Alan Zaakir needs $500,000. He believes he has a marvel of an idea: talking teddy bears that sing songs and read stories downloaded from his website. Zaakir also figures there’s no better way to raise money than to take his company, Toronto-based MyStoryFriend.com Inc., public. Only one problem — the capital requirements of traditional stock exchanges are beyond the reach of MyStoryFriend.com, which is still in the development stage.
Before now, capital-challenged entrepreneurs with dreams of an early-stage ipo were out of luck. But July 25 marked the debut of the Canadian Trading and Quotation System Inc. (CNQ), an alternative stock market for active, emerging companies. (Shell companies need not apply.) The CNQ, positioned as a competitor to TSX Venture Exchange (TSXV), merely requires $100,000 in working capital from its issuers — or proof of the company’s revenue-generating capacity.
But with all the upheaval surrounding Canadian stock markets in the past few years, will the CNQ be a good place for emerging companies to raise money? One encouraging sign is that CNQ founders seem determined to learn from other stock markets’ mistakes.
Unlike the defunct Canadian Dealer Network, the CNQ is not simply an over-the-counter equities market. Instead, the CNQ, like the TSXV, enhances liquidity by displaying an open book of all client buy-and-sell orders. Registered investment dealers also have the option of being market-makers who can pose bids and offers on stocks continually, says Robert Cook, CNQ’s president and CEO.
With recognition from the Ontario Securities Commission (OSC), the CNQ won’t slouch on regulation and disclosure, Cook adds. Issuers are required to file monthly statements and report any significant transactions, in addition to the standard quarterly reports that are mandatory at the TSXV. All the regulated filings and public documents — not to mention all buy-and-sell orders — are available on CNQ’s website (www.cnq.ca) for investors and dealers to access. The CNQ promises also to perform periodic reviews of its issuers’ disclosure records.
The strict controls and potential gains have induced a handful of investment dealers, including BMO Nesbitt Burns, TD Securities and Canaccord Capital Corp., to join the CNQ. “We see it as an opportunity to help small businesses go public in Canada,” says Paul Chalmers, executive vice-president of Canaccord.
Issuing firms, however, are playing the waiting game. With only three companies listed on the CNQ by mid-August, it’s clear that Canada’s newest stock exchange lacks the visibility — if not the credibility — of more established players. “The CNQ is going to have growing pains as some brokerages and potential issuers are sitting on the fence,” notes Vic Rogers, president of Calgary-based Rogers Capital, which advises small-cap companies looking to go public.
Rogers, who has 40 years’ worth of experience in the brokerage industry, pegs the maximum fundraising potential of the nascent CNQ at $1 million. “If a company is trying to raise $5 million off a CNQ listing, that’s a stretch,” he predicts. “If they’re just raising $500,000 or $1 million, I believe it’s possible.”
What does it take to get listed? After filing a prospectus with the OSC, applying to the CNQ will cost a company $10,000 initially and $300 a month thereafter, with no additional transaction and filing charges. To qualify, companies must also have a public float of 500,000 shares in the hands of at least 150 shareholders and, like the TSXV, become a reporting issuer in Ontario (since the CNQ is registered with the Ontario Securities Commission).
Venture Exchange issuers, in comparison, can pay $5,000 to $17,500 for the application fee and fork over annual sustaining fees of $2,550 to $6,000, depending on the size of the company. And that doesn’t include private placement and maintenance fees, among other things. While the TSX Group’s newest junior exchange, the NEX, only charges an annual fee of $5,000, payable in quarterly installments, this exchange is strictly for companies on the TSX’s inactive list.
Which is why Alan Zaakir has three words for the CNQ: sign me up. He is currently taking the necessary steps to go public and expects to be listed on the CNQ later this year.
One CNQ lister welcomes the fact that a new equities exchange is willing to give small companies a break. “Following this route, we’ll be able to advance the process more quickly,” says Mike Coulter, president of Toronto-based United Reef Ltd., a mineral exploration firm. After a five-year absence from trading on the TSX, Coulter has reactivated United Reef in hopes of raising $500,000 on the CNQ to fund a new exploration program. He’s confident the company will meet its fundraising target. “Management is usually the catalyst for raising money,” he notes, “regardless of where the company trades.”
Whether huge numbers of investors and dealers will be attracted to the CNQ remains to be seen. But for emerging companies like Zaakir’s, it may be the only viable alternative.
© 2003 Deanne N. Gage
