Jean-Marc Suret

The Survival and Success of Canadian Penny Stock IPOs

We analyze the survival and success of a large sample of Canadian penny stock initial public offerings (IPOs), launched mostly by small and unprofitable firms from 1986 to 2003. The failure rate of these IPOs is lower than in the US for larger IPOs, probably because of lax delisting rules and the market’s capacity to refinance non-profitable firms. The survival of new issuers is significantly associated with their characteristics at the IPO and with the level of initial listing requirement they meet. The involvement of reputable intermediaries in the IPO process mitigates this effect. Success, estimated by the graduation to a senior exchange, is not linked to the financial conditions at the IPO. Overall, Canada seems to have developed a particular strategy to finance the growth of small firms even if the propensity to fail of firms listed at a pre-revenue stage is very high.

Some evidence of the external financing costs of new technology-based firms in Canada

Abstract This exploratory study attempts to estimate the external financing costs (EFCs) for a sample of new technology-based firms (NTBFs). A large body of literature describes the constraints these companies face when trying to obtain outside equity from venture capitalists or non-institutional investors. The theory explains some of these difficulties by the prevalence of information asymmetry, agency costs and moral hazard problems. For NTBFs, these phenomena cause the search for outside equity to be a time-consuming, costly process: the EFCs should thus be considerable, but are a largely unexplored aspect of the small business financing problem. We propose an estimation of these EFCs. Some of these costs are not reported in the financial statements and can be determined only through a field survey and case analyses. In this study, we identify the elements that generate the EFCs and estimate the time frames and costs associated with 18 financing rounds undertaken by 12 NTBFs in Canada. We show that these costs are indeed substantial and heavily penalize small companies, especially during the initial financing round and prior to the commercialization phase. Based on our initial propositions and observations, we conclude that the EFCs are higher for the first round of financing, for companies that have not reached the commercialization stage, and are lower as gross proceeds increase.

Entrepreneurial Equity Financing and Securities Regulation: An Empirical Analysis

To protect investors, securities regulation generally restrains entrepreneurial ventures from entering the stock market. Scholars and regulators contend that strong rules and requirements for listing are essential to prevent the market from failing. However, these constraints can also unduly impede the growth of new ventures. We use the Canadian case to examine the effects of the relaxation of the regulatory constraints. Unlike in other countries, firms in Canada can list at a very early stage, without revenues, with a minimal size and even without writing a prospectus using the reverse merger technique. This provides a unique opportunity to examine entrepreneurial ventures listed on a public market. The quality of firms, their post-listing operating performance and strategy, and their fate largely support the opinion that strong listing requirements are essential to prevent the emergence of a lemon market. Investors involved in this market obtain very poor returns. This indicates that they are neither able to set correct prices in this market nor deal with the high level of information asymmetry therein. The reluctance of most regulators to relax the requirements for small business finance can therefore, be justified.

Canadian business angel perspectives on exit: A research note

This research note analyses the investment harvest expectations of a large Canadian angel group. These angels co-finance large high-tech deals; on average, greater than CAN

PIPEs: A Canadian Perspective

1.2m. Canadian low listing requirements and the junior stock market make the initial public offering a possible exit mode. However, angels prefer a trade sale, consistent with the proposition that large acquirers can fully and rapidly exploit innovations and offer better exit values. Securities regulation impedes initial public offering exit; reluctance to pursue this exit strategy however, increases with angel experience. The classical funding escalator, including venture capitalists, no longer appears to be a dominant model.

Competition and Survival of Stock Exchanges: Lessons from Canada

In the U.S., private investment in public equity (PIPE) is thriving. In Canada, the PIPE market also appears to be expanding rapidly, although evidence is scarce. The Canadian institutional context has generated a large pool of public stocks, with real but relatively minor financing requirements. The regulatory structure is also distinctive since private equity is viewed by policy makers and regulators as a way to obviate the financing gap affecting young growing companies. Consequently, the Canadian institutional and regulatory contexts differ from the U.S., owing to its rapid evolution and its tendency to strongly favor the emergence of vigorous PIPE activity. Our study shows that PIPEs have been more common in Canada than in the U.S. in the last decade. PIPE issuers belong predominantly to the primary sector, are small but not the smallest listed companies, and are growth-oriented companies, but not the more growth-oriented listed companies. PIPE may be a financing mode particularly well suited to the needs of small and medium-size companies, and thus deserves in-depth analysis.

The Canadian and American Financial Systems: Competition and Regulation

We analyze the competition between two developed stock exchanges. Their development rests mainly on their capacity to attract securities and trades. The US market is attracting a growing number of Canadian companies and is capturing a growing portion of their traded value. This slide of trading toward the US market is a huge challenge for Canadian policy makers while the efforts to compete with the US market seem to be having only limited effects. We analyze the implications of this situation for policy makers in Asia-Pacific where several markets and financial centers are attempting to emerge.

Post-Investment Migration of Canadian Venture Capital-Backed New Technology-Based Firms

Centralization of securities regulation in Canada is a recurring topic which was recently given new impetus. Various participants suggest that the American model is an example of regulatory centralization and could be transposed to Canada. Our study shows the enormous differences which separate these two systems. The SEC may be considered a regulatory monopoly with respect to important securities, in the face of a competitive and fragmented industry. In Canada, provincial securities regulation creates a form of regulatory competition in the face of a very heavily concentrated industry. Consequently, the American regulatory framework is not transferable to Canada, and the risks of significant influence by the industry on the regulatory framework or even regulatory capture are high in Canada.

The Valuation Effect of Listing Standards: An Analysis of Venture Capital-Backed IPOs

Numerous innovative Canadian new technology-based firms migrate abroad when local venture capitalists exit. This article aims to determine how common this type of exit is, and to understand the motivations behind and the consequences of these migrations. We use a mixed-methodology approach, combining quantitative and qualitative evidence. At the market level, we find that nearly half of successful venture capital exits from Canadian firms result in migration. Using a pattern matching approach with 14 cases, we show that these migrations are motivated mainly by strategic considerations in the context of a small country with few strategic partners and a small market for innovative products. Acquired firms become truncated companies with declining activities. Only a small proportion of bought-out entrepreneurs reinvest in the local economy. This phenomenon probably has strong negative effects on the creation of new large technological firms and clusters.

Canadian Private Equity: Nature and Evolution

This paper examines the valuation of venture capital (VC)-backed IPOs in Canada and the US over the 1986-2007 period. The data indicate that differences in listing standards between Canada and the US account for fact that IPOs are valued substantially lower in Canada. We consider alternative matched samples based on factors that include size, sector and expected liquidity, and consider several alternative explanations that might affect IPO valuations, including the quality of the issuer, VC and investment bank, as well as mispricing, liquidity, and clientele effects.