EDITORIAL & OPINION — Regulators and cyberspace — Dot-com mania

When you’re hot, you’re hot, and when you’re an ugly duckling, you might as well transform yourself into a beautiful swan.

That seems to be the rationale behind the flurry of mining companies trying to become E-darlings. We don’t want to rain on the dot-com parade, but there is something a bit wonky about the rush of mining companies dropping their languishing exploration projects to find fame and fortune in the netherworld of cyberspace.

It’s hard to understand how a gold expert today can become an encryption expert tomorrow. Not that we blame anyone for trying. Times are tough in the mining game. Metals prices keep hitting new lows and investors seem to be equating drilling programs with a visit to the dentist’s chair. Instead, they’re flocking to overhyped Internet and technology companies, the old adage ‘buy low, sell high’ be damned.

Technology is important, and no less than American President Bill Clinton has called it one of his many “bridges to the 21st century.” Having discovered the Internet, his right-hand man, presidential hopeful Al Gore, agrees. With these two space cadets leading the way, and with the help of Wall Street, America is aiming to become a leader in information technology.

What makes us nervous is the over-hyped optimism attached to the sector, not to mention the uncritical acceptance of anything dot-coms have to say. Remember the mid-1990s when Bre-X mania was in full flower? The euphoria and recklessness that marked those times have found a home in cyberspace, setting the stage for some disgruntled tekkies to take investors and Wall Street for a ride. Beware the revenge of the nerds.

It’s been done before. In the mid-to-late 1980s, the Vancouver Stock Exchange was bombarded with a rush of technology ventures, most of which involved American entrepreneurs. Because of the complexity of the “technology,” regulators were ill-equipped to monitor some of these companies, or to challenge the “experts” endorsing their breakthroughs.

Some of the stories were doozies. Chopp Computers, for example, got oodles of attention for its “parallel-processing technology,” based on “von Neumann architecture” that promised to process information as fast as the Cray supercomputer. And there was another company with a prototype machine that promised to read a person’s eyeballs to determine what drug or mind-altering substance he had ingested. Mothers Against Drunk Driving gave it a thumbs-up.

Alas, all was not what it seemed. Chopp Computers never outprocessed anything. The eyeball machine was a metal box with nothing inside and the American doctors behind the venture weren’t doctors after all.

We don’t want to create the impression that the current hi-tech boom is riddled with scams funded by other people’s money (OPM). All we know is that it pays to be vigilant, and that an ounce of prevention is worth a pound of cure.

What is needed now is what was needed when mining stocks were flying high in the mid-1990s: prudence, skepticism and regulatory oversight. Bubbles always burst, and this one will too.

Billions of dollars have been raised for high-tech companies, some of which have been managed by tekkies in ponytails with little business experience. The burn rate at some of these companies is mind-boggling, at least compared with incoming revenue, which is sometimes nil. Business fundamentals don’t seem to matter, but they will one day when the OPM well runs dry. Accountability doesn’t appear to be a concern either, but it will be when investors wonder where all the money went, or why one of their swans has turned into an ugly rogue duckling.

The other potential problem is, of course, disclosure. It’s difficult for investors to understand the technical terms being bandied about by hi-tech promoters, about their breakthrough in encryption and digital compression, or what-have-you. Regulators should take immediate action to upgrade their abilities to monitor this sector, and identify weaknesses in disclosure, or history may repeat itself yet again.

When mining scandals surfaced in the last boom, the industry was hauled on to the carpet by regulators and asked to clean up its act. Now accounting firms are being taken to task for the “aggressive accounting” of some non-resource, public companies.

While there appears to be no shortage of regulatory hindsight, where is the foresight? It’s like having a dog that barks only after the thief has departed.