TSX Venture Exchange rules out mass culling of ‘zombies’

Despite the about some critics, a culling from the TSX Venture Exchange is not about to take place.

Venture president John McCoach confirmed that while the exchange is looking at every possible choice to “revitalize” its business design, full of delisting has been ruled out.

“We did look at that seriously,” he said within an interview. “We think there’s room to make our continued listings standards simpler. But because far as moving the bar up or down, we think it’s within the right place.”

The Venture has simply been mauled by the commodity price collapse and insufficient financing for junior resource firms. The S&P/TSX Venture Composite Index, despite rising 11 per cent this season, is down an astonishing 83 per cent from its 2007 peak.

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But the performance from the index masks the exchange’s much bigger problem. Countless companies have exhaust cash and stopped doing anything to create value for shareholders as capital for upstart resource plays has dried out in the last few years. These inactive firms are derisively known as “zombies.”



Critics the zombies really are a real problem, complaining they distract attention in the active companies and drag on the reputation of Canada’s capital markets.

Some even see them like a threat to investors. They feel TMX Group Inc., the owner of the Toronto stock exchanges, is not doing enough to delist such companies since it really wants to maximize listing fees with what has become an ever more competitive market.

“If we’re able to delist a lot of these zombies, it’s only going to help focus talent and focus investor money in the right assets,” said Trent Mell, president of mining finance firm PearTree Securities Inc. “If you do not flush the machine, then you’re going to prolong the pain.”

McCoach did not dismiss that type of thinking, saying the argument for mass delisting is “fair comment.” But he noted that it’s a minority view and said there isn’t evidence to aid that it could be a general benefit.

Even if delisting isn’t a priority, TMX knows things as they are isn’t acceptable for the Venture

The junior market community definitely prefers things as they are. Early this year, McCoach hosted forums across the country on “revitalizing” the Venture after TMX released a whitepaper full of proposals in December.



These meetings were largely attended by employees and financiers of junior companies, and, not surprisingly, they were much more concerned with issues such as short selling and listing costs than delistings.

Rather than undergo a mass culling, Venture management believe they have addressed the issue of inactive companies with the NEX board, a trading forum for companies that have fallen below the exchange’s ongoing listing standards.

The NEX serves as kind of a problem box where information mill given a chance to return into compliance to enable them to return to the main board. McCoach noted that companies still have to meet ongoing disclosure requirements to keep listings on NEX.

The NEX is a busy place, with 398 companies finally count. Trading has been halted or suspended in more than 1 / 2 of them.

Since the NEX’s launch in 2003, 388 firms have managed to get back to compliance and go back to the main board. That shows the model can function for many companies.

But for many NEX firms that are effectively shells, it’s hard to fathom coming back towards the main board within their current form.

One NEX company called World Organics Inc. has maintained an inventory even though it hasn’t filed any financial results since 2012. (It’s filed a mind-boggling 71 default status reports, that is impressive in the own way.)

But even if delisting isn’t a priority, TMX knows the status quo isn’t appropriate for the Venture.

The exchange’s “revitalization” plan contains 25 different initiatives made to boost its relevance. They fall under three categories: reduce costs, expand investors and liquidity, and diversify and grow the base of listings (which is still 70 per cent mining and).

Those are noble ideas, and they might be essential as TMX faces growing competition from the Canadian Securities Exchange and new entrant Nasdaq Inc.

McCoach said the majority of the 25 measures will be implemented in 2016. Some may bear fruit quickly, while others will take years to correctly judge. Diversification, especially, cannot happen overnight.

The recent cross-country town halls showed that the junior market community is broadly supportive from the revitalization plans. (Skeptics may reason that the current rise in gold prices is doing more to assist the Venture’s recent rise than anything TMX management could do).

But the city has some concerns which go beyond the revitalization measures outlined by TMX.

The biggest one seems to be predatory short selling, and that is from TMX’s control. Shorting is controlled by market integrity rules enforced through the Investment Industry Regulatory Association of Canada (IIROC).

McCoach said he’s done plenty of lobbying with IIROC and securities regulators regarding shorting.

One change he really wants to see may be the re-introduction of the “uptick” rule that will only allow shorting on an uptick in the stock price. IIROC eliminated the rule in 2012, arguing it didn’t have effect on price movement, and bringing it back is really a complicated process.

“Intuitively, (the uptick rule) makes sense,” Peartree’s Mell said. “The most vulnerable players in our market would be the small-cap or micro-cap companies. If there’s any type of liquidity, there is a small pile-on effect.”

The debate concerning the zombies and also the Venture’s overall revitalization plan’s not even close to over. But McCoach said he is pleased to see that people truly seem to care. His inbox has been filled with feedback, and the town hall events were packed. That alone is one thing of the rebuke to critics who feel the junior exchange is becoming irrelevant after the commodity crash.

“I honestly didn’t know when we would have 30 people show up at an urban area hall or 300,” he explained. “I was sure very happy to view it was the latter, not the previous.”

pkoven@nationalpost.com

Twitter.com/peterkoven