PREMIUM SEARCH Search by job title, geography and build a list of executive contacts
The Canadian Venture Exchange (CDNX) is designed to help Canada foster home-grown startup companies in the face of growing competition, notably from the U.S.'s Nasdaq, which plans to form a Canadian exchange (see BW Online, 7/5/00, "For Canadian Fledglings, an 'Incubator' Exchange"). Business Week Online's Hugh Filman recently sat down for a face-to-face talk with the CDNX's new chairman, Scott Paterson, at the Toronto offices of Yorkton Securities Inc.
Paterson, who is also Yorkton's chairman and chief executive, spoke about CDNX, the entry of Nasdaq, and Canada's tech sector. He also addressed for the first time recent media criticism of his firm's involvement in "pro-trading," the practice of playing multiple roles -- investor, adviser, and underwriter -- while providing research and recommendations on companies.
Q: What is CDNX's place in the Canadian securities marketplace?
A: It's probably the only true micro-cap exchange in the world. There are lots of small-cap exchanges, there are lots of growth exchanges -- but the CDNX is uniquely Canadian, and it's playing an incredibly important role for capital formation and job creation in Canada. And it will increasingly do so, primarily because Canada is rapidly moving toward a knowledge-based economy. So we will see a greater and greater percentage of the listings on the CDNX being technology-type companies, which means the exchange is going to grow, and the banking world in Canada is going to grow with these companies, too.
Q: CDNX has been depicted sometimes as a little Nasdaq. Is it something different from Nasdaq?
A: I would embrace the comparison because I think that Nasdaq has been very successful and is the icon of a successful launching pad for technology companies. We'd like to think that technology companies should be proud of starting their life on the CDNX. But the objective is to be an incubator exchange. The objective is not to try to hold on to companies as they grow but rather be proud of when they graduate themselves to Nasdaq or to the TSE [Toronto Stock Exchange].
From Canada's perspective, we should never fight the reality that technology entrepreneurs want to be listed on Nasdaq and have a U.S. following. That's the dream of every technology entrepreneur, and we should accept it and embrace it. And people in our industry and Canadians at large should not view that as a negative but as a great sign that Canadian businesses are maturing and that they're being accepted by this very powerful capital force in the U.S.... But what we need to do as Canadians is make sure that those companies keep a listing in Canada when they move to the U.S.
Q: Is that the idea of the CDNX -- that they'll give up their listing and move on to another?
A: Absolutely. In fact, I believe we've even stated at the CDNX that we don't want dual listings. So when you're ready to move to the TSE, you give up the CDNX and move to the TSE. The CDNX should be measured on the basis of how many companies were funded that graduated to more senior exchanges.
Q: So the idea really is that it's an incubator. A lot of companies stay on Nasdaq, and it's now competing with the New York Stock Exchange [NYSE] in many ways. You don't see CDNX competing with the TSE or soon Nasdaq Canada?
A: No. Totally different business model. That's not what the effort is. Having said that, picture three to five years from now. In my opinion, the bulk of the new companies being funded on the CDNX are going to be in technology and its derivatives, and the fact of the matter is, the truncation of value creation and real economic value added is so swift that you can end up with companies that have big market caps for a period of time. But then they will migrate to one of the senior exchanges.
Q: The Vancouver and Alberta exchanges always had reputations as being rather wild and unregulated. Has CDNX inherited their investment-rodeo reputations at all?
A: Well, it depends on who you talk to, I guess. It certainly wouldn't be my view. There have been a few high-profile cases over the past several years that the VSE [Vancouver Stock Exchange] and the Alberta Stock Exchange had to live with. Relative to the number of listings and the activity that took place, I'm not sure things are really in context.
But having said that, to my knowledge there have been absolutely no issues whatsoever since the CDNX was founded on Nov. 29. Bill Hess, the CEO, is a former regulator. He was the head of the Alberta Securities Commission. I have enormous faith in this guy because I think he understands that you need to balance a regulatory environment that says we have zero tolerance for people who abuse the system -- which everybody presumably endorses -- with saying we're open for business, and we want entrepreneurs, and we want creative people and aggressive people.
