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Capital Formation w Brady Fletcher of TSX Venture – Ep. 1

by | Feb 13, 2019 | Investor Relations, Public Co's

SUMMARY

Brady Fletcher is the Managing Director of the TSX Venture Exchange. He brings nearly a decade of investment banking experience to this role and a clear perspective of how the Venture should be used as a capital formation tool.  We discuss the power of Public Venture Capital, compare and contrast it with other funding options as well as get into the mechanics of Capital Pool Companies or CPC’s.

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TRANSCRIPTION*

* This is a software-transcribed article. 

Cory: [00:00:10] Nice to be with you Brady.

Brady: [00:00:11] Yeah, good to catch up Cory.

Cory: [00:00:12] So I think you bring a really interesting experience to the table at TMX Group with almost a decade in investment banking. How’s that in forming what you’re doing now?

Brady: [00:00:24] If you go all the way back to school I was a computer engineer and then computer engineering decided I didn’t want to be a computer engineer anymore. I had more of an affinity to the business classes. And so I got hired by Jamie Brown and the crew at Canaccord Genuity on the investment banking side during the days of the mining heyday when we were doing 680 plus deals a year within one firm. And it was such an exciting time to be in the markets because he saw the pace at which capital was deployed. You saw how quickly these companies were using that money to demonstrate that they either had a resource, or they didn’t, or that they were able to build technology. They were able to start selling product that they’d never had before and it was all because we as Canaccord were there financing these companies and helping them grow. And then the Canaccord model was that we helped these companies very early on in their lifecycle through retail investment meaning high net worth accredited investors in Canada that would provide an aggregate of a million or two million bucks to some junior company to let them test their business model out. And then if that company was successful in either drilling a new drill hole or proving a technology worked then Canaccord was there to provide 5 million, and 10 million, and all the subsequent rounds. And help grow these companies. That was our bread and butter business. And so my favorite clients were Pure Technologies, Biotech Environmental, companies that we did two and a half million dollars the first time and then we got up as high as 30 or 40 million dollar financings for them with secondary transactions, help them graduate to TSX and ultimately Pure Technology sold last year for nine hundred million dollars.

Brady: [00:02:09] That’s the power of this platform and that’s what was really cool about being in the investment banking side with Canaccord Genuity. You were right in the middle of working with these entrepreneurs who are just trying to figure out how to finance their business and the growth of their business. And you were that partner that helped them get from square zero to square successful exit or turning into a senior listed successful public company.

Cory: [00:02:35] How’s that changed now? I mean, that was the heyday of the resource plays but it’s not like that anymore.

Brady: [00:02:44] Absolutely. You’ve seen sectoral rotation. You’ve had 10 years of a depressed commodities trade. We’ve seen things come and go even in as short as last year with Bitcoin and crypto currencies coming and then leaving the scene pretty quickly. But what we have here with the Venture hasn’t really changed. I think what you’re seeing now is that back in those early days it was just the mining guys and just the energy guys that understood how to take a company public early. How to do a reverse takeover of an existing listed vehicle. How to raise a couple million dollars to drill that first drill program and then separate subsequent rounds when they demonstrated there was value that was there. Or they demonstrated they had a resource. Now you’re starting to see technology companies levering those same tools that have been used for decades by the resource sector and it’s tools like our capital pool company program here in Canada. As tools like the reverse takeover mechanism. Pieces that have enabled companies to list very early on in their company lifecycle raising smaller amounts of capital and then raising subsequent rounds at higher valuations which reduces dilution for the entrepreneur, it allows the capital coming into derisk itself every time that they hit a milestone. It means that you’re not having to take hundred million dollar checks from private equity in one single slug.

Cory: [00:04:06] Who sink their hooks in…

Brady: [00:04:07] Sink their hooks in and handcuff you to whatever they want to do. With this public venture capital model, it used to be that it was just the resource guys that leaned on it but now we’ve seen it be used by the battery metals group. We saw cannabis use it to define an entire sector over the last two years. I mean it was only fall of 2014 that Canopy did their first RTO. The number of companies that have graduated off of Venture up to the TSX. And many of which are now in the S&P TSX index as some of the largest companies in Canada. And it’s all of that public venture capital model that’s facilitated the growth of these different sectors

Cory: [00:04:51] How should we view the venture?

Brady: [00:04:53] I would view Venture as a capital formation platform that is more akin to an angel list than a true public market. And the license for a company that is trying to access the pool of capital that we provide access to. Being global equity capital markets and all hundred trillion dollars of it that can’t trade on Canadian markets.

Brady: [00:05:13] The license to be able to access that is going through our listings process and doing background checks and being subject to continuous disclosure obligations. But the type of company that we’re working with is much more akin to an angel list than the billion dollar NASDAQ IPO. They’re the growth stage companies that are looking to raise 5 to 10 million dollars. Our average financing size last year was about four and a half million dollars Canadian, average market caps between 25 and 30 million dollars Canadian. And now that scales from being worth under half a million dollars to being north of three billion dollars and we get companies along the entire spectrum. But the companies who are with us are very focused on financing to hit that next milestone and then from that next milestone raise money at a higher valuation and be able to reduce dilution by financing at that higher valuation and continue to build the business.

Cory: [00:06:06] This is a market designed for you to hit milestones. To access capital hit a milestone. Access Capital.

