One of the complaints the Toronto Stock Exchange (TSX) hears from investors, brokers and companies listed on the venture exchange is that its fees are too high.
But Canada’s venture capital market has bigger problems than just the TSX Venture Exchange’s (TSX-V) fee structure.
The fees might not have become such an issue were companies that list on the TSX-V still raising money.
But except for a few star players that have had major capital raises recently – biotech being one relatively hot sector – many companies listed on the venture exchange are starving for venture capital.
The once-robust TSX Venture Exchange has been the worst-performing stock exchange in recent years. Since 2011, it has lost 76% of its value, wiping out $50 billion in market capitalization, according to Ivan Lo, founder of Vancouver’s Equedia Investment Research.
A commodity price collapse has a lot to do with that decline, since 71% of the companies listed on the TSX Venture Exchange are junior resource companies.
But Canada’s capital markets are plagued by more than just macroeconomics, according to a growing number of investors, brokers and TSX Venture companies who say the problems are not just cyclical, but structural as well.
Those critics say regulations and costs imposed by the TSX, the Investment Industry Regulatory Organization of Canada and the BC Securities Commission are deterring investment in Canada’s venture markets.
Pretium Resources Inc. (TSX:PVG) is one of the few junior miners to raise any significant capital recently – US$540 million last year to develop its Brucejack mine. But that may speak more to the high quality of the Brucejack property than to the health of Canada’s capital markets.
“There is a lot of capital on the sidelines that, I think, can invest,” said Pretium CEO Bob Quartermain. “But I think we have to reduce the burden of the regulations around investing in risk opportunities. It’s not just a TSX problem – it’s a BC Securities [Commission] problem.”
So how can Canada’s markets be fixed to restore investor confidence and bring more risk capital back into Canada?
One of the TSX’s solutions is to diversify the venture exchange. There are already 500 non-resource companies on the exchange. The TSX wants to expand that.
It is creating new sales teams and plans to open offices in key U.S. cities like San Francisco and New York or Boston. These teams will work with the dealer community to try to attract new companies and investors to the TSX Venture Exchange.
“What we’re doing is creating a platform that puts out a welcome mat to companies in all sectors,” said TSX-V president John McCoach. “Essentially these people will be prospecting for dealers and other financiers, and understanding what the financiers want and then bringing them opportunities that they may not otherwise see themselves.”
The TSX will showcase some of the venture exchange’s success stories and “identify friction points and smooth those out.”
One of those friction points is the growing red tape on either side of the border that is discouraging U.S. venture capital investment.
That Canadian markets are well regulated is one of the things that historically made Canadian junior resource companies attractive to U.S. investors, although those in the finance business say it has gone too far now.
Mickey Fulp, who publishes the Mercenary Geologist, is an American, but favours junior mining companies with Canadian listings. He said the only speculative investments he considers are in companies that have a Toronto listing, but not because of anything the exchange is doing.
He looks for a Canadian listing, he said, because securities regulators here require mining companies to back up their resource estimates with detailed technical reports, the absence of which in the U.S. has led to numerous “scams by unscrupulous promoters.”
But apart from that, Fulp said, the Canadian capital market has become over-regulated and increasingly hostile to investors like him.
“It is increasingly difficult for U.S. investors to participate in private placements and trade stocks listed on Canadian exchanges, and has gone from being cumbersome to … a can of worms over the past three, four years,” Fulp said.
McCoach agrees that regulations on either side of the border are discouraging U.S. investors from deploying venture capital in Canada. He said the TSX is looking at ways to remove some of the barriers.
“We’ve put together an action team that’s very focused on identifying all of the things that have changed to make that more difficult for that American investor to participate here,” he said. “We’re doing our PhD on this.”
As for the TSX’s plans to diversify the venture exchange, Don Mosher, a partner at B&D Capital, believes the last thing it needs is more listings. He believes the venture exchange is already overpopulated with marginal companies.
Instead of encouraging more initial public offerings, the TSX should put a cap on them, he said.
