A chance for the TSXV to explain how “zombies” meet CLR

Last year, in response to the publication of the Spring 2015 Zombie List , The TSXV was quoted as follows: TSX Venture Exchange consistently and carefully reviews the companies that are listed on its exchange to ensure they comply with its continuous listing standards. It is absolutely false to suggest that there are 600 companies that fail to meet our standards,” the company said in an emailed statement.

John McCoach recently sent me an email regarding all the negative working capital companies listed on the TSXV. “our position is that TSXV is currently, and has consistently, applied our continued listing standards as outlined in our policies.”

I answered his email with the following:

I would appreciate it very much if you would share with me the specifics of how the TSXV ” is currently, and has consistently, applied our continued listing standards as outlined in our policies.” because my reading of the TSXV’s CLR indicates that the CLR are not being enforced.  I will be happy to change my opinion once you have explained your stated position.

How I reached my present conclusion:

As what I consider any reasonable person would do, I have been going to Policy 2.5 http://apps.tmx.com/en/pdf/Policy2-5.pdf and starting off with

1.1 “Each Issuer must meet the CLR standards applicable to its category in order to remain listed in either Tier 1 or Tier 2.”

then

2.1 Working Capital “adequate Working Capital or Financial Resources of the greater of (i) $50,000 and (ii) an amount required in order to maintain operations and cover general and administrative expenses for a period of 6 months” (TS: negative working capital obviously is not adequate to meet either ‘need’)

then

2.1 Assets and Operations: “no requirements generally although the Exchange retains discretion to declare that an Issuer no longer meets Tier 2 Continued Listing Requirements if, in the Exchange’s opinion, the Issuer or its principle operating subsidiary substantially reduces or impairs its principal operating assets, ceases or discontinues a substantial portion of its operations or business for any reason” (TS: spelling – oops)
then

2.1 Activity

either A or B below:

A) For the Issuer’s most recently completed financial year: i) positive cash flow; ii) significant operating revenue; or iii) $50,000 of exploration or development expenditures.

B) In aggregate, for the Issuer’s two most recently completed financial years, $100,000 of exploration or development expenditures.

(TS: another test that is relatively simple to measure and apply)

then

3 Inability to Meet CLR

Tier 1 could go to Tier 2 so looking at 3.2:

“A Tier 2 Issuer which is unable to meet one of the Tier 2 CLR will not immediately have its listing transferred to NEX. The Exchange will notify the Issuer in writing (the “Tier 2 Notice”) as to the Tier 2 CLR that it does not meet and will allow the Issuer six months from the date of the Tier 2 Notice to meet the requirement. During those six months, the Issuer will trade as a normal Tier 2 Issuer. If, after that six-month period, the Issuer does not meet all applicable Tier 2 CLR, the Exchange may either, at its discretion, suspend and delist the Listed Shares of the Issuer or transfer its listing to NEX.

(TS: While “discretion” is given to the TSXV, that discretion is not the equivalent of magically causing a company to meet Tier 2 CLR standards.)

then

3.2 (e)

The Exchange uses discretion and flexibility in applying Tier 2 CLR. If an Issuer has a viable business, the Exchange may determine that it is not appropriate to transfer the Issuer to NEX even where the Issuer is unable to meet all Tier 2 CLR. The Exchange will, for example, consider the seasonal or other cycles which affect an Issuer’s business. If an Issuer’s Working Capital is low because of seasonal or other temporary conditions, the Exchange may delay enforcement of this Policy but will continue to monitor the Issuer.

(TS: This “discretion and flexibilty” was designed – rightly – with exploration companies in mind. It could easily be possible for a company to be inadequately financed after it paid its bills at the end of an exploration season and before it announced results and raised money for the new season.

3.2 was obviously not intended to be used to allow companies to spend years with negative working capital and doing nothing except racking up G&A expenses.

I see no other discretionary clauses, so what is the TSXV relying on when it says “is currently, and has consistently, applied our continued listing standards as outlined in our policies.”?

If you can provide me with an explanation, I will include it in my next posting so that others, and there are many who are as confused as I am, will also understand what is going on.

