Accessing Venture Capital, the Canadian Way

By Antonio A Arias

PUBLIC VCWhile advising a US private company raise growth capital, being in Vancouver, Canada instead of Silicon Valley or New York is a handicap. It is time to revisit our Canadian alternative. Some may argue about the compliance costs, but the Canadian financial marketplace is catching up with the US JOBS Act, indirectly. The incumbent venture exchanges and securities regulators will have to compete in cost and efficiency or self-expire.

Canada has its unique junior stock exchanges available to foreign issuers, in the form of the TSX Venture Exchange and the Canadian Securities Exchange, and the nascent TSX Private Markets. These exchanges fill the gap the JOBS Act and other global crowdfunding rules are supposed to fix. With the delayed implementation of an economically feasible US JOBS Act Title III rules, equity crowdfunding is limited to accredited investors under Title II Reg D Rule 506(c) or (b) without general solicitation. Adoption to Rule 506(c) which allows for general solicitation to accredited investors is working primarily in real estate and hedge funds. Other new platforms applicable to technology or healthcare have yet to populate and engage their platform with more relevant qualified investors.

Holding our breath for Title III and its spill over benefits into the US and Canadian capital markets could be fatal. For decades, Canada has been the mining venture capital of the world with a mature ecosystem copied by other countries. With the depressed state of mining, retail and institutional investors are starting to sector invest into technology and healthcare. Several mining ventures were financed in Canada but operating elsewhere. It equally applies to technology, healthcare and other sectors which are primarily operating in the US market.

Going public is not for everyone. Accessing capital through public listing has its challenges. It is more appropriate for the right growth stage business combined with the right management aptitude and attitude. Critical factors to consider before going public, among others include:

Matchmaking made in heaven – matching the target private company and the public venture company shell is akin to finding long term marriage partners. The founders of both companies have to be aligned in terms of mission, values, and culture as they have to work together until the real major exit by M&A. For extra precaution, management services or “pre-nup” should be agreed in advance to allow for orderly changes.

Milestones – hitting major milestones on time as promised is mandatory or otherwise face an angry market that will be reflected in the stock price.  Management has to set reasonable and deliverable expectations.  There is no room for reckless planning or value destructive decision making. Everyone has to identify with the enterprise value drivers while under-promising to shareholders.

Time velocity – time seems to travel at warp speed while managing public companies, as core business actions have to be executed synchronously with the periodic reporting to shareholders. Contingency planning and risk management are critical skills to please shareholders. Even at best efforts, something else will go wrong at the wrong time.

Continuous disclosure and financial reporting – growth companies unaccustomed to transparency will have to conduct themselves like public companies and hire public company professional managers –  investor relations, accountants  and finance people with knowledge of securities rules, in particular.

Corporate governance – recruitment of independent directors, reporting of related party transactions, insider reports, management compensation are examples of legally mandated best practices that management needs  to start adopting even as private entities.

All of these challenges are manageable when the management team is experienced or educated in running public companies. The added cost is warranted particularly when a company is about to scale or execute an expansion plan in a robust market. Timing is everything. When everything is running perfectly, a public company is creating its own currency for further expansion.

For further guidance, check out the BC Securities Commission Your Guide to Going Public and the TMX Capital Pool Company Program (CPC).

At ALA Midas Capital, we advise  early revenue to development stage businesses, the right time to go public using the TSX capital pool company program, as well as advise companies manage its securities regulations compliance, investor communications, and applying other best practices in running public companies. While preparing to go public, we can also advise you to become investment ready at the regulated equity funding platforms in Canada and in the United States. For a feasibility assessment or to gain insight from some case studies, contact us at info@alamidascapital.com.

Posted in Capital Raising and tagged , , , , , , , , , , , , , , .

Leave a Reply

Your email address will not be published. Required fields are marked *