Small Business

Forget the big exchanges

Written by Calvin Leung

There’s an old saw in business that goes something like this: always ask for money when you don’t need it. (And when you do need it? Keep on asking.) For most entrepreneurs, that means a trip to the bank, a venture capitalist or Uncle Fred. But what about tapping Joe Public?

True, getting a listing on the Toronto Stock Exchange or another high-profile exchange €“ and the access to billions in capital it would bring €“ is beyond the reach and means of most entrepreneurial firms. That’s no reason to abandon hope of going public. In fact, there are viable public financing options for small but growing companies. One of the following might be right for you.

CPC: capital plus experience

You have a promising firm that needs capital. An experienced management team has capital and a listing on the TSX Venture Exchange. Wouldn’t it be great if you could do a deal?

You can, through the Capital Pool Company program, which is unique to the TSX-V. It allows veteran business managers to form a shell company that raises cash through a public offering on the exchange. However, this capital pool company has no business operations; rather, it has 24 months to complete a “qualifying transaction,” typically the reverse takeover (RTO) of a private firm. If you’re that private firm, you end up with control and the capital of the CPC, experienced minority shareholders and a TSX-V listing that facilitates further fundraising and any future acquisitions.

Herb Willer, head of corporate finance at Kingsdale Capital Markets Inc., a Toronto-based securities dealer, says you’re a candidate for a CPC deal if your business has a good shot at $50 million in sales, projected market capitalization of $10 million to $50 million, a management team with experience in growing companies and attracting public capital, gross margins among the best in your sector and a business model that scales up nicely. An RTO typically takes two to four months and costs $200,000 to $400,000 in legal, accounting, stock exchange and other expenses.

You can find a list of potential CPC partners at In late May, 62 were listed. For more details on each one, visit, on which public companies are required to file information for securities regulators.

A CPC deal offers several ways to acquire capital. One is the CPC’s cash on hand, typically $500,000 to $1.5 million. You can also do a private placement concurrent with the RTO, offering shares to financial institutions and wealthy individuals accredited by a security regulator to participate in financings without a prospectus. In 2004, firms raised up to $12 million this way.

You can also do subsequent rounds of private placements. In 2004, these averaged $1.8 million on the TSX-V, with one pulling in $91 million. At most, you’ll pay the exchange a modest $30,000 in fees per private placement. As well, each year you’ll have to lay out $2,750 to $8,000, depending on your market capitalization, to maintain your listing, plus at least $50,000 in legal and accounting costs.

Still, a CPC deal is no guarantee you’ll find it easy to raise capital. “Being a publicly listed company does not necessarily bring with it access to liquidity and the ability to use the company stock as currency,” says Mike Middleton, a managing director at Fusion Capital Partners, a Toronto-based corporate finance boutique. “All too often we see companies that have been orphaned, with very little trading volume, no research coverage (or interest) and a limited retail following. They have little to show for being a public company, except the rising costs of compliance and insurance.”

To avoid this fate, it isn’t enough to tell investors a compelling story of strong management and high growth potential. You’ll also need to hit your business €“ plan milestones consistently €“ and spread the word that you’ve done so.

CNQ: Cheap trading

An even more affordable way to get a listing is to go public on Canada’s newest and smallest exchange. Launched in July 2003 and geared toward emerging businesses, the Toronto-based CNQ now lists 43 firms with an average market cap of $7.3 million. Larry Martin, a partner at Leede Financial Markets Inc., a Calgary-based securities broker, says the CNQ could be a good option if you have growth potential and revenue, contracts in place or a product ready to sell into the marketplace.

Although only one company has gone public so far on the CNQ (the rest have migrated there from other public markets), almost half the firms on it have parlayed their publicly traded status (read: stock liquidity) into private placements. These averaged $1.3 million, ranging from $30,000 to $10 million. Because the CNQ, unlike the TSX-V, doesn’t levy a fee for private placements, it can be a cheaper way to raise money. And faster, too: you can close a financing deal just 24 hours after posting a form on and issuing a press release if the information is material. On the TSX-V, the exchange must approve such transactions, which takes two to three days on average.

Fees for trading on the CNQ are an economical $10,000 for a listing and $300 per month after that. The biggest outlay is for legal and accounting costs, which Laila Perruzza, an associate in the corporate and commercial group at law firm WeirFoulds LLP in Toronto, estimates to be $25,000 and up per year. The CNQ’s main limitation is that trading is thinner than on older exchanges, with the average firm trading 22,000 shares per day, worth just $13,000.
Those numbers could rise. Bernard Pinsky, chair of the corporate finance and securities and U.S. law practice groups at Clark Wilson LLP, a Vancouver-based law firm, says the CNQ may need one breakout company to put it on the map. It could be yours.

otc: over-the-counter capital remedies

A third option is to bypass exchanges entirely and trade “over the counter.” You may want to do so if you have a business and business plan, staff and a firm on the brink of generating revenue.

Although it’s possible to trade OTC in Canada, there’s no stock-price quotation service to make it easy. Your best bet is to look south to the Rockville, Md.-based OTC Bulletin Board. The OTCBB isn’t an exchange, but more like an electronic notice board. Authorized firms or individuals use it to post an asking price or bid for a stock, warrant or other financial instrument not listed on a major national exchange. It typically costs US$75,000 to US$150,000 in legal and accounting expenses and takes six to nine months to go from an emerging private company to a public one with shares quoted on the OTCBB, says Pinsky. Firms often kick off the process by selling US$100,000 to US$500,000 worth of shares to friends, relatives and close business associates.

OTCBB status also facilitates private placements, usually to wealthy individuals. Pinsky ballparks the typical size as US$1 million to US$3 million. But the range is huge: his firm has participated in ones from US$100,000 to US$40 million.

Of course, your stock will need enough liquidity to assure investors they can sell shares in your firm whenever they want. Stephen Brock, president of Las Vegas-based Go Public Today, which advises private firms on going public in the U.S., says for that you’ll need a volume of 50,000 to 75,000 shares per day. The average OTCBB-quoted security did far better than that, trading 420,000 shares per day, worth US$58,000.

There’s another off-exchange option: Pink Sheets LLC, a New York-based private firm that provides pricing and financial data for OTC trades. But many investors are wary of Pink Sheets’ lack of transparency, since it doesn’t require firms to make regular financial filings.

Firms quoted on the OTCBB, like ones listed on an exchange, run the risk of being orphaned. And OTC stocks have a negative reputation among some investors due to past trading abuses stemming from a lack of current, reliable financial information. The OTCBB has tried to remedy this by requiring firms using it to report their financials and other official documents to the U.S. Securities and Exchange Commission.

That’s made this a more appealing option. David Prussky, president of Patica Corp., a Toronto-based merchant bank, sees the OTCBB as a necessary stepping stone for some emerging businesses. And, he adds, “If your company grows up to trade on the NYSE, no one is going to care how you got there.”

© 2005 Calvin Leung

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