Exclusive Interview: CSE CEO Richard Carleton on Growing the Exchange for Entrepreneurs

Equities Editors Desk  |

There has been a major shift in the Canadian capital markets in recent years. The progression has been driven by several major fronts. One is the significant correction in the natural resource market, which had been the bread and butter of the country’s extended boom into a world-class growth market. While this transition period certainly has presented a number of challenges, it has also forced the market to diversify and nurture various other promising high-growth industries. Another has been the expansion of Canada’s historically venture-friendly financial system to even earlier stage companies and entrepreneurs.

One exchange that really seems to be at the forefront of these converging trends is the Canadian Securities Exchange (CSE), which has been lauded for effectively providing issuers with lower costs and superior efficiency than its competitors. For an exchange directed at earlier-stage startups and entrepreneurs, this creates a considerable advantage for the CSE.

But for new issuers, it’s important to understand that going public isn’t the finish line. In many ways, it’s really the beginning and to that point, the CSE has focused on providing a support infrastructure that helps companies to better understand and communicate with the financial markets.

Equities.com had the opportunity to speak with Richard Carleton, CEO of the Canadian Securities Exchange to learn more about the momentum his exchange has built over the past year, key initiatives going forward to help and attract more issuers, and the major trends he’s watching in the industry.

EQ: What is the role of the CSE in the financial markets?

Carleton: The Canadian Securities Exchange is the exchange for entrepreneurs. Where we see ourselves positioned in the public capital markets in Canada as a place for early-stage Canadian companies, and in fact, for international companies as well, that are looking to raise money effectively through the Canadian public capital markets at low costs. We do this both for their primary raise and then subsequently provide a well-organized and efficient secondary trading system for their securities once they have listed.

EQ: The exchange has generated a lot of traction since you became CEO in 2011. What are some of the major milestones over the last few years that have really made the CSE a competitor on equal footing to the other exchanges?

Carleton: The exchange obviously had a long history before I became CEO. We date back to 2003 when we began operations here in Canada, and have hardcoded into our DNA from the outset a regulation model for our companies that takes into account all of the advances in communications technology, whether it's internet-based services, discount brokerages, social media, etc.

For all of these things, we focus on the disclosure record of the individuals and companies that are seeking to list on our exchange. That translates into the ability to conduct a public raise, get listed in a significantly shorter time to market—assuming that you meet all of the criteria that are set out in our exchange rules—at a lower cost for the company and the shareholders involved. For us to basically get to the critical mass and beyond where we are today, it took a number of things.

Obviously we had to become part of the trading infrastructure in Canada. We had to insure that the real-time market data was carried by all of the significant information vendors who serviced both the retail and the professional markets. We had to make sure that our trading system was accessible by all of the dealers operating in Canada, whether they're bank-owned, independents or local branches of the international dealer community. We had to basically prove to the financial community in Canada that we had the resources and capability to operate this exchange for the long haul.

In the last few years, the growth of the exchange that you noted, really began to accelerate. We achieved those milestones and have significant backing from our Chairman Tom Caldwell through Urbana Corporation, and Ned Goodman, who is our Deputy Chair through Dundee Corporation. Both of them are very well-respected and well-known figures in the Canadian public financial industry. Their endorsements, both through direct participation on the Board and with their investment in the exchange, really seems to seal the deal for a number of people. The combination of the prominent backing that we have along with the model that people like, and of course our well-earned reputation for high levels of service, really seems to give us the boost that we've experienced over the last two years or so.

EQ: You mentioned Integrating CSE into the infrastructure, and you've got done a lot on the institutional side. What are you doing to also integrate into the retail side? What are some initiatives that you're focused on, both in the near term and long term?

Carleton: There are few things across the board. We're now being asked by our issuers and by some people who are active in the junior capital space to improve access to our market from the United States, from Europe and from Asia. So having effectively completed the task in Canada, we're now looking to reduce the friction for investors looking to trade our stocks from the US, Europe, and Asia. We’ve done a number of things with international dealers and access providers for trading purposes to improve that access. Still, there are number of things yet to be done.

We’re also looking to improve the liquidity profile of these companies that are listed on the exchange. To do that, you'll be seeing some initiatives on the pricing side from us. We'll be looking at changing the prices that we charge dealers to trade on the exchange, and we're also looking to build partnerships with global market-making firms that are looking to make markets in Canadian stocks, which for one reason or another they may not have done all that extensively over the years but are now looking to bring the market-making models that they’ve pioneered in other markets and introduce them into the Canadian marketplace. In the coming months, you'll be seeing a number of announcements from us on that front as well.

