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Blog January 20, 2016: Cheat Sheet for Revitalizing TSXV Town Hall Meeting


On December 1, 2015 the TSXV published a "white paper", Revitalizing TSXV, in which it acknowledges that the bear market dragging down its venture capital listings is not just due to "cyclical" macro-economic factors. The white paper proposes to tackle a turnaround through three avenues: 1) reducing administrative and compliance costs for its listings, 2) expanding the investor financing base and enhancing liquidity, and, 3) diversifying the listings away from the current dependency on the resource and energy sectors. In an effort to solicit feedback from stakeholders the TSXV has launched town hall meetings beginning with January 12 in Calgary, January 15 in Montreal, January 20 in Toronto, and January 28 in Vancouver. The big one will be the Vancouver meeting at 2:00 pm Thursday January 28 at the Pan Pacific Vancouver Hotel (Oceanview Suites - Level R). The venue has been changed from UBC Robson Square because of a surge in expected attendance. Because at least half the TSXV listings are headquartered in Vancouver the turnout from stakeholders is expected to be substantial. But it may turn out to be even bigger because Thursday is the last day of AME's Roundup 2016 mining and exploration industry conference which is being held in the convention center attached to the Pan Pacific. The town hall meeting overlaps with Roundup's final 2-5 pm Government and Industry session. Roundup attendees are being quietly urged to leave their rock hammers at home and not raid the core shack for chunks of drill core if they plan to attend the TSXV town hall meeting instead.

The TSXV has come under a lot of criticism for having its head in the sand during the past couple years when industry observers started sounding the alarm that this time was different, that it was not just a cyclical downturn that the traditional resilience of the Canadian juniors would survive. I personally sounded the alarm in a February 15, 2013 Streetwise Interview. I also gave a major technical presentation at Toronto's PDAC in March 2015 (The Future of the Retail Investor and the Resource Juniors). More recently on December 11, 2015 I published a detailed analysis on The Four Structural Problems that are Killing the Canadian Resource Juniors. In my view there is little the TSXV can do about these structural problems which emanate from Canada's regulatory system and the establishment banks that own the TSX/TSXV. The changes proposed by the TSXV have been mocked by industry observers as woefully misplaced and misguided. Some have even suggested boycotting the town hall meetings. I believe that is a mistake. Based on observations I heard about attendance at the Montreal meeting, it is the establishment banks which are boycotting the meetings. They want Canada's venture capital market to die because it poses a threat to their business model of managing the financial assets of Canadians. As owners of the TSXV it is surprising that they have even allowed the TSXV to potentially stir the pot by acknowledging that all is not well with the venture capital eco-system.

I believe all stakeholders, which include company executives, investors, the public company support industry, the mining and exploration industry, and even the energy and resource oriented education system need to pay attention to the catastrophic collapse that is underway. The continuing meltdown in the commodity markets, signaling at least a couple more years of misery before help comes in the form of a macro-economic turnaround, coupled with the worst new year start ever for general equity markets, injects a particular urgency into this situation. The establishment banks that own the TSXV would be happy to see the Vancouver town hall meeting attended by a handful of cranky stock promoters bashing the TSXV officials. They would not like it at all if well informed stakeholders show up to air grievances that target the real problems and their origins. To help stakeholders understand in what ways the proposed "actions" may or may not be helpful, I have reproduced them from the white paper and added my own comments.

WE WILL REDUCE OUR CLIENTS' ADMINISTRATIVE AND COMPLIANCE COSTS, IN A MEANINGFUL WAY, WITHOUT COMPROMISING INVESTOR CONFIDENCE: We will introduce multiple changes to enhance the public market experience for our clients.
TSXV Taking ActionKaiser Comment
Eliminating the general requirement for sponsorship. In those limited cases where certain material aspects of a company's disclosure document are not independently verified -- and there is no acceptable substitute for arm's-length due diligence -- TSXV may request a focused independent review of the new listing application. Not relevant to existing listings, but sponsorship of new listings and reverse takeovers is an emerging problem due to the disappearance of independent broker-dealers.
