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Four ways to fix the ‘broken’ TSX Venture Exchange

The TSX Venture Exchange has real problems.

TSX Venture Exchange by the numbers in 2015

-34% drop in total equity capital raised by Venture issuers
$3.1 billion amount of equity capital raised
$677 million amount raised in public offerings
-9% decline in total listings to 1,806
-15% decline in trading volume
-29% decline in number of trades

Liquidity is drying up. Listings are declining. Hundreds of listed companies have almost no money and no apparent way to create shareholder value. Competition from both new and established rivals is growing. And the S&P/TSX Venture Composite Index is hitting humiliating new lows on a regular basis. It fell below 500 points for the first time on Dec. 14, down a mind-boggling 85 per cent from its record high in 2007.

None of these facts will come as a shock to investors who, for the most part, are avoiding this exchange like the plague. But the meltdown has finally reached a stage where TMX Group Inc. acknowledges that it is time to take action.

Until recently, the Toronto-based company argued that the Venture’s woes are a function of market conditions. After all, hardly anyone wants to finance junior mining and energy plays during a steep commodity downturn, and they make up more than 70 per cent of stocks on the exchange.

But earlier this month, the company released a whitepaper with a detailed plan to “revitalize” the Venture. It was a tacit admission that the exchange’s current model needs to evolve.

“The first thing to acknowledge is that it really is broken,” said Rick Rule, chief executive of Sprott US Holdings Inc. and a major financier of junior resource plays. “There are still a lot of participants who don’t think it’s broken.”

The Venture’s raw statistics are ugly. According to Market Intelligence Group, total equity capital raised by Venture issuers in the first 11 months of 2015 was down 34 per cent year-over-year to $3.1 billion. And most of that money just came from private placements, as only $677 million was raised in public offerings. Total listings dropped nine per cent (to 1,806), trading volume dropped 15 per cent, and the number of trades plunged 29 per cent.

A broader and more esoteric concern is the potential damage done to the Venture brand after years of investor losses and falling liquidity. To many people, it simply isn’t as strong as it used to be.

One of those people is Tony Simon, co-founder of the Venture Capital Markets Association and a frequent thorn in the side of TMX management. His view is that the Venture’s primary strategy has been to maximize listing fees, and as a result, it has allowed too many low-quality companies to maintain listings.

Earlier this year, he called for a mass delisting of about 600 “zombie” resource firms that have negative working capital and no clear ability to create value for investors. He also said the Venture should not have allowed capital pool companies to proliferate so much and distract attention from more active firms.

“Let’s say you go to a restaurant and there’s 1,500 things on the menu, and if you’re lucky, only 50 per cent of them will give you diarrhea,” Simon said, in reference to the Venture.

“You’d be much happier going to a restaurant where they only have 10 things, but they stand behind them all. And if the prices were a little higher, you wouldn’t mind because they’re quality.”

Of course, investing in the Venture is high-risk by design, and most people aren’t as critical as Simon. But no one would dispute that a revitalization is a welcome idea.

The TMX has three central goals in its revitalization plan: reduce the “administrative burden” on listed companies, expand the investor base and liquidity on the exchange, and diversify and grow the stock listings.

Venture market participants interviewed by the Financial Post offered their own ideas about how to improve the ailing exchange, and they are presented below. In some cases, they overlap with the TMX whitepaper. It should be noted that some of these proposals are outside the domain of TMX Group itself, but they are goals that management can absolutely lobby for.


John McCoach, the Venture exchange’s president, rejects any claims that the exchange is lowering its listing standards to allow “zombie” companies to hang around, as Tony Simon and others have alleged. But last year, even he acknowledged that the idea of purging hundreds of stocks “has merit.” It would shrink the sizable gap between the number of companies and the number of quality assets and management teams.

So perhaps toughening the listing standards is worth considering. Critics complain that inactive companies get too much leeway to maintain their listings when market conditions are bad. And instead of getting delisted, a lot of companies get bounced to the NEX board when they have little-to-no corporate activity.