Brady: [00:06:15] It really is public venture capital. And when I joined Canaccord early on, we were the public venture capital or PVC group. That’s how we were known. And when you think about what venture is – it’s less about it being a fully regulated public stock market, which we are. The ASC and the BCSC in Canada have oversight of us. We do run on the same technology as the TSX. It’s less about us being a fully regulated public stock exchange and more about us being a capital formation platform for growth stage companies. And when I say that, it’s about us being able to help these early stage companies raise money, use their share currency to make acquisitions and scale, be able to use their their publicly quoted currency to attract and retain top talent. If you’re a technology company that’s building today and you give a new engineer some options, that are options in a public company, they’re worth something from day one. You don’t have the same rotation that we see in Silicon Valley where engineers jump from one company to the next hoping that at some point one of those options will get to a liquidity event. All the options in a public company are worth something. Which allows you to attract top down.

Cory: [00:07:33] In viewing it as a venture vehicle versus just an exchange for smaller companies. By that there is going to be a higher failure rate for some of those opportunities. Do we understand as a collective that there’s a higher failure rate there. Or should we understand?

Brady: [00:07:50] There’s a bunch of pieces to unpack with this one.

Brady: [00:07:54] Absolutely it’s a venture market. And so there are failures and there are successes. And anybody that’s investing into equities is looking for returns that are better than your government t-bill. And as a function of that then that comes with higher risk than a government t-bill or just keeping money in a savings account or whatever else. And when you start focusing on earlier stage higher risk opportunities then there’s higher risk that the company could go to zero. But there’s also higher chance for reward or outsized returns. And so I think sometimes people lose sight of that. This is a venture market and failure is ok. One of the pieces that I think is really important to keep in mind is that at least when a company is publicly quoted with us and it’s listed on the exchange, if they find out that there isn’t gold on the property that they thought there was originally, or the technology just isn’t feasible or it’s not commercial, or their biotech company fails FDA trials. Then the management of that company can tighten their belt, retrench and find some new project to vend into it. Giving those retail investors another kick at the can. When you see that happen in private company’s space or a crowdfunded company, we could all go and put five thousand dollars into a little private company, that company finds out that there’s nothing of merit there and the company goes to zero. Our money is gone. But at least when it’s publicly quoted and it’s traded on the Venture or another junior exchange, then those investors have a chance at participating in whatever happens next to the business. It gives management teams a better chance to pivot and turn and try new things, vend other projects in. Hamed Shahbazi with TIO Networks was a great example of that. Listed with us for 15 years, pivoted at least five times over those 15 years before he eventually developed the technology that allowed him to build the customer base and scale into 300 million dollars.

Cory: [00:09:58] And ultimately a sale to PayPal.

Brady: [00:09:59] Huge sale!

Cory: [00:10:02] I was going to ask for an example but I mean, that’s a prime example of sticking with it, doing it right and working through.

Brady: [00:10:09] I mean, just look at the cannabis space in Canada. It’s been a dynamic regulatory environment for the last four years. And so by being publicly listed these companies were able to raise money. They were able to try new things. They were able to adapt to what Health Canada did. They were able to see what was working, what wasn’t working. What were cash costs. What did they have to do for quality control. All these different pieces that you had to work through as you define an entirely new sector. We’re supported by the public markets.

Cory: [00:10:40] What companies shouldn’t bother listing? What companies should just stay away from the markets?

Brady: [00:10:46] That comes back to your differentiation between venture and other public markets. If you think about Venture as just a public market for small companies, then you’re totally missing the boat with this thing. If Venture is a capital formation platform, it’s meant to help companies grow. We’re meant to help them raise money, we’re meant to help them finance, we’re meant to help them grow through acquisition, we’re meant to help grow them into becoming big success stories. And when you look at our track record of the six thousand roughly companies that have been with us since the year 2000 versus the tech companies that have been financed by private equity. It’s about 1 percent out of both categories that have become unicorn status. Which is actually really interesting to think about. Our portfolio view of the companies listed with us versus the companies that are financed in private equity. It’s about the same that turn into billion dollar companies and actually a little bit better on the downside because what we’ve also seen is that two thirds of the companies listed with us raise three or more rounds of follow on capital.

Brady: [00:11:53] And that number is dramatically lower than private equity because when something doesn’t work out people pull the plug and they reallocate capital to the things that are working. Whereas in Venture, people allow management teams to pivot. Shareholders can pull their money out and they can rotate through the mechanism of the stock exchange. But we’re still here to help those companies grow. Back to your question about what companies shouldn’t necessarily be looking at listing. That’s where I think if you’re a mom and pop restaurant with one location, and you’re happy with the living that you’re making, and there’s a little bit of money that comes off of it then, I don’t think that makes a lot of sense as a public company. When you’re thinking that you have growth aspirations and a defined use of proceeds and something that you can do with money that actually really builds a business and you’ve got aspirations to grow into something that’s much larger than you are today. That’s where the public markets can, and public venture capital can be really supportive and exciting.

Cory: [00:12:54] What I’m hearing there is that obviously a mom and pop restaurant kind of business is not a public company. But if there was a revenue generating, just steady eddy, rental business as an example. Commercial rental business that may be doing 15 – 20 million in revenue but they’re not looking to double, triple, quadruple those revenues or that growth. Is that a candidate? Or is that something that you just look and say, wrong market?

Brady: [00:13:27] It depends on management behind it. You look at the REIT space, you look at some of the cemetery companies like Park Lawn, you look at the Storage Vault guys. Companies that are, they’re not overly sexy in terms of what they have but they’re cash flow generating, defensible assets in there. So they’re getting up and they’re getting listed.

