Five-Cent Financings
Last month the TSX changed the financing rules for junior companies, creating a special class of capital raises at below five cents per share for companies in trouble.
I had a very interesting conversation with a senior market participant. I argued that in weak markets like the one we are currently in, I prefer to see companies shut down and reverted back into shells. I would like to see 20-30% of the junior companies shut down. He argued the market is so weak that if the exchange did not change the rules, some good companies would die alongside the bad companies.
I agree that the market is completely shut down for many juniors, but we also have a significant number of private companies that could replace the sub-five cent players in the market. A good company should be able to do a $0.05 financing with a $0.075 warrant exercisable for two years.
Weak companies spend 20-40% of their market caps in exchange fees, lawyer fees, and audit fees. There should be a point where the plug is pulled and the company is either restructured (a rollback) or put out of its misery (a delisting). A company with 150 million shares outstanding at $0.02-$0.03, no resource, and $250k-$500k per year of overhead needs to make changes.
If we let the weaker companies go out of business, we can put more focus on healthy companies. On the other hand, the stock exchange makes significant fees from zombie companies, so it will not give up its sugar rush with any speed.
Comments
Hi Benjamin - this is a great article I would like to use it for my blog. Hope you don't mind.
Hello Antonio- I am glad you enjoyed the article. Feel free to repost it on your blog. We would love to track all financings, including equity based financing, but our biggest problem is dealing with the different disclosure rules and regulations. Please pass along the link and I look forward to reading your blog.
As the crowdfunding industry evolves, it may be a good idea to track equity based financing as well. Watch Second Market, broker dealers, as they continue to develop the private company secondary market. This is NASDAQ being reinvented. More Facebook investors made money while they were trading at the private company marketplace.