Trading has started on the Canadian Trading and Quotation System (CNQ), a new electronic market for unlisted stocks. The trading began July 25 with nine dealer members on the market.
The CNQ is providing a market that combines auction and market-maker trading to maintain liquidity in small-capitalization stocks. Exchange-based trading of shares in small venture companies has been beset by episodes of poor liquidity, and the backup provided by a securities dealer making a market in a company’s shares is expected to make trading faster and easier.
The dealer lineup consists of three bank houses, BMO Nesbitt Burns, Scotia Capital and TD Securities, and six independent firms, Byron Securities, Canaccord Capital, Haywood Securities, Jones Gable, Octagon Capital and W.D. Latimer. A few more dealers are considering taking out membership.
Members of the system must also be members of the Investment Dealers Association, and the market is overseen by Market Regulation Services, the Toronto Stock Exchange’s market-surveillance provider.
The Canadian Dealing Network, which formerly provided a market for unlisted securities, shut down operations in October 2000, after an agreement divided the securities-trading market among the Toronto, Montreal and (then) Canadian Venture Exchanges.
Companies that qualified for listing on Tier 3 of the Canadian Venture Exchange were invited on to that board, but those that could not qualify, and companies that did not want to go to the expense of maintaining a Venture Exchange listing, were shuttled to the Canadian Unlisted Board, which provided trading reports to the Ontario Securities Commission but did not release prices publicly. Some Tier 3 companies on the Venture exchange found it difficult to maintain liquidity on an auction market as well.
Interest in a new market that would not operate as a pure auction exchange grew, and by late 2001, a group led by investment banker Ian Bandeen, securities lawyer James Boyle, and former Toronto Stock Exchange vice-president James Gallagher had approached the Ontario Securities Commission for approval to run a small-capitalization market that would combine auction and market-maker trading and allow market transparency. “We got a lot of encouragement from the mineral-exploration sector,” says CNQ president Robert Cook.
To be eligible for trading on the CNQ, a company must be a reporting issuer in Ontario and file a “Quotation Statement” — prospectus-level disclosure that resembles an exchange listing statement or the Annual Information Form required by securities regulators. This month the Ontario Securities Commission requested public comment on a proposal to allow reporting issuers from British Columbia, Alberta and Quebec — all provinces with similar reporting requirements to those in Ontario — to list on the CNQ.
There is a general requirement for an issuer to have a 500,000-share public float worth at least $50,000, making up no less than 10% of the total shares. There must be at least 150 public shareholders, and they must have at least one board lot of shares.
Companies in the mineral-exploration business need either title to or an agreement to earn an interest in a mineral property that has been previously explored. The company has to provide an independent report recommending further exploration, which meets National Instrument 43-101 standards.
Once on the board, the issuer must remain in good corporate standing and in good standing as a reporting issuer, and file the documents required by provincial continuous-disclosure regulations on both SEDAR (the central filing site operated for the provincial Securities Commissions) and the CNQ’s own web site. There is also a monthly requirement to file a certificate of compliance.
About 30 companies have applied for trading on CNQ, a third of which are mineral explorers. So far,