Thank you for your attention.

++++++++++++++++++++++++++++++++++++++

The questions above are fair and detailed. Did I get any answers?

Complying with CLR – or just being given a dispensation?

Last year, in response to the publication of the Spring 2015 Zombie List , The TSXV was quoted as follows: “TSX Venture Exchange consistently and carefully reviews the companies that are listed on its exchange to ensure they comply with its continuous listing standards. It is absolutely false to suggest that there are 600 companies that fail to meet our standards,” the company said in an emailed statement.

John McCoach recently sent me an email regarding all the negative working capital companies listed on the TSXV. “our position is that TSXV is currently, and has consistently, applied our continued listing standards as outlined in our policies.”

I answered his email with the following:

I would appreciate it very much if you would share with me the specifics of how the TSXV “is currently, and has consistently, applied our continued listing standards as outlined in our policies.” because my reading of the TSXV’s CLR indicates that the CLR are not being enforced.

I will be happy to change my opinion once you have explained your stated position.

How I reached my present conclusion:

As what I consider any reasonable person would do, I have been going to Policy 2.5 http://apps.tmx.com/en/pdf/Policy2-5.pdf and starting off with

1.1 “Each Issuer must meet the CLR standards applicable to its category in order to remain listed in either Tier 1 or Tier 2.”

then

2.1 Working Capital “adequate Working Capital or Financial Resources of the greater of (i) $50,000 and (ii) an amount required in order to maintain operations and cover general and administrative expenses for a period of 6 months” (TS: negative working capital obviously is not adequate to meet either ‘need’)

then

2.1 Assets and Operations: “no requirements generally although the Exchange retains discretion to declare that an Issuer no longer meets Tier 2 Continued Listing Requirements if, in the Exchange’s opinion, the Issuer or its principle operating subsidiary substantially reduces or impairs its principal operating assets, ceases or discontinues a substantial portion of its operations or business for any reason” (TS: spelling – oops)

then

2.1 Activity
either A or B below:
A) For the Issuer’s most recently completed financial year: i) positive cash flow; ii) significant operating revenue; or iii) $50,000 of exploration or development expenditures.
B) In aggregate, for the Issuer’s two most recently completed financial years, $100,000 of exploration or development expenditures.
(TS: another test that is relatively simple to measure and apply)

then

3 Inability to Meet CLR
Tier 1 could go to Tier 2 so looking at 3.2:
“A Tier 2 Issuer which is unable to meet one of the Tier 2 CLR will not immediately have its listing transferred to NEX. The Exchange will notify the Issuer in writing (the “Tier 2 Notice”) as to the Tier 2 CLR that it does not meet and will allow the Issuer six months from the date of the Tier 2 Notice to meet the requirement. During those six months, the Issuer will trade as a normal Tier 2 Issuer. If, after that six-month period, the Issuer does not meet all applicable Tier 2 CLR, the Exchange may either, at its discretion, suspend and delist the Listed Shares of the Issuer or transfer its listing to NEX.
(TS: While “discretion” is given to the TSXV, that discretion is not the equivalent of magically causing a company to meet Tier 2 CLR standards.)

then

3.2 (e)
The Exchange uses discretion and flexibility in applying Tier 2 CLR. If an Issuer has a viable business, the Exchange may determine that it is not appropriate to transfer the Issuer to NEX even where the Issuer is unable to meet all Tier 2 CLR. The Exchange will, for example, consider the seasonal or other cycles which affect an Issuer’s business. If an Issuer’s Working Capital is low because of seasonal or other temporary conditions, the Exchange may delay enforcement of this Policy but will continue to monitor the Issuer.

(TS: This “discretion and flexibilty” was designed – rightly – with exploration companies in mind. It could easily be possible for a company to be inadequately financed after it paid its bills at the end of an exploration season and before it announced results and raised money for the new season.

3.2 was obviously not intended to be used to allow companies to spend years with negative working capital and doing nothing except racking up G&A expenses.
I see no other discretionary clauses, so what is the TSXV relying on when it says “is currently, and has consistently, applied our continued listing standards as outlined in our policies.”?