Revising the Exchange's shareholder approval requirements so that they will not generally apply to inactive companies completing an arm's length transaction, such as a change of business or reverse takeover. Will assist in recycling ghost listings.
Recognizing active and proven directors and officers of TSXV-listed companies. One example of this would be to employ a new NEXUS-type of status. A bigger problem is the aversion individuals have with regard to serving as largely unpaid directors holding options with dubious upside potential while taking on oversight responsibilities with regard to compliance with irrelevant regulations. A Nexus style registration system for directors sounds like a make work program for TSXV employees that imposes further paperwork burdens on potential directors.
Extending the interval to renew a Personal Information Form (PIF) from three years to five years. Why not join the government of Canada in embracing the wisdom of finally allowing 10 year passports instead of the former 5 year term?
Providing automated online filings. TSXV now offers this service for private placement transactions and we plan to expand this service to additional types of transactions. Why is it that Kaiser Research Online knows more about the financial health and projects of TSXV listings than the TSXV itself? It is because KRO spends the money to convert financial report filings into structured data while most of the material filed by listings is in an unstructured form. Not only is third-party compilation of structured data expensive, but it creates inputting error risk. Given that the TSXV spends a lot of effort approving every asset transaction, why does it not go the extra step of creating an online data collection system whereby companies are required to input and maintain basic information about each project? The current system of discussing the company's affairs in the quarterly MD&A has neither rhyme nor reason. Imagine one could go to the TSXV web site, look up a company, and find every property listed with all relevant information, including a quarterly statement about what was done and planned for each project? Forcing the companies to maintain the information in this online format not only would enforce the integrity and accuracy of the information, but the TSXV would have it in a structured form that would enable it to carry out internal analytics about the overall activity and health of its listings. It could also provide as a public service a search engine similar to the KRO Search Engine which would allow investors to find companies whose fundamentals and project focus meet the investor's goals. The existing TSXV web site borders on useless as far as information about its listings is concerned.
Implementing a more responsive system to accelerate transaction processing. TSXV will commit to providing comments within a specified number of days. Shortening the approval process might be a realistic prospect if the TSXV officials stopped trying to judge the merits of a transaction. Rather than acting as a second board of directors, they should just check for completeness. If all these transactions were made available online in a structured format, it would create a transparency that enables the media, investors and the blogosphere to recognize garbage transactions that stigmatize the company and its management. Make all the transactions sticky, and company boards will think twice about trying to push self-serving or stupid transactions through the exchange approval process. I recommended such an approach to the Matkin Commission during the early nineties, but the Internet had not yet emerged. Today there is no excuse for this. The TMX Group should also abandon its obsession with charging lots for all this "valuable information" because this information is a public good. Perhaps one should consider spinning out the TSXV as a non-profit utility which has a single order execution book and a well developed information system so that market integrity is restored through a fair trading system and information transparency.
Eliminating TSXV's escrow requirements and applying only the Canadian Securities Administrator's (CSA) national policy on escrow. In conjunction, we may eliminate the concept of Tier I and Tier II boards on TSXV. Nobody pays attention to the Tier I and II distinction except lawyers handling transaction paperwork for listings. Almost nobody distinguishes between a TSX and TSXV listing as far as resource sector juniors are concerned. A "graduation" on the TSX should only happen when a resource company has achieved a minimum market cap and at least one year of operating revenues. Operating the exchange for venture capital listings as a non-profit utility would get rid of the need for multiple order execution platforms in the name of competition. This would also allow reinstatement of the short-sale uptick rule because the order-priority structure of the trading platform establishes whether an order is in compliance with the uptick rule. This is not possible when the same order is shunted through multiple parallel order books.
