Interesting article on CDNXCanada's CDNX sheds VSE stigma
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By Martin Cej, CBS.MarketWatch.com
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VANCOUVER (CBS.MW) - Less than two years ago, the Vancouver Stock Exchange
was suffocating, unable to shrug its reputation for slipshod regulation and
as a haven for desperado financiers.
Labeled the "scam capital of the world" by Forbes Magazine in 1989, the
VSE's share of the total trading volume on Canadian exchanges had dwindled
to less than 25 percent in 1998 from about 50 percent in the early 1980s.
Across the Rockies in Calgary, the Alberta Stock Exchange, which had been
western Canada's premier exchange for oil and gas start-ups since the 1914
Turner Valley oil boom, was also struggling, often unfairly, with a
notoriety for lax regulation and small-cap stock manipulation.
So when Canada's stock exchanges decided to reorganize in 1999 to create
one national exchange for junior companies and start-ups in Vancouver; a
single exchange for Canada's blue chips and other large companies in
Toronto, and a Montreal-based exchange for derivatives, many investors had
their doubts.
Those concerns waned, however, as Vancouver's stringently regulated
Canadian Venture Exchange swiftly began to attract some of the country's
hottest tech and biotech start-ups, and its main stock index charged ahead
to become the best performer in the country.
"I would have no problem buying a stock on the CDNX exchange tomorrow,"
said Stephen Gauthier, a fund manager at Pictet Canada Ltd. in Montreal.
Pictet oversees about $100 billion globally.
"The VSE had a reputation as a place for schemes with penny stocks,"
Gauthier said. "But now they want something serious, and with the
regulations they have in place, they may get it."
The CDNX Index, which includes every company listed on the exchange, about
2,400, has soared 56 percent so far this year and is up 83 percent since it
began November 29, 1999.
By comparison, the Russell 2000 Index, the benchmark for small-cap U.S.
stocks, is up 6.8 percent so far this year.
Granted, the companies trading on the CDNX make many small-cap stocks in
the U.S. look like behemoths, but now investors can judge the risk of
investing in little-known Canadian start-ups on the companies' merits
without having to factor in the additional risk of doing business on a
disreputable exchange.
"We have completely revamped our regulations," said Bill Hess, the
48-year-old president of the CDNX. "These are start-up ventures and this is
where we excel. The guy who can raise $100 million right out of the blocks
doesn't need us."
Indeed, the CDNX is organized to facilitate financings from half a million
Canadian dollars to 20 million Canadian dollars ($13.6 million). The CDNX
has chosen to act as a springboard for companies to bigger markets and
doesn't try to hold onto companies once they've outgrown the exchange.
"Hey, if I was a Canadian football player graduating from a Canadian
university, I'd settle for the Canadian Football League, but I'd sure want
to play in the NFL," Hess admitted. "A lot of companies want to go right to
Nasdaq."
Among the companies that have made a successful transition from the CDNX to
bigger gains on bigger exchanges is Toronto-based wireless communications
equipment maker Wi-Lan (CA:WIN: news, msgs). Wi-Lan shares have tripled to
36.50 Canadian dollars on the Toronto Stock Exchange in the last 12 months.
Cell-Loc , which makes technology to track the location of cell-phones, is
also a graduate, as is Burnt Sand Solutions (CA:BRT: news, msgs), a
consulting and computer systems integration company. Cell-Loc shares have
doubled in the last year while Burnt Sand has climbed fivefold.
A feature unique to the CDNX is its capital pool companies. These are
companies comprised only of an experienced management team and their
capital, which then lists and begins trading on the exchange with no
operating business. Rather, they seek out and acquire promising ventures.
A capital pool company, or CPC, has 18 months from the moment it begins
trading to acquire a company. The capital pool is then dissolved and the
entity becomes a regular listed company.
This way, the lab rat, software genius or lucky geologist with a great idea
but no financial acumen can find a ready source of capital coupled with
management expertise.
"It's our most successful product," Hess offered.
The exchange's trading operations are based in Vancouver though its
corporate headquarters are in Calgary. The CDNX also has an office in
Toronto and expects to open another shortly in Winnipeg, pending the
successful takeover of the Winnipeg Exchange.
Hess, a securities lawyer who spent seven years as the chairman of the
Alberta Securities Commission before joining the CDNX, admits that
investing in many of the companies on the exchange demands a higher
tolerance to risk and careful scrutiny by the investor.
To that end, the CDNX has created a website that permits investors to
investigate every company listed on the exchange, including the
affiliations of its directors, its auditing firm, subsidiaries and its
bankers. The site provides website addresses for the company as well as
contact names and phone numbers.
"We'll still have more companies fail than other exchanges," Hess allowed.
"But these are entrepreneurial ventures, not mature companies."
"We've actually had complaints that we halt too many companies, but if we
detect any trading aberrations, these companies have to go through the
paces," he said.
Hess argues that the CDNX shouldn't be tarred with the same brush as the
erstwhile VSE and ASE, which were called a Wild West Show by one
Toronto-based money manager.
"It was the bucket-shop of the country. No serious investor would buy
there," said Sebastian van Berkom, president of Van Berkom & Associates in
Montreal, which specializes in small-cap stocks.
Now, however, "the number of complaints about the CDNX is remarkably low,"
Van Berkom said.
Even so, Van Berkom and others remain reserved.
"It's still early going."