It’s nearly June, 2014. Where are all the big TSX tech IPOs? By now, many expected to see at least one of Hootsuite, Vision Critical, Desire2Learn, Shopify or BuildDirect go public. With the innovation sectors pacing the markets, it seemed to be a layup.
As we wait, Wellington Financial’s Mark McQueen is beginning to think the promise may simply not be fulfilled.
“I’m becoming more convinced by the day that there isn’t going to be a raft of IPOs, after all,” said McQueen in early April. “Certainly not an onslaught. I’d expect there to be a couple names hitting the TSX market this fall. But that’s the extent of it. The problem is simple: the media coverage has centered on the prospects of five firms that John Ruffolo and I touched on at the Cantech Letter conference in January and my gut tells me that most of them are looking southward, to the NASDAQ.”
Every month, however, we’re seeing new listings in the innovation sectors and they’re happening through a process that still isn’t very well understood, even sometimes by the business press. It’s a reverse takeover. You can usually spot one when the Twitter-verse lights up with comments like “Why is a mining company merging with a social media company!?” (or SaaS, or medical marijuana, or 3D printing, take your pick). The short answer is, “they aren’t”.
What they are doing is being acquired by a “shell” company. The former business of that shell company, which might have been about nickel or uranium prospecting, is no longer viable, so the vehicle looks to acquire something that is more palatable to the market’s current tastes. The shell will then change its name to that of the new business. This dance will continue, presumably, in seven or eight years when technology is no longer in fashion and XYZ Tech Co. will once again become XYZ Mining Co.
But for now, the rush to innovation is on. A typical scenario happened last November when Calgary-based Primary Petroleum Corp. acquired Keek, a social networking app best known for the fact that Kim Kardashian used it. Primary Petroleum changed its name to Keek in March, to the relief of its shareholders.
“We are here to live another day. It’s a detour but great for our shareholders as we enter a new business more in favour with investors,” said Mike Marrandino, Primary’s CEO.
This scenario has played out in the innovation sectors eight times already this year, with names like OneRoof Energy Group, Tweed Marijuana, Revive Therapeutics and Tinkerine Studios going public through vehicles with names such as LW Capital Pool Inc., White Bear Resources, and Carlaw Capital IV Inc.
The number of innovation sector IPOs since Avigilon’s wildly successful offering in late 2011 remains curiously low, given that names such as Ottawa’s Halogen Software and the more recent Lumenpulse were reportedly vastly oversubscribed.
Last year, there were 17 innovation companies that went public through a reverse merger or capital pool qualifying transaction (capital pools are a remnant of the old Alberta Stock Exchange, they see investors “pool” funds and look to take a company public through a qualifying transaction in the already capitalized shell) including Spectra7 Microsystems, Magor Corp. Pediapharm and Pivot Technology.
Tinkerine Studios’ VP and CFO Martin Burian, a former exec with brokerages Haywood and Canaccord, says the $3.1-million the company was able to raise was simplified by the decision to go public through a reverse merger.
“We went the RTO route as it let us been in control of our capital raising by doing a concurrent private placement,” says Burian. “Using this method, and being a topical and high growth tech company we were able to access both institutional and individual investors ourselves. With the venture capital markets in Canada currently a bit thin, this was an advantage. I would not expect the cost and time frame to be materially different had we gone the IPO route.”
While reverse mergers are normally typified by companies like Tinkerine that are earlier stage than those that choose formal IPOs, it doesn’t preclude them from having success. In 1997, a small company in Milton, Ontario came public through reverse takeover of a publicly listed shell, allowing it to raise a relatively meager $10 million. That company, which was known as Systems Excellence became SXC Health and then Catamaran. Today, with a market cap of nearly ten billion and annual revenue of almost $15-billion, it’s Canada’s second most valuable innovation sector stock.