Dave Beal, Business Editor, Twin Cities Business Magazine, Minneapolis, Minnesota, U.S.A.
Capital Migration - Foreign Exchanges Persist in a Drive for U.S. Listings - They're a Venue for Small-Cap IPOs That's Tough to Find at Home
For much of the past decade, stock exchanges in Toronto and London have
tried to attract small-capitalization companies based in the United States. They don’t have much to show for their efforts,
but don’t expect them to stop trying anytime soon.
Consider TMX Group, which includes the Toronto Stock Exchange and its
baby sister, the TSX Venture Exchange. Last
November, TMX brought its road show back to Minneapolis for an event that
featured two panel discussions and private meetings with listing prospects. TMX plans to send its recruiters to the city again
in 2010.
Then there’s Mark McGowan, who runs AIM Advisers, a California-based consultancy
that represents the London Stock Exchange’s AIM for small caps. McGowan is crisscrossing
the country to explain the workings of London's AIM in face-to-face meetings with
small-business executives and the professionals who handle their legal and
financial affairs. He has penciled in a
visit to the Twin Cities this spring.
These two exchanges differ in many ways. “Small” is larger for London's AIM, where listed
companies’ average capitalization is around $90 million. It’s only $16 million on Toronto’s Venture Exchange,
where companies are generally in earlier stages of development.
But advocates for both London's AIM and TSX Venture have one thing in common: They
share a belief that for many reasons, the U.S. capital markets for publicly
traded companies are not functioning well enough at the smaller end of the
market. Both want to be the needed
alternative.
Minding the Gap
“We see a gap in the capital markets that we’re filling,” says Ungad
Chadda, senior vice president of the Toronto Stock Exchange.
Studies of initial public offerings, done for the Grant Thornton
accounting firm this year, define the gap. The latest of these reports is
highly critical of the U.S. capital markets.
David Weild, founder of the New York firm Capital Markets Advisory
Partners and a former vice chairman at NASDAQ, co-authored the reports. He found that by 2008, listings on the three
major U.S. exchanges (New York Stock Exchange, NASDAQ and American Stock
Exchange) had fallen 55%, adjusted for growth in the economy, from their peak
in 1996. That was by far the worst
showing among eight of the world’s leading stock exchanges.
The near extinction of small IPOs—those raising less than $25
million—has caused much of the decline in exchange listings in Minnesota and
the rest of the country. Weild calls
this a “market structure” problem—the unintended consequence of a series of
industry, regulatory, and technological shifts that sharply lowered investors’
trading costs and in turn choked off the resources that paid for research and
trading in the stocks of small companies. This was the mother’s milk that enabled tiny
companies to go public and allowed a fortunate few to morph into tomorrow’s
Medtronics and Best Buys.
Weild concludes that the U.S. faces a first-class market failure that’s
costing America millions of jobs. He is urging
U.S. securities leaders to create a new market custom built to serve smaller
companies.
A Hard Sell
So far, moving into the vacant space that the public market isn’t
serving in the U.S. has proven difficult.
London's AIM, born in 1995, worked with the Faegre and Benson law firm to make presentations
in Minneapolis in 2004 and again in 2005. Today, McGowan says, only about 60 of London AIM’s
roughly 1,100 listings are U.S companies, none from Minnesota.
Toronto’s Venture Exchange got started in 2002, after TMX acquired the
Canadian Venture Exchange in
Calgary. Both of the TMX exchanges
have targeted Minnesota because of its strong suits in technology and life
sciences and its proximity to Canada. At
present, 62 U.S. companies are among the 2,184 listed on the Toronto Venture
Exchange, and only one—Rapid Brands in Chanhassen—is from Minnesota.
Rapid Brands, a franchisor that refurbishes and remanufactures printer
and laser toner cartridges, went public in May of 2007 on the Toronto Venture
Exchange. It was the first U.S. company
to participate in the venture exchange’s “capital pool company” program. Under this program, Black Mont Capital, a
Toronto investment firm, raised $4 million for Rapid Brands in a deal that
enabled the company to become public by merging with a shell entity already
listed on the venture exchange.
Rapid Brands (TSX: RAP-V) has been hit hard by the recession, which led
to store closings. Early on, its stock
reached a high of $3, but in November it was trading for only seven cents a
share.
Getting More Attractive
Companies on the Toronto Venture Exchange are subject to many of the
same disclosure rules as in the U.S., but Rapid Brands CEO Roger Block
estimates that his company would have spent $500,000 more a year for compliance
costs had it been listed in the U.S. rather than in Canada.
“It would have been out of the question to even discuss going public in
the U.S.,” Block says.
Several mining companies active in Minnesota have raised money from the
Toronto exchanges, including Washington-based Franconia Minerals Corporation,
which hopes eventually to mine copper and nickel deposits near Babbitt. Franconia (TSX: FRA) went public on the
venture exchange and then graduated to the Toronto Stock Exchange, raising a
combined $30 million from the two markets. New York investment bankers “won’t get out of
bed for less than $50 million,” says Franconia CEO Brian Gavin.
AIM Advisers’ McGowan was also the CFO of DDD Group, a London AIM-listed company in California. He says the number
of U.S. companies that have completed IPOs on the London Stock Exchange's AIM “hardly scratches the
surface” of what’s possible. In his
prospecting efforts, McGowan targets companies with potential valuations
ranging from $25 million - $500 million.
“Fear of the unknown” is one factor that foreign exchanges have to
contend with, says Rick Brimacomb, a Twin Cities financial adviser who helped
TMX drum up attendance for its latest Minneapolis event. But he believes that small companies locally
are now more receptive to the pitches of foreign exchanges than they were five
years ago, given the difficulty of doing IPOs domestically.
If he’s right, persistence might eventually bear fruit in Minnesota for
foreign stock exchanges.
