The TMX Group released a 9-page white paper earlier this month that explored ways to ‘revitalize’ the TSX Venture exchange.
A straight forward plan to combat the lack of confidence, decreased liquidity and overweight resource exchange of the TSX Venture is long overdue. While volatility can lead to exceptional profit taking opportunities (no one was complaining in 2010 or 2011), the exchange has felt the adverse effects of being too dependent on resource issuers as it hovers near the 500 level. Worse, the exchange is trading record low volume, as interest in the vast majority of issuers has dried up after the exchange entered its 5th consecutive bear market (losing 20% of its value or more in each of the past 5 years since 2011) in 2015.
I wrote about the astonishing decline in liquidity (over 75% in 5 years) in an article titled Canadian household debt hurts Liquidity on TSX Venture.
TMX Group outlines plan to ‘revitalize’ TSX Venture
While most of our readers know the exchange has become a graveyard of broken down zombie resource issuers, something you might not have known is that the TMX Group, which owns the TSX and TSX Venture is about to take action.
The white paper, titled Revitalizing TSX Venture Exchange Canada’s Public Venture Market, outlined 3 core initiatives the TMX Group hopes will improve overall conditions and sentiment on the exchange in 2016 and beyond:
- “We will reduce our clients’ administrative and compliance costs, in a meaningful way, without compromising investor confidence.
- We will expand the base of investors financing companies and generally enhance liquidity.
- We will diversify and grow the stock list to increase the attractiveness of the marketplace overall.”
None of these lofty goals, which have been sorely missed in the past 5 years, will mean anything unless executed.
In respect to reducing administrative costs and compliance costs, the exchanges’ first order of business is to remove the general requirement for sponsorship. Below is a direct excerpt:
“In those limited cases where certain material aspects of a company’s disclosure document are not independently verified – and there is no acceptable substitute for arm’s-length due diligence – TSXV may request a focused independent review of the new listing application.”
The cost savings?
“Obtaining sponsorship typically takes several months and can cost a company between $50,000 and $100,000. By modifying the sponsorship requirement, many companies will be able to avoid this cost and delay entirely. Others will save time and money to the extent the requirements can be minimized.”
While this will largely benefit new companies or companies conducting a change of business on the exchange, it is a sign the exchange and brokerage houses are willing to compromise to achieve a more fluid less taxing environment for new issuers. A good sign indeed.
The TSXV management team interviewed more than 130 clients and other key stakeholders about the current state of Canada’s public venture market to aid its action plan. Below are two direct quotes taken from client feedback:
“Public company related costs are a major concern. The audit, legal and personnel costs to comply with the regulatory burden is ever increasing. It is a significant cost of capital.”
“A relatively small portion of the regulatory costs are directly related to TSXV, but the Exchange’s brand is at risk by association with so much red tape.”
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The TSXV revitalization report comes at a much needed time as many market participants search for any positives to cling to during the holiday season. Hundreds of junior resource issuers have been delisted from the TSX Venture in recent years and, roughly 5% of the exchanges total were delisted in Q4 of 2015 alone, opting for boards such as the NEX, CSE, OCTPK, or simply delisting entirely.
Click here to read my recent report on the NEX Board titled Some Struggling Junior Resource Stocks opt for NEX Board.
The report provides a detailed action plan and the numerous benefits it would provide. The exchange appears to have realized that its own health depends on the health of its issuers who in many ways, are its customers.
The report concluded that:
“We are confident the initiatives outlined here will deliver tangible benefits to the multiple clients and stakeholders who have come to depend on us.”
As early as 2013 and January of 2014 we were advocating for increased diversification in articles such as Vancouver Financiers Shifting TSX Venture to Technology Stocks. It appears the TSX Venture will now actively pursue greater diversification, providing incentives to non-resource issuers, while maintaining its position as the premier small-cap mining exchange.
Some investors, having ridden junior resource stocks with decent fundamentals into the ground over the past half-decade, will have a justified wait and see attitude. However, this three pronged initiative is a step in the right direction as the TSX Venture exchange prepares to take action to spur interest, greater diversification and increased liquidity on Canada’s preeminent venture capital market.
Note: TMX, Toronto Stock Exchange, TSX Venture Exchange and Capital Pool Company are registered trademarks of TSX Inc. Please visit revitalizingTSXV.ca to learn more about the report.
This article represents solely the opinions of Alexander Smith. Alexander Smith is not an investment advisor and any reference to specific securities in the list referred to in the article does not constitute a recommendation thereof. Readers are encouraged to consult their investment advisors prior to making any investment decisions. The information in this article is of an impersonal nature and should not be construed as individualized advice or investment recommendations.