Cory: [00:13:50] And still a good candidate and a good company to be on the Venture.

Brady: [00:13:55] To be on the venture, use that share currency to finance their next acquisition. But their aspirations are to continue growing and so they’re thinking about OK we have one asset here and then we understand how these assets work. So we’re best in class operator and we’re going to acquire this one, and that one, and we’re going to continue scaling and growing. Well Health Technologies is another one today. You look at what they’re acquiring with the hospital beds and the number of acquisitions that they’re making in order to scale the business. And they’re in that model of saying, we understand how this business works. We have the backend technology to run these businesses more efficiently than sole proprietors do. And so we’re going to continue to acquire all of these other businesses that are out there and grow.

Cory: [00:14:42] And WELL is the follow on business of Hamed Shahbazi. He’s right back to the Venture?

Brady: [00:14:49] Absolutely.

Cory: [00:14:49] So I mean that’s a huge testament to using it properly.

Brady: [00:14:53] Well we do see that consistently. People who have successfully leveraged the Venture to finance, to be able to retain control of their company, not be subject to the preferred shared term sheets that come from private equity, and they’ve successfully grown into an exit. They’re our biggest proponents. They’ll get up and talk about the benefits of being Venture listed all day. Similarly serial entrepreneurs who have been forced through a sale or liquidity event at perhaps not the right time for the business because venture capitalists had a preferred share term sheet that they could force the liquidity event. They then become our biggest proponents as well because they like the idea that they can retain more control over the business. When you see the serial mining guys. The likes of Bryan (Paes-Braga) who’s now working with Giustra and Gord Keep and that group. They’re the guys that have consistently built a company in Venture, scale that up from exploration to development and then sold it to a major. Wheaton Precious Metals was another great case study for us. Grew up on the Venture, graduated to TSX, now dual listed down on NYSE. The mining guys have a long track record of doing exactly that. Understanding that what they do with the businesses is formulate the idea or the hypothesis behind the project, raise the first money to drill it out – prove there’s an asset there. Then raise the next round of capital to expand the asset and start to take it to development. And at some point one of the major producers turns around says “that asset works for us” and they pick it up. And then that management team that was taking that company from exploration through to production goes back to start it again. And they find another asset they’ve vended in. They’ve got a successful track record doing that.

Cory: [00:16:40] They’ve put it through the formula again.

Brady: [00:16:42] It’s early days for us seeing the technology guys doing that. So when you see Hamed having done TIO come back and now do Well (Health) Technologies, it’s exactly that. We’re starting to see people who have successfully built technology companies with us, recognize how they can build that playbook to continually lever the Venture to grow their businesses.

Cory: [00:17:06] When we were having a discussion last time we touched on the question – who’s the customer of the TMX Venture? And I don’t think we ended up on an answer. We probably just digressed and didn’t come back to it. But, who is that customer?

Brady: [00:17:21] It’s an interesting one. You think about it all the time – is your customer capital? Or is your customer the company? And we are a for-profit business and our listing fees are paid for by the companies and those companies are paying us to have access to capital. I can take a technology mindset a little bit to this and I would say that capital is the circuitry and components in your iPhone. Then the user experience is what’s the friction of working with us through a listing’s review and background checks and all the things that we do as the exchange to maintain integrity of the market. And if we have a great user experience and we provide you the best access to the deepest pools of capital then that’s what we’re selling to companies. But at the same point in order for us to be able to have the best access to capital we need to be able to show global pools of capital that the companies growing with us are best in breed. And that there is that opportunity for outsized returns by growing, by coming and looking at the companies who are listed with us.

Cory: [00:18:29] Bringing foreign capital into the markets.

Brady: [00:18:31] And we do that actively. Roughly 40 percent of our daily trading activity comes from outside of Canada. Twenty five percent of the member firms that we have who are IIROC registered or are headquartered outside of Canada. They’re all groups that come here to trade and they come here because they want to have access to the junior mining space, or they want to have access to cannabis, or they like the idea of being able to participate in some of the growth stage technology companies that we have. And all of these capital pool companies are out there looking for interesting acquisition opportunities to bring new companies public. What that means is that that entrepreneur finds the CPC to do a deal whether they’re based in California or they’re based in Toronto, when they find that CPC they take over running the public company. So when you look at that number of over 200 companies that listed with us in the year of 2018 and the net increase that came with that, we also started to see capital pool companies coming out of Israel. And so we’ve got groups like A-Labs now that have founded two CPCs, Israeli based CPC’s that are looking for Israeli technology companies and bringing them to this market. And the whole thing is that you know they have international pools of capital that support them. They have an Israeli based founder team. They have Israeli based technologies and it’s totally international. They’re just leveraging the technology of a public venture capital marketplace to be able to rotate shareholders and financing raw businesses.

Cory: [00:20:14] Since you’ve taken this role at the TMX, how would you say that your leadership, your vision of where it’s going is different than in the past?

Brady: [00:20:26] It’s an interesting question. And, I consider I’m as relatively close to the past leadership myself. I saw my early exposure to Venture when I joined Canaccord I was working with him going down to the U.S. to educate U.S. companies about listing in Canada. I was one of the bankers that he put on a panel to talk about the benefits of listing in Canada.

Cory: [00:20:49] Oh, this is your predecessor.

