Silicon Valley North #54                                       May, 2003


The Way I See It… by Michael C. Volker


New CNQ market holds promise for junior tech companies


Raising equity capital is never an easy task. Financing sources available to companies are limited and there simply aren’t enough alternatives for those in need of cash.


Last month I wrote about the funding gap at the very early proof-of-concept stages of development (i.e. the need for incentives for early stage high-risk investors). When a company gets past this hurdle, it is then faced with raising substantially larger amounts of growth capital – provided mainly by institutional venture capital investors. However, many ventures are considered too risky for the portfolios of VCs who, after all, have to exercise great diligence in investing other people’s money.


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. 


Enter the Canadian Trading and Quotation System, or CNQ. It has the ring of a Canadian junior Nasdaq. The CNQ is a private sector initiative founded by Ian Bandeen, a former executive at BMO Nesbitt Burns and Robert Cook from the TSX Exchange.  Based in Toronto, the CNQ has already received the blessing of the Ontario Securities Commission and expects to start trading in about 50 companies by mid-year.


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.


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.


At the same time, the B.C. Securities Commission has proposed its solution to Canada’s regulatory confusion. The BCSC is pushing against jurisdictions such as Ontario by proposing a “principles-based” regime as opposed to detailed rules similar to those enacted in the U.S. under the Sarbanes-Oxley legislation. Hopefully, this “BC Model” will be adopted nationally. This dovetails nicely with the CNQ philosophy of being a trading vehicle and not assuming the role of venture capitalist. The approach makes sense – leave the regulating up to the regulators. There are enough rules already without the need to add more. Besides, regulations don’t make the dishonest honorable.


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.


The way I see it, we need more efficient and cost-effective mechanisms to facilitate investment in promising technology companies. New initiatives such as those taken by the CNQ and the BCSC are paving the way.


Michael Volker is a high technology entrepreneur and director of Simon Fraser University’s Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is Chair of the BC Advanced Systems Institute and past-Chair of the Vancouver Enterprise Forum. He may be reached at