I was recently introduced to George Khalife, a Chicago-based Vice President at the Toronto Stock Exchange. In Canada, there are two exchanges; the TSX which is the senior exchange suited for later stage, more established businesses and the TSX Venture Exchange (TSXV) which allows earlier-stage companies to raise public capital--for companies that otherwise would be too early stage to go public in the United States and are typically more dependent on traditional private market financings funded by venture capitalists. It was an eye-opening conversation, that I didn't even think was possible, and I wanted to share those learnings with all of you.
TARGET COMPANIES
The Venture Exchange is targeting companies with $5MM-$50MM in revenues, with valuations of $5MM-$50MM, that are trying to raise $5MM-$25MM in capital. Companies can be in any industry (although many are in the technology industry) and the business can be headquartered anywhere. If that sounds like your business, keep reading.
HOW IT TYPICALLY WORKS (on the TSX Venture Exchange)
The most common way to go public on the TSX Venture Exchange is through a Capital Pool Company (or CPC). This is a unique listing vehicle which introduces investors with financial market experience to entrepreneurs whose companies require strategic capital. Unlike a traditional IPO, the CPC enables seasoned directors to set up a public shell company with no assets other than cash. The CPC then uses the funds to seek out an investment opportunity - and once the operating company has been acquired and meets the listing requirements, its shares begin trading regularly on the Venture Exchange. Here is an example typical structure of the ownership of the company after going public.
THE PROCESS YOU WOULD FOLLOW
If you are a company in the Midwest U.S. doing at least $5M in revenue and are interested to learn more about raising public capital, get in touch with George Khalife at the TSX who can help walk you through the process in more detail (email provided below). He will likely set up an intro call to learn more about your business and figure out from there the best course of action - this might involve you sending an investor pitch deck which George would review and assess which introductions to the investment community make the most sense based on your company’s profile.
If approved, your pitch will get circulated to potential investors (the founders of the CPCs described above). If any of them like your business, those CPC founders will act like your investment banker to do all the work in helping to get your funds raised through their public shell company. It would typically require a day or two of investor meetings in Toronto, and the process from start to finish is around 3-4 months in length. The total cost to the issuer (your business) would be $100K-$500K depending on the deal size, which would be deducted from the funds raised in the round. All monies raised can be in US Dollars.
THE ADVANTAGES
The advantages here are that this is a creative way for early-stage businesses in the U.S. to raise capital, especially if they are having trouble getting the attention of the U.S. venture capital firms. And, once you are public, raising your 2nd and 3rd rounds, graduating from TSXV to TSX, are materially easier than trying to "pound the pavement" for new venture capital investors.
The important factors to focus on is the “why” of raising public capital - reasons like; (1) access non-dilutive growth capital to execute against strategic growth plans, (2) improve company profile from both a community and customer perspective, (3) ability to make the right acquisitions by using shares as currency, and (4) added credibility that comes from being a publicly-listed entity, etc.
THE DISADVANTAGES
The disadvantages here are that now you are a publicly traded company. Your financials will need to be filed quarterly and they will be openly visible to all your competitors. And, the costs of the financing are materially higher than doing a private round with a venture capital firm. But, maybe you don't care, because you ultimately were able to raise capital that you otherwise could not have raised.
KEY CONSIDERATIONS
Going public is a major milestone for any company and is a decision that requires careful consideration and advice. To start, ask yourself the following questions when thinking about listing:
● Does your management team have expertise in your industry sector and experience running a publicly-traded company?
● Is your management team committed to the implementation of effective corporate governance measures?
● Does your company have an attractive track record or a product or service that has a readily identifiable market / significant growth potential?
● Have your management team and board of directors invested their own capital in the company?
● Has your company developed the appropriate internal controls that are needed to meet financial reporting requirements?
If you have answered yes to the above questions, you should be a viable candidate. It’s certainly not the best fit for every company, but it is surely a right fit for some - and as founders, it’s important to consider all the financing options on the menu before making a definite decision of which path to take.
CLOSING THOUGHTS
Anyway, I thought this was unique and worth sharing as a potential funding path for you. Thanks George for introducing the TSX Venture Exchange to me (and our readers). If anybody desires to reach out to George, feel free to email him at george.khalife @tmx.com.
For future posts, please follow me on Twitter at: @georgedeeb.