Brady: [00:20:50] Yeah. And so John and I did tours together through the U.S. and we were out trying to drum up business and I was the banker who would help bank the company and he was the exchange that helped facilitate all the meetings and put things together. I think the difference is that, one going out to hire for this role I think there was a perspective that they were going to find a lawyer who is tenured and had some grey hair and John was a little bit older than I am. And so they were looking for somebody that kind of came from that cloth you know, 15 years experience as a lawyer, do the policy book inside and out, came from a very regulatory perspective. And when they started fooling around and say – “who should run the Venture?” and they had a headhunter doing this. What I was told was that my name just kept coming up because I had been somebody who had not only been with Canaccord putting these deals together and working RTOs through the system and tried to convince junior growth stage companies to come up and raise capital with us and then participate in their growth on the Venture. But also from there I went to work for a venture capital fund and then from the venture capital fund I actually went to work for, I did my own technology startup for two years which was an incredible learning experience but more so I relate to the entrepreneur who is trying to figure out how do I make payroll for my team. Your finance on a month to month basis and you’re trying to figure out – I have people that are counting on me for their rent checks to put food in their kids mouths. How do I make sure that I’m providing them the greatest chance at success? And making sure that I’m not taking on an undue risk for them. So that was a big learning experience as you build a team and you have people counting on you for that. That’s a lot of pressure too. And so when you’re thinking about you know how do you make sure that you’ve got access to capital and how do you make sure you’ve got efficient ways to continue to build that support network. I do believe the public markets are the greatest way to do that.

Cory: [00:22:51] Yeah, there’s definitely a conviction there.

Brady: [00:22:53] Public markets are the original form of crowdfunding. It used to be that a mining company or technology company would go meet a broker at one of the independent dealers and they’d say “Here’s my business plan, here’s what I think I want to do. I’d like to raise a couple million bucks”. And if that broker liked it, then it would go to the corporate finance group to do due diligence on it and make sure that there weren’t any criminals involved, that the business plan made sense and financials made sense, do the legal background checks and due diligence requirements. And then that broker would manage the relationship with the company and he would put his network of clients into that company in smaller amounts. And so you had a gatekeeper functionality there that somebody whose day to day job was to evaluate and assess these companies to meet management and then be able to understand what was a good opportunity versus what was maybe subpar. And then there was the regulatory function of all the dealers to actually do due diligence on the management teams, and the companies, and the businesses before any of the retail audience was actually investing into these companies. And I think there’s something about that, that maybe was a little bit old school and very hand to hand that you had to meet the guy and whatever… but there was a level of due diligence that was done on all these speculative investments before retail investors like my mother who watches BNN could invest into an early stage company. When you look at crowdfunding today, anybody can make a powerpoint presentation, post it up to a website and then that website can go promoted on Facebook. You don’t have that same due diligence or gatekeeper functionality which is what we provide in the public venture capital world. And so I think there’s value to that method.

Cory: [00:24:46] Somewhat on the same vein. Yes, I agree there’s tons of value there. But we’ve seen a big change in our markets. We’re seeing a lot of the broker dealers get consolidated and a lot of the big banks are starting to control a lot of that capital and thinning that or really reducing that pool of capital that’s available for early stage companies. That’s something that I think it’s just continued to happen especially from ten years ago when it was nothing like it is now. How true is that statement? Is there more detail that can go into that? Which do we know about that?

Brady: [00:25:29] There’s a bunch pieces to that. Arguably to do a venture deal as a banker probably takes more work than doing a hundred million dollar deal for an established large cap issuer. And those large cap issuers are all institutionally relevant, there’s research behind them, they’re known household names. So when you need to raise a hundred million dollars for them you just walk them around the street and showcase the company. When you’re trying to do a venture deal, you need to educate as to – who the management is? What’s the market opportunity? What are they trying to do? What’s the roadmap look like? How much is this really going to cost for them to develop it? All of those pieces take a lot more work to educate a prospective investor about what that opportunity looks like. And so that’s where the role of a banker’s all that much more important. And as you’ve seen independent dealers consolidate and some of them focus on the larger deals and partly driven just by market dynamics over the past decade. We’ve also seen the emergence of merchant bankers and investor relations groups and people who do become those capital markets partners and do provide that extra level of scrutiny becoming the partner of a public company. So I think it is a reality that there are challenges as the banks have consolidated wealth management and they’ve focused them on less risky alternatives.

Cory: [00:26:54] And less risky managed products.

Brady: [00:26:56] Manage products and their own managed products. But that being said the opportunity behind venture stories is as great as it’s ever been because we’re seeing more sectors lever the tools that Venture provides to list companies early and give retail investors access to these growth stage companies. Now, we’re not talking about Apple forecasts that they’re going to miss their revenue by 10 percent and so their stock slides 8 percent on trade figures between China and the US. We’re talking about companies that are going up, trying to develop a new pharmaceutical drug to cure cancer. And as they get closer to that trial results date, they’re either going to have a dramatic step function decrease that it doesn’t work or it’s going to increase because guess what? They just proved it does work. Those are the companies that we’re working with and you’re actually seeing that by being listed on Venture we’re able to provide retail investors and the average individual the opportunity to participate in some of these companies that are traditionally reserved for straight private equity. And I think that’s really exciting. That it’s giving people and democratizing the investment into venture stage investing, allowing broader retail to participate into some of these growth stories that if they’re held privately, people don’t get the opportunity to participate in. Uber for instance. How many people probably would’ve liked to participate in the growth of Uber from going from a billion dollars to the rumored hundred and twenty billion dollar valuation? It’s been reserved for the world’s ultra wealthy and the elite and the venture capital funds that manage their money.