EQ: That is very important because obviously liquidity is a major issue when you talk about early-stage companies and companies in the junior space. Is there any particular model that you feel the CSE can model after that is working effectively?

Carleton: That is a tough one because I think you'll never talk to a trader who says that there is enough liquidity on any exchange, regardless of the size of the stocks where their listing is oriented. But again, as I mentioned, what we're looking to do is to combine a variety of different market-making methods on exchange and potentially off exchange to help maximize the amount of capital that is available for longer-term investors to trade against. What it takes is people that are prepared to commit capital in a market-making setting to take on the positions, and then ultimately trade out of them as a market maker. That is something that you will see us talking about quite a bit over the next several weeks.

EQ: As you mentioned, there are a lot of prominent industry figures involved with the CSE. You mentioned Tom Caldwell, Ned Goodman, and yourself, as well. Can you tell us more about your background as well as some of the major backers of the CSE?

Carleton: Like many of the staff members here at the exchange, I worked at the Toronto Stock Exchange earlier in my career for a number of years. We were in the enviable position of being able to handpick a number of individuals with particular areas of expertise, whether it's in the listing area, the market surveillance or market regulation area and in the technology space. As I say you'll see from the bios of many of the older folks around the organization we do have a background with the Toronto Stock Exchange.

From a shareholder perspective, we have a number of dealers who I’m not at liberty to disclose because as a private company our shareholder list is confidential. However, I did mention Dundee and Urbana because they, as public companies, did in fact issue press releases indicating that they've taken out an equity position on the exchange. Generally speaking, the ownership is a group of dealers, small institutions and individuals who have a background in the public capital markets in Canada. It’s a very highly knowledgeable and engaged shareholder group.

EQ: There is growing recognition across the industry that young companies need to be nurtured, and that removing a lot of the regulatory and financial hurdles that come with accessing the capital markets is essential for the future of the economy and the market. From your point of view, how significant is this for exchanges like the CSE to tackle?

Carleton: We have a really big advantage in that we're located in Canada. What that means is that the overall regulations of public companies under the Securities Act is far less expensive, less legally risky and less time consuming. We don’t have thousands of class action securities lawyers launching greenmail lawsuits every time you issue a press release. Overall, it's a significantly lower burden and it doesn’t matter what exchange you're listed on, it’s a lower burden to be a public company in Canada than it is in the United States. We start from that advantage to begin with, and as an exchange, we purposely do not engage in a business merit review of the company. Instead, we focus on is the disclosure record.

To put in simpler terms, we don’t believe as regulators that we're smart enough to be able to pick the winners and losers from a business perspective. That’s the role of the capital markets to decide. Our role is to make sure that there is as much timely and accurate information about the company available to the investors who are basically voting with their buy and sell orders for the particular company. As I mentioned before, that translates into a faster and a lower-risk path to raising public capital than on exchanges where a full-blown business merit review may be conducted.

EQ: Historically, the Canadian markets have been heavily focused on the resource sector. Given that this particular market has endured quite a difficult time in recent years, have you noticed a rise in other industries that have helped to make up for that drop?

Carleton: It's fair to say that the overall number of companies that have been created in Canada is down from the commodities boom of a few years ago. And it is absolutely fair to say that there has been a shift away from the mining and oil and gas-related, natural resource-based companies to much more focus on technology companies. When I say technology, it’s obviously a broad base but it’s a lot of software development, medical devices, Life Sciences, biopharma-based companies, etc. that is getting much more focus. In fact, I think about 50% of our companies in the last year fall into this—again, broadly speaking—technology sphere.

EQ: Does this help to change the perception of the Canadian markets at it relates to the investment community because they can view the financial markets in Canada as a much more diverse offering as opposed to just predominantly resource companies?

Carleton: That is absolutely right. The other issue here is that we don’t have as well developed a private equity and venture capital model for funding the technology stories that exists in the United States, for example. We’re very active in encouraging entrepreneurs in that space to look at public capital raise as an alternative to private funding. To that extent, we're competing with venture capital and private equity and to do so we've got to deliver on our promise of lower cost of capital and few public company headaches in managing the firm.

That can be a tough sell in some cases because there are obviously significant requirements and obligations to being a public company, but from our perspective it does appear that the independence that also comes from being a public company really helps people forge their own way. The company's founders and entrepreneurs have an opportunity to really take the company in the direction that is in line with their vision.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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