Q: Nasdaq has come fairly easily into Quebec. What sort of impact does that have on CDNX?
A: I'm a little less certain than I think [Nasdaq is] that the Canadian constituents -- i.e., the dealer community, the issuers, and the institutions -- will embrace Nasdaq Canada as well as [Nasdaq thinks] they may. And it has nothing to do with nationalistic pride and everything to do with a very, very fundamental difference between Canadian stock markets and Nasdaq. And that is, our markets are auction markets. That's a very different culture.
In any event, it's not a challenge to the CDNX because the CDNX is a feeder exchange. It grew up -- and I'm talking about its predecessors -- because this country historically didn't have the breadth and depth of venture-capital activity or the wisdom associated with it. The investors were there. We know that because the markets went crazy during the mining booms. The entrepreneurs were there because they were the guys behind the companies. But there wasn't the kind of body of wisdom that's traditionally associated with the venture capitalist. And so the exchange became the medium.
People criticize it in this country. They say Canadian companies raise less money when they go public, they go public with smaller market caps. Well, that's not bad. That's good. We adapted as a country. We didn't have a venture-capital body, so you went public through the junior exchanges. That's why [the new unified exchange] is called the Canadian Venture Exchange. It's really an alternative to venture capital.
Q: You talk about differences in the culture. A lot of that is dictated by the regulatory environment. Is that going to come more and more out of Wall Street?
A: We need in this country the ability to finance companies in $5 million rounds. That's not going to happen on some global stock exchange or an alliance with the New York Stock Exchange or even on Nasdaq Canada. So from CDNX's perspective, the globalization is good for CDNX. It just gives more outcomes, more probability that companies that graduate can graduate on the world stage.
Q: What about the trend toward private exchanges?
A: I don't believe the ATSs [alternative trading systems] are any challenge whatsoever to the CDNX. When stocks are very, very liquid, an ATS can play a role either with respect to anonymity or after-hours trading. There are a few benefits.
But when it comes to stocks that aren't liquid or aren't heavily institutional stocks, all it does is fragment the market more. It came up on the [CDNX] board, and the general consensus is that ATSs for the indefinite future are not a threat. [Trading in small retail stocks] is not what they're used for.
Q: Rightly or wrongly, you've emerged as a controversial figure in the local media recently. How to you respond to criticism that it has been inappropriate for Yorkton to play multiple roles -- be investor, adviser, underwriter, and provide research and recommendations on companies?
A: That [criticism] doesn't make any sense to me. I mean Goldman Sachs, which is the most formidable institution in our business in the world, is the most aggressive player in just that. Goldman Sachs is a huge venture capitalist prior to taking companies public. They do all of those services and value adds, plus more -- subordinated debt, senior debt.... I guess I just don't quite get it, because the biggest institutions in the world [are doing it]. That's what Citigroup is all about. That's why the big banks were buying the brokerage firms. Clients want integrated services.
Q: Looking at this type of incubator activity, how good is Canada at nurturing technology companies?
A: There has been a great proliferation of venture capitalists and incubators in the last year. I'd put a Canadian up against an American any day of the week because Canadians have the intellectual capability, the work ethic, and they might be a little gentler -- which can work a little for you or against you from time-to-time. But one of the challenges for Canada is we don't have the idea of second-generation and third-generation entrepreneurs who have been through it before....
We talked about companies going to Nasdaq. A great Canadian technology company is a company that has their R&D in Canada, their sales and marketing in the U.S., and we keep the CEO here. We've got to take away this notion that an incubator can only be in Canada. The best incubators have great relationships in the U.S. and in Europe, because all these companies are going to have 95% of their sales outside Canada.
Q: How do you know when these companies are ready to graduate?
A: My advice to Canadian companies is: Don't try to force it on the U.S. marketplace. Wait until interest is sufficient that the dealers want you down there. That's when you'll get the best reception. So build a loyal following and a base in Canada and certainly reach out to U.S. investors, but wait until you're pulled a bit.
Copyright 2000, by The McGraw-Hill Companies Inc. All rights reserved.
Printer-Friendly Version