WE WILL EXPAND THE BASE OF INVESTORS FINANCING COMPANIES AND GENERALLY ENHANCE LIQUIDITY: A number of initiatives have been developed to attract more investors and increase public venture market liquidity
Bolstering our business development programs to create more positive awareness of Canada's public venture market and to showcase TSXV-listed companies to fund managers, retail investors, investment advisors, investment bankers and research analysts. We will present over 100 companies to these audiences in 2016. This is a really bad idea because it reflects the TMX Group's ambition to get into the investor relations business. The TSXV should let the private sector take care of promoting its listings. What are the criteria by which the TSXV decides who it showcases? What will be the costs inflicted on listings "nominated" for this "privilege"? The TSXV already does its showcasing with its index which contains less than 20% of its listings and is constantly adjusted to get rid of the failures. Who in the investment world is so stupid as to pay attention to anything that stock exchange officials parade around as wonderful? This is just another strategy to squeeze listings for fees.
Leading an action team of industry experts and diverse TMX Group representatives, with a goal to reduce the barriers to U.S. investors wishing to participate in the Canadian market. How useful will it be to send a team of lobbyists to petition the United States to stop protectionist regulations that make it difficult for US residents to trade efficiently in Canadian listed stocks and participate in private placements? Why has not one Canadian regulator, stock exchange official or politician called foul on the American PFIC (passive foreign investment company) rule aimed at offshore trusts which manages to include most Canadian listings? Most American investors treat their Canadian stock transactions like any capital gain, but technically if the company is designated "PFIC" they need to deploy a nightmarish accounting system which would discourage any American resident from ever owning a Canadian company. Maybe the action team should visit Comic Con to learn what it means to be a hero.
Working to facilitate more direct communication between issuers and investors (where allowed by securities laws). For example, we are currently developing mobile- and web-based tools to stream summaries of treasury offerings from our listed companies. By itself this is useless. It would be more productive if the TSXV established a clearing system for private placements whereby once a proposed private placement has been approved, its availability shows up in the online accounts of investors who have 100% responsibility accounts at a discount brokerage firm. Through an online interface the investor could "subscribe" for a certain amount, whereupon the financing amount is immediately swept out of the account into an escrow account. The investor would have a two day "buyer's regret" opportunity to reverse this decision, after which the funds are committed to the private placement. The TSXV maintains the order book, and, when it reaches the minimum threshold and deadline, electronically collects the funds from the various brokerage firm escrow accounts and delivers the digital stock certificates and warrants, and transfers the money to the company's bank account. As part of the initial "subscription" decision the investor will have acknowledged all the boiler-plate about the riskiness of the investment and so on. The investor need never have met nor talked to a company official. The order book would be filled on a first come first serve basis enforced by the TSXV clearing system. There might be an initial registration process for the investor that establishes jurisdictional eligibility. It would be an excellent way to turn the "existing shareholder exemption" into a practical reality that enables retail investors to participate in private placements (they need to ditch the pointless existing share ownership requirement - why should only individuals with some rolled back debris in their account be entitled to buy private placement stock in a promising junior?). The TSXV would also have the data needed to keep track of how much of the 12 month maximum allowance per company a retail investor has used up (currently $15,000). Because this limitation is not something the company can enforce it makes compliance a nightmare. Another reason to create a non-profit exchange utility for Canada's venture capital market. And don't bring up the CSE. It is also a for-profit entity subject to the same "competition" rules and operates its own alternative trading platform that helps fragment the TSXV listings market.
Introducing a Market Making program on TSXV by facilitating arrangements between issuers and qualified Market Makers under the high governance and monitoring standards of the Exchange. Unless the TSXV has in mind computer based market making, this is a waste of time. Human market makers cannot function in a market where algorithmic trading by entities with day trading accounts exempt from borrowing stock for short sales is allowed. And how is a market maker supposed to function when there are multiple trading platforms through which orders can be funneled?
Introducing new investor analytic programs and research products. We are beta testing a new stock screening tool that will allow investors to identify opportunities by using numerous parameters. We are also investigating research tools that will leverage crowd-sourced knowledge. So the TSXV wants to get involved in rating the quality of its listings? This is bad idea. Make it easier for the bank operated algo traders to target vulnerable listings! However, if the TSXV developed on online search engine as already discussed, which allows a combination of search terms that are individually neutral, but secure their valuative meaning through the searcher constructed combination, that would be a hugely productive development! Of course that would render KRO's Search Engine obsolete, though I'm far more worried about the resource juniors becoming obsolete.
