveillance
is not as high (although I would argue that with its recent reforms, the
VSE's supervisory systems are anything but lacking). But, most importantly
you, the investor, can readily access timely information on listed companies
and make your own conclusions. That's where the OTC is weak, relying mainly
on the Securities and Exchange Commission (SEC).
What I find totally crazy about this
situation is the fact that, in Canada, securities trading is regulated
by provincial securities commisions. In BC, the BC Securities Commission
does not require OTC companies operating in BC to file their quarterly
and annual reports with SEDAR, the depository for corporate information!
Starnet is a good example of this. When I first heard about this firm,
I could not readily obtain its financial reports. Yet, Canadian investors
can happily trade these Canadian stocks. That's nuts!
IPO Performance Update
In recent columns, I reported on
some of this summer's hot IPOs, notably Sierra Wireless Inc., Creo
Products Inc., and Pivotal Corporation. So how are they doing? As the chart
below shows, Creo's and Pivotal's shareholders should be happy campers,
both showing an immediate upside of 50% on the IPO price. Sierra Wireless'
shareholders are presently out-of-the-money, but only marginally. Being
listed on Nasdaq, both Creo and Pivotal are enjoying much higher trading
volumes than Sierra.
| Company |
IPO Date
& Price |
Recent Price
(Aug 27) |
Range |
Sierra Wireless Inc.
(TSE:SW) |
As
C$14.50 |
$13.50
(-7%) |
$11.50-
$15.80 |
Creo Products Inc.
(NASDAQ:CREO)
(TSE:CEC) |
29Jul99
US$15.00 |
$22.25
(+48%) |
$16.00-
$24.25 |
Pivotal Corporation
(NASDAQ:PVTL) |
5Aug99
US$12.00 |
$18.00
(+50%) |
$11.88-
$19.50 |
Junior Technology Portfolio -
Update
In July 16, I arbitrarily "invested"
$25,220 in 10 small, micro-cap companies selected from the T-Net
listing of all B.C. publicly traded technology firms. I wanted to be able
to buy at least a few hundred shares in the $1 - $10 price range in each
of 10 viable companies and invest a total of $25K.
This "starter" portfolio, as updated
below, shows that the original investment of $25,220 has already dwindled
down to $21,765. Most of the companies in the portfolio have declined.
At this point, I see no reason for selling any of them and going back to
Buffet's principles. I think that the best strategy for now is to be a
patient long term investor.
The T-Net20 portfolio index of the
20 biggest (by value) tech companies in BC is up 18% to 2659 in the comparable
period. So far, we would have been better off to go with the value leaders.
It should be noted that, with few exceptions, even the top 20 are still
small, emerging companies. Don't make the mistake that so many people made
with Microsoft - i.e. thinking that it's price is near the top and hence
not investing. Even numero uno - PMC-Sierra - still has a long way to go
before it can join the $1 billion sales club. Creo and Pivotal, soon to
be added to our top 20 list, are also just "getting started". As long as
their growth is double-digit (which it is) in a strong market, there's
lot's of room for a lift from their current valuations.
Sample "Starter" BC Technology
Portfolio:
|
Company
|
Price
16Jul99 |
# Shares
|
Price
27Aug99
|
Current
Value
|
|
Sierra Wireless
Inc. (TSE:SW)
|
13.00
|
200
|
13.50
|
2700
|
|
A.L.I. Technologies
Inc. (TSE:ALT)
|
9.60
|
300
|
6.60
|
1980
|
|
Sideware Systems
Inc. (VSE:SYD)
|
3.18
|
1000
|
2.90
|
2900
|
|
Burnt Sand Solutions
Inc. (TSE:BRT)
|
1.95
|
1500
|
1.62
|
2430
|
|
Inflazyme Pharmaceuticals
Ltd. (VSE:IZP)
|
1.35
|
1500
|
1.35
|
2025
|
|
Spectrum Signal
Processing Inc. (TSE:SSY)
|
7.00
|
400
|
3.25
|
1300
|
|
Avcorp Industries
Inc. (TSE:AVP)
|
2.00
|
1000
|
1.89
|
1890
|
|
Pacific Insight
Electronics (VSE:PIH)
|
2.81
|
1000
|
2.80
|
2800
|
|
Marine Bioproducts
International Corp. (VSE:MBP)
|
0.90
|
2000
|
1.00
|
2000
|
|
Avcan Global
Systems Inc. (VSE:ACN)
|
1.10
|
2000
|
0.87
|
1740
|
|
TOTAL PORTFOLIO
VALUE
|
$25,220
|
|
|
$21,765
|
|
GAIN (LOSS)
|
|
|
|
($3,455)
|
VCP Update
Another four new Venture Capital
Pool (VCP) companies have filed their prospecti with the VSE in the past
two weeks. New additions to the list include First Castle Enterprises,
First Harbour Enterprises, First Tower Enterprises, and Syntegra
Investment Corp. Obviously, someone thinks that it pays to be first!
I wonder if any investors will get these "Firsts" mixed up?
A closer examination of these "Firsts"
reveals that Nick De Cotiis, Don De Cotiis, Graeme Sewell, Conrad Clemiss,
Alan Crawford, Allen Sewell, and Negar Towfigh are involved with all three.
It would appear that this group is looking for a triple header. Don't confuse
these with another recent listing, First Step Ventures Corp (VSE:FS),
which is headed up by Donald McInnes, Gerals Cook, John Greig, John MacDonald
(of MacDonald Dettwiler fame), and Rubert Legge. For the record, this latter
one was the second of the "Firsts". The first "First" was actually FVC
First Venture Capital Corp, which was the second (not the first) VCP to
complete its QT by acquiring Lasik Vision.
Recent in-progress IPOs, now numbering
eleven, are still awaiting their trading debuts.
The immediate challenge for all VCP
companies is to complete a "Qualifying Transaction" (QT). This entails
finding a suitable active target company and then merging with it. The
fact that so many of these pools are being formed supports my oft-cited
claim that there is more capital than good deals. Yet, so many companies
are struggling to get financed. I suspect, from my own experiences, that
these struggling companies are deficient in some major attribute (e.g.
proprietary technology, management talent, or customers). That is precisely
why I am a big fan of the VCP concept - VCPs
can provide more than just the early
stage capital. VCP Boards can address the shortcomings. And that is what
makes them superior to an old, beat-up shell company for acquisition purposes.
Check
our Venture Capital Pools chart for a complete
updated list all the VSE's VCP companies. To date, only two of the VCP's
that have issued a prospectus have completed their "qualifying transaction"
(QT) thereby removing their VCP status.
Michael Volker
is the Director of the University/Industry Liaison Office at Simon Fraser
University, Chairman of the Vancouver Enterprise Forum, and a technology
entrepreneur. He owns shares in many of the companies he writes about.
Contact: mike@risktaker.com.
Copyright,
1999.
What
Do You Think? Talk Back To Mike Volker
Tech Futures is a bi-weekly
column that focusses attention on new and emerging BC publicly listed technology
companies. Mike Volker is the Director of the University/Industry Liaison
Office at Simon Fraser University, Chairman of the Vancouver Enterprise
Forum, and a technology entrepreneur. He owns shares in many of the companies
he writes about. Contact: mike@risktaker.com
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