TSX Venture Exchange pledges to revitalize, diversify

A town hall meeting to discuss the TSX Venture Exchange’s proposed improvements to Canada’s public venture market filled a large ballroom at the Sheraton Hotel in Toronto on Jan. 18.

The meeting was called to discuss the findings of a recent White Paper by the TSXV on revitalizing the exchange, based on interviews and discussions with hundreds of clients and other stakeholders about the major factors impeding the venture market’s success.

“After gathering feedback from clients last year, we ranked ideas by how much they would impact the venture market, and awarded greater weighting to those that could be implemented sooner than later,” TSX Venture Exchange president John McCoach remarked. “We decided to focus on things we could influence, as opposed to try to make changes that were in other people’s control.”

After distilling all the feedback, the TSXV determined three priorities: reducing compliance and administrative costs for clients without compromising investor confidence; expanding the investor base funding TSXV companies and generally enhance liquidity; and diversify and grow the stock list for the marketplace.

So far the TSXV has identified 23 initiatives that it says will help achieve these goals. “Some of the initiatives are well underway and others are a work in progress, but there is obviously no single magic solution,” McCoach said. “There is no finish line — we’ll start with these 23 initiatives, and … we’re going to continue to refine the initiatives and put more meat on the bones on the ones that are not fully developed, and we’re going to come up with new ideas.”

On the cost-cutting front, McCoach said the TSXV will look for proxies for sponsorship, as sponsorship requirements can make up much of the time and cost ($50,000 to $100,000) of going public.

“All companies are required to obtain a sponsor, with some exceptions … but we’re going to turn that concept on its head, and we’re going to start with the premise that sponsorship is not required unless there is no independent due diligence or other proxy, or sponsorship for that due diligence,” he said.

If a private company was backed by a venture capital firm, McCoach said, as an example, the TSXV would recognize that the venture capital firm had gone through a lot of due diligence, and had probably done the same due diligence a sponsor would have, and in that case, the exchange would not need sponsorship. 

Another example would be if a company had meaningful sales or had its business vetted by its customers. In this case, the TSXV would not need sponsorship either, McCoach said.

“Last year a company from Newfoundland went public and most of their sales were to the U.S. Navy, and we looked at the due diligence that the U.S. Navy did in this particular case and it was very, very extensive, so we waived sponsorship.”

The TSXV can also revise the exchange’s shareholder approval requirements so that they do not apply to inactive companies completing an arm’s-length transaction, such as a change of business or reverse takeover.

“In our view, and in the view of stakeholders we spoke to [mid-year], those shareholders have given management a proxy to go out and find a business opportunity for that company,” McCoach said, adding that the change would save companies months in scheduling a shareholders’ meeting, and anywhere from $20,000 to $40,000 in costs.

“These are changes to policy and will require Securities Commission approval,” he said. “But we are drafting these as we speak, and will submit to the Securities Commission in the next few weeks.”

Other changes to enhance the public market experience for clients include extending the time to renew personal information forms from three years to five years; providing automated online filings (the TSXV already offers this for private placement transactions, but now plans to expand the service to other transactions); implementing a more responsive system to accelerate transaction processing (to provide comments within a certain number of days); eliminating TSXV’s escrow requirements; and applying only the Canadian Securities Administrator’s national policy on escrow. The TSXV might also eliminate Tier 1 and Tier 2 boards.

To expand the base of investors that fund TSXV companies and enhance liquidity, McCoach said the exchange must work harder to attract more investors to the marketplace, as well as support dealers who have expertise in public venture capital, and attract other dealers that do not.

It plans to highlight the TSXV’s track record and showcase the success stories listed on the exchange, and get these companies out in front of more fund managers, retail investors, investment advisors, investment bankers and research analysts.

“We’re going to be a lot more aggressive,” McCoach said. “We’ve committed capital and new initiatives to showcase over 200 companies in 2016.”

The TSXV will reduce the barriers U.S. investors face in Canadian markets. “Fifteen years ago it was just as easy for an American to buy stocks on the TSXV or TSX as it was for a Canadian to buy shares on a U.S. exchange,” McCoach said. “A number of things have happened and it has become far more complex for Americans to now participate in our marketplace … we’re going to do our PhD on this topic and try to identify what the issues are, and we’re going to try to reduce those barriers.”

Helping on that front, he added, are its partners in the trading group and its own legal counsel and data group, as well as law and brokerage firms that have cross-border experience. 

The exchange is also working for more direct communication between issuers and developers, such as developing mobile and web-based tools to stream summaries of treasury offerings from listed companies.

Other plans include introducing a market-making program between issuers and qualified market makers, and creating investor analytic programs and research products. It also wants more stringent criteria for listing on its NEX Board, which was created in 2003 to provide a market for former Tier 1 and Tier 2 issuers that drop below the exchange’s continued listing requirements (CLR), or do not have active businesses. The companies that do not meet CLR are not de-listed (unless there are other reasons to do so), but are moved to NEX and identified with the trading symbol suffix “H” to show they are inactive. The venture also wants to amend and simplify CLR, and provide more tools for companies to reactivate from NEX.

The TSXV’s goal to diversify its stocklist and include more non-resource companies appeared to resonate the most at the town hall. While there are almost 500 non-resource companies listed on the exchange, 71% are still resource companies.

“The perception of the Venture in the U.S. is that it is full of resource companies that are poorly capitalized,” one attendee said during the question-and-answer period.

One way the TSXV hopes to change that is by recruiting small- and medium-sized sale teams that bring new companies from diverse industries (and compensate the SME sale teams that bring companies to the marketplace). It is opening four new offices: one on the West Coast, one in Montreal or Ottawa, a third in New York or Boston, and a fourth in either Palo Alto or San Francisco.

It is also ensuring that private equity firms, venture capital firms and angel investors see the TSXV as an exit strategy for early-stage companies, and explore alliances with other exchanges, like the one it has with the Santiago Stock Exchange (which provides qualified TSXV-listed companies with dual listings).

“We have to work hard to change the perception of the venture market in that it is not just reso
urces,” TMX Group’s president and CEO of Global Equity Capital Markets Nick Thadaney said. “We hitched our pony … to the resource wagon, and guess what, that isn’t going to work so well right now. So we have some work to do.”