Engaging with the Investment Industry Regulatory Organization of Canada (IIROC) to obtain clarity regarding the application of IIROC's suitability standards. To this end, IIROC will soon publish an FAQ document that is intended to create a consistent understanding within the industry regarding the suitability standards. The client relationship model (CRM) and suitability standard was invented by the securities commissions and IIROC, a pseudo-regulatory entity controlled by the establishment banks, not the TSXV. Daring to broach this topic is the most courageous thing in this white paper. CRM and IIROC are waging a war on individual stock ownership by investors. The goal is to steer client capital into managed accounts stuffed with structured products that diversify away individual company catastrophe risk such as was experienced by Canada's biggest mining and energy companies during the past couple years. It is death to high risk venture companies. The TSXV should stand up and call foul, but the TSXV is part of the TMX Group which in turn is owned by the establishment banks. People have been very disparaging about the "white Paper" and "town hall meetings" because it is clear that the establishment banks have an agenda to marginalize and ultimately eliminate Canada's venture capital markets because these listings have no place in their future, robo-advisory based business model. The efforts by the TSXV to save itself are justifiably seen as a farce. But it is no longer just independent observers such as myself calling foul: read the comments by GMP's CEO Harris Fricker in his January 13, 2016 Memorandum about why he axed 27% of the staff of this brokerage firm that caters to small to mid tier companies. The enemy is not the TSXV itself, but rather its establishment bank overlords.
Amending and simplifying TSXV's Continued Listing Requirements (CLR) and providing additional tools for companies to reactivate from NEX, a separate board of TSXV for companies that have fallen below TSXV's CLR. We will also introduce more stringent criteria for maintaining a listing on NEX. Check out the KRO Resource Junior Crisis Center to see that more than half of the TSXV resource listings have negative working capital and are no longer viable as continued listings. Prolonging the twilight zone of these zombies and ghosts is not helpful. Shunting them to the NEX board while maintaining the capital pool listing program is just an effort to keep fees flowing into the TSXV.
Advocating for additional prospectus exemptions for public companies, such as the recently introduced "existing shareholder" exemption and the proposed dealer exemption. This is very important, but take note that the Ontario Securities Commission, the fiefdom of the establishment banks, declined to the adopt the pitiful "existing shareholder exemption" because it knows that eventually the "existing shareholder" restriction will be ditched to make this a truly useful exemption that enables any Canadian resident investor to fund publicly listed companies directly through private placements. The banks want Canadian investors strapped into rocking chairs where they feed them pablum while nourishing themselves on the investors' capital. They do not want investors to become responsible for their own investment decisions and by-pass the financial sector except for using it as an order submission and trade clearing conduit.
Partnering with a Canadian financial technology company to enhance our programs promoting financial literacy and capital markets education in universities and colleges across Canada. This would be wonderful if investors had a way to apply abstract knowledge to actual data. But financial statements are loaded with mind-numbing gibberish invented by American regulators in their effort to control their much bigger league crooks. Most of the accounting gibberish obfuscates the truth. The TSXV's "financial literacy education" efforts would be productive if they made financial data available in a structured, searchable manner as already mentioned. Then investors could get to the heart of the relevant question, how and where are you and will be burning up money that needs to be replaced through future equity financings?
WE WILL DIVERSIFY AND GROW THE STOCK LIST TO INCREASE THE ATTRACTIVENESS OF THE MARKETPLACE OVERALL: We will work to further diversify the stock list in terms of industries and geography.
Hiring a dedicated team (the SME Sales Team) to bring new companies to our marketplace from diverse industries, and to help these companies secure financings. The team will be deployed in key centers across Canada and in the U.S. This is the TSXV finally acknowledging that it is not just "cyclical", that this time is may be different for the resource sector and its junior venture capital ecosystem. So it is hoping to lure other types of ventures onto the exchange, but for that to be worthwhile, the problem of how to get capital into corporate treasuries, and enabling the market to function as a price discovery mechanism in an environment of predatory algorithmic trading must still be solved.