TMX said in its whitepaper that it will introduce “more stringent” criteria for maintaining a listing on NEX, which is a potential positive for those who want to see more delistings. The company also wants to provide more tools for companies to “reactivate” from NEX to the main Venture board.


A few years ago, a Venture-listed company called Barkerville Gold Mines Ltd. released a study suggesting its British Columbia project may hold 90 million ounces of gold. Once everyone stopped laughing, they questioned how this absurd figure could have ever come about.

The simple answer is that non-GAAP resource reporting rules are as much art as science. Resource estimates, all-in sustaining costs and other figures can vary greatly depending on who is producing them. To bring greater investor confidence to the junior resource sector — and ultimately more investors — experts said there needs to be greater standardization.

“The fact that we don’t hold our own processes more accountable and accessible to investors has contributed a lot to the situation the TSX Venture finds itself in,” Rule said.


The TMX whitepaper devotes a lot of space to reducing the administrative burden on companies. The proposals include eliminating the sponsorship requirement, providing automated online filings and accelerating transaction processing. These are all sensible ideas.

“If you can make it more streamlined and less complicated, that would certainly be a big help,” said Brent Cook, publisher of Exploration Insights. “The financial burden to cover your regulatory filings and such is more than it needs to be.”

But market watchers also don’t want the Venture to go too far in cutting costs. Annual listing fees, which range from $5,200 for tiny companies to $90,000 for much larger ones, really aren’t that bad. Cut the administrative burden too far and you can damage investor confidence and the exchange’s overall reputation, which is far ahead of unregulated alternatives like the over-the-counter market in the United States.


In a bear market as bad as this one, any idea that could boost access to capital needs to be on the table. One of the most promising ones is crowdfunding, which opens up a whole new universe of potential investors beyond the aging demographic that buys junior resource stocks. Ontario and four other provinces have approved a crowdfunding regime that goes into effect next month.

Jed Richardson, the chief executive of Venture-listed Great Quest Fertilizer Ltd., is trying to develop a phosphate project in Mali. It is not the sort of thing that traditional small-cap investors want to fund right now. But he is intrigued by the crowdfunding option, which may help him attract non-traditional investors by promoting the humanitarian side of what the company is doing.

“It could change the narrative for a lot of resource companies like ours,” he said. “It could really revitalize the Venture if it made itself a leader on that kind of issue.”

Just as important as crowdfunding is pushing regulators across the country to permit more exemptions that would allow companies to raise capital without having to issue a costly and time-consuming prospectus. Exemptions have been introduced for selling stock to existing shareholders and close associates, and another one has been proposed when selling to retail investors that have obtained advice from a dealer. TMX has been advocating for these exemptions.


TMX desperately wants the Venture to be known as more than a resources exchange. Last week, chief executive Lou Eccleston talked about raiding Silicon Valley and Canadian tech hubs to attract new listings as the exchange faces new competition from Nasdaq Inc.

Generating more high-quality listings is always a positive. But several experts said: Don’t panic if diversification doesn’t work out as planned.

The Canadian markets have always been resource-heavy, and always will be. Canada is a world leader in resource extraction; it’s not a world leader in consumer staples or health care. And despite an impressive little tech sector, it isn’t Silicon Valley either.

Trying to re-brand the Venture as something other than a resources exchange may well be doomed to fail. After all, there are nearly 500 non-resource companies listed today, and it hasn’t made a lick of difference.

When the time is right, non-resource businesses will go public here regardless of the Venture’s reputation — just look what happened with the marijuana sector last year, or tech stocks in the 1990s.

Overall, most experts are optimistic about the Venture’s future. The resource sector will bounce back — it may take a long while this time around, but it always does. Once that appetite for risk returns, people will want to own small-cap stocks again. And if TMX strengthens the Venture brand today, it will be in far better shape when demand does return.

But if nothing changes and market conditions continue to deteriorate, investors and listed companies may long for days like today when the index is hovering around 500 points.

“We’re not standing still,” Eccleston said last week in response to questions about increasing competition. “If we sat here and said, ‘We’re just hoping resource pricing comes back,’ I think we’d be heavily exposed.”

Financial Post, with files from Christina Pellegrini