If you can provide me with an explanation, I will include it in my next posting so that others, and there are many who are as confused as I am, will also understand what is going on.

Thank you for your attention.
++++++++++++++++++++++++++++++++++++++

The questions above are fair and detailed. Did I get any answers?

TSXV Performance

For investors and speculators, the TSXV has been an epic disaster for the last seven years. It has by
far the worst record of any stock exchange in the developed world.

It is misleading to reference the TSXV/S&P Index, which is as artificial and stacked for favorability as can be. Here’s how it is calculated. http://web.tmxmoney.com/assets/docs/indices/VXSC/Methodology_VXSC.pdf  Continue reading “TSXV Performance”

BCSC sent this out today

Cooperative Capital Markets Regulatory System: Comment Letters Posted.

In French? why?

Aside from that little faux pas, you can bypass anything you don’t understand and just head straight to the pdf list.

There are 50 listed. Read a few and get a sense of what problems being generated by the regulators are being exposed by the comments.

A good example is this one by Blake, Cassels Graydon LLP.

Regulators can get Canadian companies back on track in 2016

Here’s a well-written Opinion by Larry Reaugh and Daniel McGroarty that identifies a huge problem that for some reason the regulators have been unwilling to fix.  If they continue to refuse to fix it, the whole works of them should be terminated and replaced with people who understand the market.

“How can we staunch the bleeding and help Canadian resource companies?

Restore the up tick rule. Would that really help? Yes, and we don’ t have to speculate.

It’s official. The last trading day is done, and 2015 is in the books. The financial headlines read like an epitaph: 2015 is the year the Canadian market dropped like a stone, posting the world’s third-worst decline — eclipsed only by Singapore (read: undone by the China bubble) and Greece, Europe’s economic basket case.

NATHAN DENETTE/THE CANADIAN PRESSCanada was home to the world’s third-worst market decline in 2015, behind only Singapore and Greece.

Canada down there with Greece as one of the world’s worst investment markets makes for good copy. Google it — you’ll find it fast becoming a staple of financial stories.

With all that Canada has going for it, how is that possible?

Start with what everyone knows. Everyone knows that Canada’s economy is strongly slanted toward resource extraction, and resource prices are down across the board. True enough, but why when copper is down 52 per cent from 2011 to today, should mining companies be down 90 to 99 per cent over the same period — literally trading for pennies on the dollar? Over at the London Metal Exchange, the copper stockpile is 45 per cent smaller. In a rational world, smaller stockpiles result in a rising price. But not for resource stocks on the Canadian exchange.

If you’re looking for a reason, try the end of the uptick-trading rule — a bedrock concept that helped lead the U.S. markets out of the Great Depression 80 years ago, and pulled Canada’s financial market up right alongside. The uptick rule eliminated the ability for predatory short traders to influence the downward pressure in a falling market. The rule simply changed the short trade from a manipulation to a bet on which direction the shares were headed. You had to borrow the shares you did not own before selling them, and could only do so on an uptick.

For reasons never fully explained to the public, regulators reacted to the aftermath of the 2008-09 financial meltdown by scrapping the uptick rule.

The change ushered in a kind of wild-west trading that no Canadian under 80 years old has seen in his or her lifetime. Here’s how it works. Speculators now don’t have to own a share of stock to sell short — they’re free to hit the bids with non-existent shares until the price crumbles. Eventually long-term shareholders feel pressed to sell, allowing the traders to cover their short positions — pocketing investor money that could have gone to financing the company. And the company goes on life-support without any regard to market fundamentals, or global demand for the resource in question.

The damage to the Canadian economy is considerable. Around 100,000 jobs have been lost directly and indirectly from the demise of the Venture Exchange — and who knows how many from the TSX itself.

How can we staunch the bleeding and help Canadian resource companies, not to mention the oil and gas and pharmaceuticals sectors, return to financial health? Restore the uptick rule.