Cory: [00:28:41] To the last question of a change in banks position in Canada and a change of broker dealers moving more up market. You mentioned that you’re seeing more and more people almost fill a void like IR firms and smaller capital providers and different partners who can help public companies become real operating success stories. That goes to our previous conversation – takes a village to help build something great.

Brady: [00:29:14] And Fiore Group has that track record of successfully building mining companies and being able to bring in the right operators and the right relations and being able to develop that village and the team around it to say – “Hey! Together we’re going to build this is a success story”. Some of the other roles in the void that you reference – Canaccord’s rolled out this program called the COLTS Program. And the COLTS Program is something they’ve taken from their Australian arm but it’s Canaccord Opportunity’s long term. And the Canaccord Opportunity’s long term model is for them to identify companies that are too early for them to provide traditional research for but they will provide visibility and some sort of coverage that highlights what the company’s activities are. And I think that’s exciting because it’s bringing some of those independent dealers who did move upstream. It’s getting them to look back, a little bit down, a little bit further into the smaller end of the market and find those opportunities where they can provide some support and help cultivate that support to grow them into the next round of successors.

Cory: [00:30:20] That’s actually really cool, I didn’t know about that.

Brady: [00:30:22] Yeah. We’re seeing them across Canada. I mean you’ve got Varshney Capital, you’ve got Schmeichel and JJR (Capital Corp.), you’ve got all these different merchant banking groups who are consistently putting together new vehicles. Rob Munro and the Chrysalis (Capital) Group, they just listed their tenth CPC or their tenth capital pool company with us, county capital. And that’s a great example of how this market is designed to help entrepreneurs be able to get up, get listed and Rob and his group have done it ten times now. Eight of those CPCs have gone on to do their qualifying transaction or vended a business into it. And they’ve raised over $300,000,000 dollars in aggregate amongst those eight companies just by getting up and getting listed with us.

Cory: [00:31:10] I’d like to take us into going down the path of understanding the mechanics of a CPC as if I was an entrepreneur. For the CEO of a company who’s looking to go public. There’s a ton of pieces to that puzzle and there’s a ton of partners who can come into it who you need to do due diligence on. You need to do a ton of work to make sure you’re pulling together that right team… pulling together that village… What should we go through? What should we look for?

Brady: [00:31:46] The first thing that you need to do is think about the stage of your business. If you’re Shopify and you’re saying “hey, we’re thinking about going public”. You have the resources around you to have the whole team already in place. You’ve got the accounting there, you’ve got the Investor Relations, you’ve got the marketing group, you’ve got all the banks providing coverage of you providing support for your going public event. You’ve also been around long enough, you’re probably pretty close to two hundred shareholders and don’t need distribution requirements. And so there’s not a ton of value to that idea of doing a reverse takeover.

Brady: [00:32:20] If you’re the earlier stage entrepreneur where you’re saying… “listen, I’ve developed this technology in my basement. It’s myself and my six co-founders and we’ve now scaled this thing to being 5 or 10 million bucks in revenue and we think there’s a 100 million dollar opportunity in front of us, but we need 20 million bucks to do it. So we’re looking at how do we take this thing public?”. You can come in and you can try to do the IPO but when you’re going down the path of saying let’s do an IPO the questions are going to be… Who are your investors?… Who’s in the company already and the distribution requirements? Or do you need to get distribution through the prospectus offering? And what I mean by distribution is that at the time of listing there’s a minimum number of shareholders that you have to have in order to be able to be a public liquid company. So that’s one of the boxes that a CPC helps tick… is that you automatically need distribution requirements if you’re doing a deal with the public with an existing publicly traded vehicle. The other piece that I think is the more attractive part to a CPC is retaining control over the timing of the transaction. So if you’re that early stage entrepreneurs saying “listen, we’re doing 5 to 10 million bucks in revenue and we need 20 to be able to double the size of this business or take us to whatever level”. There is a lot of risk to going up to that financing that the markets may or may not believe you, you could be a first time entrepreneur that has no track record in the public markets. And so… if you’re going down the prospectus route you’re going to spend a lot of money preparing the prospectus, you bullet it, you file it with the commissions, then you go out to try to see if there’s support for your deal and you might find out there’s nothing there. In which case you’ve incurred all these legal costs, you’ve spent all the time and now you’re back at square one with no money, having spent all that time and money. Versus if you do the capital pool company program or you do a deal a reverse takeover with an existing shell vehicle, what happens is that you just have to agree to the terms with the vehicle, file a press release and then you can go up and test the investor appetite. And make sure that there is appetite to getting this deal done. When you did Urthecast. Urthecast was exactly that…

Cory: [00:34:35] They actually went to the TSX… through a shell effectively…

Brady: [00:34:41] Same mechanism… So the shell put out a press release saying “we’re going to do a deal with Urthecast and take this satellite company public” and you were able to go out and make sure that the money was there before you actually incurred all the legal costs on the back end… The mechanism and the disclosure requirements are still the same. You still have to do a filing statement that takes you to a prospectus level disclosure. You’re just doing it after you know that the money’s available. There’s a lot of risk in trying to take a satellite imagery company public at an early stage, pre revenue on the basis of a bunch of contracts. And so you think about that… do you go and prepare the prospectus and go down the route of incurring all those legal fees? If at the end of the day the capital markets say “sorry, it’s not there”. It’s better for you to be able to keep control of that process which is where the Capital Pool Company program works really well.

Cory: [00:35:40] Can we get more granular on the CPC process? On actually the mechanics of doing it.

