Extending flow-through shares to the technology sector: The whys and the why-nots

If nothing else, opinion on extending the idea of flow-through shares to the technology/bio-technology sector – a theme that was the subject of a current column – is mixed.

Here would be the comments in one reader who likes the concept that, if implemented provides capital to companies and tax breaks to investors C with the hope being that the idea being developed provides large capital gains at some future date. That idea has been promoted as a means of diversifying the economy, a process that probably needs some type of government assistance.

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READER A. “As investment propositions, information technology startups have similar characteristics to junior mines. They are capital-hungry lotteries with virtual certainty of loss balanced by a remote expect dramatic riches.

“There’s clearly a nearby community with an appetite for that sort of risk, possibly justified with a faith in subject expertise. It’s long seemed regrettable that there hasn’t been a mechanism for tapping into the community, and extending its skills to supply investment capital for something other than rock-bashing.

“To the extent that it makes sense to inspire what is considered wild gambles, (because the collateral benefits outweigh individual losses), extending flow-through shares to startups would be a good development,” he explained.

JAY KELLERMAN. The managing partner in the law firm, Stikeman Elliott, recently wrote an opinion piece for MicroCap Review Magazine.

In that piece, Kellerman, whose practice through the years has focused on mining companies, writes from the similarities between the junior resource sector and the start-up technology sector. Those similarities include: both are based on the capability to own and exploit property; both have an insatiable appetite for capital; both of them are run by entrepreneurs, both of them are risky ventures and when successful, many of the founders see their companies sold to larger concerns, often prior to the commercialization of their assets.

Kellerman noted one possible difference: within the mining sector “title is usually very secure,” whereas with the technology sector property rights “are contained in the brains of those who leave the workplace every single day.”

As a part of his work, Kellerman has noticed another experience the technology sector, whether it is in and around Kitchener/Waterloo; the Ottawa area or perhaps in Vancouver.

And given the new government’s priorities on innovation/science/technology C Kellerman had a few suggestions for the tech sector, some of which will require time for you to germinate.

starting something similar to the Prospectors and Developers Association of Canada (PDAC) where investors could talk with management;Engage with the key federal ministries. Kellerman suggested that the tech sector could take a webpage out of the mining book “and engage the federal government around the idea of investor incentives such as a “technology flow through share”, where certain R&D expenses could be directly flowed through to investors.”

Kellerman made those suggestions around the expectation that “there could be some appetite along with other market participants, for example Canadian investment banks and perhaps the Toronto Stock market to sign up within the progression of this important Canadian industry.”

INVESTOR B. This B.C.- based investor had a bad experience with buying a labor-sponsored investment capital fund. “All they are doing with one of these things is find a reason to pay for the executives that are established to run this stuff outrageous annual salaries.” This investor asserted he spent over $50,000 “supporting this type of thing and today the shares are in a value of $3,000.” That isn’t a great outcome, for a product that is being phased out in areas.

In this investor’s view, “you don’t make things work unless there’s at least an opportunity of some reward. People are better off getting an upright market exchange with firms that are proven. Therefore if Ottawa is considering extending the flow-through concept to the technology sector, it presently has the benefit of the opinions of three Canadians.