Would that really help? Yes, and we don’t have to speculate. Look at the U.S., for instance. The uptick rule was ditched in 2007, fuelling the 2008-09 market implosion. Almost immediately, there was a huge clamour in the U.S. to reinstate the uptick. In February 2010, the SEC reinstated a partial uptick rule. The Dow has gone straight up since then — a gain of over 7,500 points.

Canada, for its part, moved in the opposite direction, starting down the regulatory road to repeal the uptick rule in early 2011.

Today, Canada’s equity market is scraping along the bottom. Look out Greece, we’re coming for you!

Why aren’t more people blowing the whistle on the disastrous impact of a financial world without uptick? Because it’s a great game for the traders, who can put their money on the table — and their thumb on the scales. Don’t expect them to enlighten the Canadian public about what’s going on.

The plain fact is that Canada shouldn’t be in the situation it’s in. The world population is growing, heading for 10 billion in 2050. Hundreds of millions of people are moving in the next generation up from subsistence living, and into some semblance of middle-class life — with all of the creature comforts that implies. The world needs more resources, and Canada is blessed to have them.

Let’s put the uptick rule back in place, to let the markets finance Canadian resource companies, to meet global needs — and lift Canada and her people to new levels of prosperity.”

 

Four ways to fix the ‘broken’ TSX Venture Exchange

New Financial Post article by mining reporter Peter Koven discusses the troubles of the TSXV and zombies. I am mentioned.

Link here:  Four ways to fix the ‘broken’ TSX Venture Exchange

Excerpt:

A broader and more esoteric concern is the potential damage done to the Venture brand after years of investor losses and falling liquidity. To many people, it simply isn’t as strong as it used to be.

One of those people is Tony Simon, co-founder of the Venture Capital Markets Association and a frequent thorn in the side of TMX management. His view is that the Venture’s primary strategy has been to maximize listing fees, and as a result, it has allowed too many low-quality companies to maintain listings.

Earlier this year, he called for a mass delisting of about 600 “zombie” resource firms that have negative working capital and no clear ability to create value for investors. He also said the Venture should not have allowed capital pool companies to proliferate so much and distract attention from more active firms.

“Let’s say you go to a restaurant and there’s 1,500 things on the menu, and if you’re lucky, only 50 per cent of them will give you diarrhea,” Simon said, in reference to the Venture.

“You’d be much happier going to a restaurant where they only have 10 things, but they stand behind them all. And if the prices were a little higher, you wouldn’t mind because they’re quality.”

Of course, investing in the Venture is high-risk by design, and most people aren’t as critical as Simon. But no one would dispute that a revitalization is a welcome idea.

Here’s why there are 600 zombie companies on the TSX/TSXV

44 comments for TMX Group, directors, auditors, and regulators

These 44 comments on TSX- and TSXV-listed natural resource companies, and the accompanying schedules, have been prepared with the objective of identifying some of the contributors to the many problems faced by junior exploration companies and their investors, and hopefully convincing those responsible that there is a better way to do things.

When close to 600 companies make a list because they clearly are non-compliant with Continuous Listing Requirements of the TSXV (Policy 2.5, Heading 2.1), it is reasonable to assume that a troublesome pattern has developed.

The comments are designed to give enough facts and generate enough ideas so that people who might jump to a quick conclusion have a chance to be exposed to possibilities that are not so obvious.

There are several targets:

  • Some will blame the companies, or at least their directors and promoters.
    Others will think it is obvious – TMX Group management and directors who have the power to demand compliance with, and an obligation to follow, their own rules but choose not to.
  • Some are going to take a hard look at the auditors and the Canadian Public Accountability Board and question whether true professional standards are being met.
  • Some will question whether the securities commissions are fulfilling their mandates.

Please note that all the people listed above make money out of the industry, even while the individual companies and their stakeholders absorb the losses.

All this might be seen as a recipe for a great Canadian financial horror story:

  • 600 non-compliant companies,
  • over $2 billion in negative working capital,
  • over $5 billion in questionable exploration assets,
  • illiquid markets,
  • impressively worded mandates from organizations that seem to exist for investor protection, and,
  • to use an old pun, investors getting the shaft.

Continue reading “Here’s why there are 600 zombie companies on the TSX/TSXV”