Brady: [00:35:46] The CPC or Capital Pool Company program is something that’s been a big success for us. Over the 16 year history of the process, we’ve done some twenty six hundred plus CPCs and over 80 percent of them who’ve successfully completed their qualifying transactions. Some of those have gone on to be the likes of Canopy Growth Corp., Wheaton Precious Metals, Urthecast. Success stories across all sectors on our markets. The cool thing about this Capital Pool Company program is that it allows a private company and the management of that private company to effectively take over the existing public vehicle by doing a share exchange. So that publicly traded vehicle, the CPC, will do what we call a reverse takeover qualifying transaction and the capital pool company will issue newly issued treasury shares in exchange for some number of the private company’s shares. Effectively… how this ends up is that then the public company would own 100 percent of the private company shares and the private company’s shareholders would then own some pro rata interest in that public vehicle. When that happens management of the private company then takes over running the public company and all the assets of the private company are then now owned by the public company. Sometimes the management of the CPC or the directors of the CPC will stay on and be supportive of the resulting issuer. Sometimes they just walk away. And so those are some of the things that you negotiate with the CPC team as to how involved you want them to be after you’ve completed the listing.

Cory: [00:37:29] And that plays into the point of… really choosing your horse. What does that CPC bring to the table. Is it just a shell? Just a vehicle? Or is there a lot more there in terms of experience, connections, calibre of directors and so on?

Brady: [00:37:49] … when you’re putting together that go public transaction… doing a deal with the CPC is your opportunity to recognize where you might have gaps on a management team or you might have a role that needs to be filled. And if… by doing a deal with the right CPC you can bring on the right director or you can bring on the right IR guy, or investor, or someone who’s a salesperson, or any other strategic position that you really think… “that guy would be great to add to our team”. Then, those can be really powerful CPCs to work with. Is it your opportunity to give that person a little bit equity in the business? To give them a vested interest in the resulting public company and continue to grow together.

Cory: [00:38:39] What else do we need to know about partners? Bringing people in to support them.

Brady: [00:38:46] I would say that… the two key benefits to a Capital Pool Company would be – one is that control over process. Being able to control the timing and when you’re incurring fees, etc. The second would be the intangible side of what comes with the CPC. And… there’s always a little bit of money in the bank account. So that money can help offset legal fees and transaction costs. There’s the distribution requirement that’s already been met. And then there’s the calibre of people who are behind it. And if you look at Rob Bakshi who’s a serial entrepreneur, had a couple big successful exits including Silent Witness. He’s now put together a new CPC with Hamed Shahbazi as well and a number of other known technology players. And… if a technology company is thinking about going public, that’s your opportunity to bring a number of seasoned serial technology entrepreneurs who have built public success stories into your deal by doing a deal with their CPC.

Cory: [00:39:51] Effectively what you’re doing is reaching into a network, the same way you would go and find V.C. money… Private venture capital.

Brady: [00:39:59] Absolutely.

Cory: [00:40:00] You’re reaching in and you’re looking for a board who’s sitting on that CPC who’s got the connections in. And in the case of technology it sounds like that’s a CPC which is a good horse to pick.

Brady: [00:40:11] Absolutely.

Cory: [00:40:13] Structure is such a big piece. What have you seen? What works? What doesn’t work? What’s an absolute red flag you should stay away from? Aside from negotiating percentages?

Brady: [00:40:24] I mean valuation’s always relative. And ultimately the markets price companies where they deserve to be. The piece that I think is probably up for debate… When you look at some of the US companies and more so the Australian ones, they typically have hundreds of millions of shares outstanding at 10 cents a share or less. In Canada we very much prefer a tighter share structures. And the tighter share structure means that you’re not subject to 20 percent swings on one penny. It means that you’re actually looking at a more cohesive shareholder base that’s more supportive of the deal. So I’d say that’s that kind of “structure is king” comment… as long as the share cap isn’t totally blown up, as long as there’s a relatively well maintained flow then, that’s one of the big things that people look for.

Cory: [00:41:26] From the successes you’ve seen. What’s that range? How big is that float? Usually. I mean, as if you had a rule of thumb. Keep it within this range.

Brady: [00:41:36] That’s totally dependent on stage of company… How much you’re raising… I’ve seen it very tightly held and keep it to the minimum number of distribution and most of the distribution is just that single board lot which is a very very tightly held stock and probably doesn’t trade that much. The flip side is, you’ve seen the likes of TGOD the marijuana company… their IR guy was able to put together over 4000 shareholders before they actually went public. It’s a huge number of shareholders and a lot of work that went into that but it meant that they had kind of that vested interest. So, I don’t think there’s a single rule of thumb. It’s more about understand what your strategy is, understand what where you want to spend time and how you want to engage your shareholder base.

Cory: [00:42:31] There’s a couple of points you made there which were interesting… markets price companies where they deserve to be… When I interview Bryan he said – he views the markets as so incredibly inefficient that if you’re not marketing you haven’t really got a hope in hell. And now that brings me to your example of TGOD. Something like 4000 shareholders before they go. That’s incredible! How can you do that effectively without getting offside? Because there’s all sorts of ways you go blast out a message. But how do you do that effectively without being offside with the exchange or the regulators?