Revising the Capital Pool Company (CPC) Policy to make the program more flexible and attractive to companies in all industry sectors. The best revision would be to eliminate capital pool companies. The era of rising metal prices that drag marginal deposits into the money is over. There is no near to medium term need for clean CPC shells into which entrepreneurs can stuff privately acquired deposits for paper. As far as conceptual projects such as biotech or other non-resource innovations are concerned, those will get seed funding from private equity or "crowd-funding". They will want to go public by IPO not a back-door RTO of a CPC. One reason we have such a glut of zombie and ghost companies is that the TSXV's rules allowed a CPC to be easily converted into a life-style company through acquiring a "property of merit". While some CPC RTO's went on to become bigger companies and even buyouts, many of the 2,000 CPC shells listed since 2000 simply became resource juniors with feeble management and prospects with zero wealth creation potential. It may also be time to pull the plug on CPC's because the small brokerage firms that would conduct these IPOs are disappearing.
Tailoring TSXV policies further to reflect the needs of non-resource companies. We are on the cusp of a materials science boom. A half century ago we had the garage based startup created by innovators. But as technologies became more complex it was no longer feasible to invent stuff without the support of a fully equipped machine shop or laboratory such as operated by large companies like Xerox or Bell labs. Then came the Internet revolution which turned code writers into innovators, but the TSXV's predecessor botched the dot-com boom which in any case invaded the Canadian junior venture capital far too late in the cycle to create much of value. The more recent social media and mobile app boom was dominated by American startups, most of which have yet to go public despite achieving "unicorn" status (a billion dollar plus valuation based on the most recent financing round). The unicorn world has started to evaporate. The next innovation frontier is arriving on the backs of the digital revolution that has put extraordinary computational power into an innovator's bedroom. The tinkerer's garage of the future is the high-powered computer which runs simulations of new organic molecules and physical structures whose functionality resides at a nano-scale. All such "hypotheses" still need to be prototyped and tested in the real world, which will require capital. A future for TSXV listings would be the acquisition of rights to these ideas and funding their verification, similar to an exploration project. Most will fail, but that is the essence of venture capital which so frightens the establishment banks and other investor protectors. The TSXV should focus on developing new models for putting a value on the acquisition of such rights from innovators. These material science projects will not lend themselves to 43-101 style reporting. It remains to be seen if the TSXV can return to the non-resource boom days of the eighties without the scams of that period.
Increasing our efforts to ensure private equity firms, VCs and angel investors consider TSXV as an effective exit strategy for early-stage companies. It is wrong to think of a TSXV listing as an exit strategy. A listing should have the purposed of facilitating the funding of the next stage of an innovation's verification or development. If an innovation is ready for an exit strategy, it will happen privately. The way this "action" is presented suggests that the TSXV wants to help private investors stuck in dying unicorns unload their paper on the general public.
Exploring alliances with other exchanges that could benefit our clients, similar to our relationship with the Santiago Stock Exchange, which provides qualified TSXV-listed companies with complimentary dual-listings. Just an excuse for junkets to other countries.
Engaging with Exchange Traded Fund (ETF) firms to develop more investment products that may include baskets of TSXV-listed companies. This idea shows how out of touch TSXV officials are with the problems afflicting their listings. Venture capital listings lack the liquidity needed to be bundled into baskets with an ETF mechanism that ensures the value of the ETF basket tracks the market value of its constituents. That requires solving the problem of the TSXV's failure as a price discovery mechanism. It is possible to accomplish this goal by turning the exchange into a single order book utility. But a bigger problem is that venture capital listings are too diverse in both story and capital structure to be meaningfully bundled into a structured product. Furthermore, if ETFs are created, the need to arbitrage between the basket and the individual stocks prevents the reinstatement of the short-sale uptick rule.
Advocating for early-stage public companies to be fully eligible for the refundable investment tax credit (ITC) under the federal Scientific Research and Experimental Development (SR&ED) program. This was attempted during the eighties and went nowhere. Tax driven investment is never a good idea, as we have seen with Canada's flow-through exploration funding program which simply attracts tax avoiders rather than gamblers on long term fundamental outcomes, and results in risk capital being wasted to meet tax related deadlines.

 
 

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