Brady: [00:43:11] So we as Venture have taken a very strict position on. If you’re compensating or in any way paying for the disclosure then you’re responsible for the factual accuracy as a company. So if you’re paying a third party newsletter writer, you’re still responsible for what they’re putting out to make sure that it’s not overly promotional, that it’s all factually accurate. It doesn’t matter whether it comes out as a press release from you or from some third party and… It doesn’t matter whether one of your shareholders pays for that you paid the shareholder… If it’s paid for by on behalf of the company then you’re responsible for it. Absolutely I think you know Investor Relations and shareholder engagement is a huge part of being a public company. And to Brian’s point, you’ve got to be out marketing. And you need to be able to get out and tell the story. The flip side to that is, you need to be telling a story that actually has something to tell. So you need to be out there saying… “here’s what we raised money to do. Here’s how we’ve hit on our milestones. Here’s what our plan looks like”. And that should be all material that you can put into the public domain. Making sure that you’re not you’re not giving anybody inside information. It’s got to be all transparent and it’s got to be available to the broader investing public and contained in your public disclosure.

Cory: [00:44:33] When it comes to digital outreach… We live in an incredible age where you can reach so far and in so many different ways. How is that viewed by the exchange?

Brady: [00:44:46] It’s it’s an evolving landscape… absolutely. And it’s only been the last few years that people have really started to embrace social media and digital strategies for either putting together new newsletters, or independent research, or engaging with investors and investment communities in a different way. All of that is… in my mind it’s awesome and it’s powerful. And it’s things that we’re doing to help bring visibility to this market around the world. Our venture 50 Awards last year we had over 800,000 views of the 37 videos that we filmed for the companies that won. So… to me that’s really impressive because… these venture stage companies who don’t have the resources to have big IR teams and don’t have the scale to be covered by every dealer around Canada are getting 800,000 views of their videos. And that’s where I think the power of YouTube and social media and other distribution mechanisms comes in to be able to engage retail investors and be able to help tell the story and bring visibility to the companies growing here. The challenge that it does then represent is, how do you enforce disclosure requirements? And how do you monitor all of these different channels and different websites… GoDaddy websites that can pop up overnight? How do you monitor for factual accuracy and not being overly promotional or manipulative of stock trading? And… that’s something that we spend a lot of time on and we have a big compliance department here and we work closely with Iraq and the regulators in the CSA to be able to try to maintain market integrity.

Cory: [00:46:29] There’s no doubt we need that market integrity but when you use words like “overly promotional”. What defines that?

Brady: [00:46:39] There’s press releases where you’ve seen somebody say something like “gushing oil”… I don’t think “gushing” is a technically defined term in 51.101. There’s stuff that you look at and… it’s over the top. And when you read it just says… “hey, we’re the best and we’re the number one in this”… I’m thinking through some of the examples without trying to name names… but you think through…some of those statements and they’re statements that can’t be backed up or substantiated with any factual accuracy. They’re using terminology or descriptions that aren’t supported in any technical disclosure. And that’s the sort of thing that gets to be… overly promotional side of things.

Cory: [00:47:45] Reaching out to a shareholder base. What do you see in Canada with venture companies? What is that distribution of retail investors? And what’s the average size of holdings for retail? Is there a way to quantify who venture investors are?

Brady: [00:48:03] It’s a sliding scale… In the earlier days of any company that is listed with us… It’s probably very heavily weighted towards retail investors and people who have smaller interests in the business and if you’ve got a $100,000 dollar cheque from someone it might be a big deal. As the company grows and you turn into a 10 million dollar or 20 million or 100 million dollar company, then you become institutionally relevant in the small cap, institutions participate, the different dealers start to provide research coverage and you get better distribution amongst their channels. So it is very much a sliding scale that goes from being just the individual retail investor with aT.D. Waterhouse account, all the way through being the Canada Pension Plan that participates in Canopy when they’re listed and part of the list of TSX and part of the S&P TSX index.

Cory: [00:49:05] You mentioned earlier that… 25 percent of your member dealers are headquartered outside Canada. How are companies engaging those? … Aside from the Venture engaging them to bring more in, more foreign dollars to look at our deals. How are companies engaging them? or how should they?

Brady: [00:49:29] …It’s a constant evolution in a company to be able to build your village. And going back to that example of how do you build the right village? We’ve got UBS and Credit Suisse and Bank of America and Morgan Stanley and JP Morgan and all these groups who do trade companies up here and do provide support. You need to be able to find the right banker, and you need to be able to connect with them, and you need to be able to say… “what are the criteria for me to be able to access your platform?”. And the difference between PI, which is one of our really active venture firms – do a lot of work on the earlier stage and have done a lot of work in the cannabis and some new novel sectors. You’ve got PI that goes to Canaccord, and then Canaccord that goes to RBC, and then RBC that goes to Morgan Stanley or J.P. Morgan. Along that entire spectrum there’s different requirements to be able to access any of those different platforms. Some will be smaller and some will require $100 million dollar plus finance.

Cory: [00:50:41] It’s a gradual step function as you build the company building up, building the relationships. I interviewed a gentleman named Hanif and his former investment banker and is now building a really interesting fintech company…. When you’re closing you’re “A” you should be talking to people about your “B”…. keeping that step function in mind of building those relationships… He’s doing it the venture capital route but sounds no different.

Brady: [00:51:20] … the number one rule for any CEO is don’t run out of money… whether you do that in private company land or through public venture capital you need to be setting up that next round of financing as soon as you’re closing the last one. So absolutely… you’re closing your Series A and you’re talking about your next round. Same thing in public markets. When you’re closing that first round, you’re educating people about what your plan is and what you’re hoping to achieve. And people are watching as you work your way towards certain milestones. And at some point as you work your way towards or you achieve certain milestones then the dealers will come back and say “hey, we want to give you another round of capital”.

Cory: [00:52:10] And just keep working yourself up.

Brady: [00:52:12] You just got to keep educating, keep talking your story, keep engaging with your shareholders, and keep engaging with the capital markets. But it’s an interesting example because I don’t think that being public is that much more of a burden than being private. And when you hear entrepreneurs like Hanif talk about the fact that as soon as he closes the series A he’s got start due diligence with somebody on his series B and educate them along that road. How is that any different than having to do IRR as a public company? If anything, I’d say it’s actually worse because you start going down the path of doing your Series B, and you sign a term sheet with one fund and as you’re developing your business and growing towards closing that round off. All of a sudden you miss a milestone, or you miss something, or something changes with the fund and they decide not to do the deal with you. You’re out of options.

Cory: [00:53:08] You’re very locked in.

Brady: [00:53:09] At least in the public markets you’ve been out there educating the masses about what you’re doing with the business and you’re growing the business. And if something changes you still have the ability to rotate those shareholders and bring someone new into the business. Quickly.

Cory: [00:53:30] That brings me to the next question. What do you see for the future of the TSX Venture?

Brady: [00:53:37] When you look at our breakdown today, very heavily weighted to resources still and we’re in the first inning of the innovation sector, really recognizing how this model works. So I think we’re going to continue to see technology companies lever tools like the capital pool company, take advantage of that idea of financing to hit certain milestones, and continue to grow that side of the business. And I think that’s what’s really exciting about this place right now… These paths and structures that have been developed over decades by the resources sector are only just starting to get leveraged by the technology and the biotech and the cannabis space and the innovation sector. That’s why the biggest thing you’ll see is the continued diversification and the breadth of investment opportunities that are growing with us here on venture. Then, when you start thinking about – what does that also mean globally? We’ve seen a slowdown in early stage venture capital financing privately as more of those funds have focused on the later stage opportunities the Ubers of this world. Meaning that… internationally we have a dearth of companies that are in this kind of 5 to 10 million dollar revenue run rate don’t quite have the same financing opportunities in front of them and so they’re starting to look at this market saying “hey, what happens if I listed on the Venture Exchange?. Am I able to raise money there?”. Our CEO Lou’s favourite comment is that our address is local and our business is global or our addressable market is global. And really… the fact that we trade on Eastern Standard hours is just how we focus liquidity to a limited time frame to be able to try to make buyers and sellers actually meet. And we provide international companies all an ability to come and list on this market. So today we’re 80 – 85 percent Canadian headquartered companies but I’d anticipate that number growing dramatically.

Cory: [00:55:36] That’s really interesting.

Cory: [00:55:47] With the explosion of cannabis and the cannabis space. When will the TMX group start to work with more US companies or any US company?

Brady: [00:55:56] Yeah, we’d love to. And we’ve obviously seen that it’s constituted a majority of the business for the CSC but when you start looking at the US cannabis space it’s a difficult one because regardless of what tweets come from the current president or whether you think the States act will pass this year or not, or what public support looks like… on whatever poll. Those are all circumstantial and qualitative speculation and while we’re defining listings policy for this market, we can’t define something based on public sentiment or our speculation and best bet as to what we think is going to happen. We have to root our policy in facts and then we have to be able to equally apply that across all industries. And if we were to start listing US cannabis, that means that we’re opening the doors to working with federally illegal companies under U.S. and Canadian federal law, which has been something that we’ve elected not to do.

Cory: [00:57:03] Simple as that.

Cory: [00:57:25] I know a few guys who did a really interesting run during the advent of online gaming. And it’s the playbook that happened there with the US and what’s happening in cannabis right now is very similar.

Brady: [00:57:42] Oh absolutely.

Cory: [00:57:45] To wrap this up for anyone who’s either in the public markets right now or looking to go to the public market using the TSX Venture and public venture capital. What’s the final thoughts for them?

Brady: [00:58:01] It comes full circle to that discussion we were having around how you view the Venture. I think the final thought would be to reinforce that… this isn’t meant to be a true public market where you trade with the vagaries of economic speculation. This is meant to be a capital formation platform where companies that are working towards milestones will finance and work towards achieving those milestones and when they do, then there should be a step function valuation increase. And if you’re an investor looking at the volatility that’s out there today and you watch the Dow take a point and a half slide or see anything that’s going on with trade disputes and government shutdowns and all these macroeconomic trends, the Venture is a little bit insulated from that because the companies listed with us are working towards valuation increasing milestones that will increase in a step function. If you’re a company and you’re saying… “How do we deal with this current volatility? And what does it look like?. Then… it’s absolutely open to them to come here and start having that discussion around “how do we make sure that we have those options structured in?” Because as a public company you do have the ability to rotate your shareholder base. Sheldon Pollack and OV2 Securities his favorite comment is that public venture capital is permanent capital whereas private venture capital is borrowed capital. And what he means by that is that a VC fund has an obligation to return their money to their investors within a defined time frame and maybe they can get a year or two extension on that. But there is a defined obligation that the money has to go back to the LPs. And so that forces those VCs to force exits at potentially at non opportune times. Whereas… when you finance in the public markets, as soon as that money comes into the company treasury, it’s now yours. It’s yours to spend, it yours to deploy, it yours to use for for growing the business. And if that investor decides that they need to be able to liquidate their position, they have the mechanism of the stock exchange to be able to rotate themselves out and bring new shareholders in.

Cory: [01:00:20] Brady thanks so much for your time.

Brady: [01:00:21] Thanks for having me…