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(photo credit: Bloomberg)
Where should small-cap Israeli technology companies be listed? Take a close look at Canada and the Toronto Stock Exchange (TSX) group of exchanges, which provide an excellent gateway to the North American capital market for Israeli companies.
For small-cap technology companies (under $500 million market capitalization), NASDAQ is not always the place to be. The cost and complexity of complying with Sarbanes-Oxley ("SOX") has, until recently, effectively priced NASDAQ out of the market for some small-cap technology companies. In addition, there is sometimes a lack of capital market interest and support (research, sales and trading) for small-cap technology companies on NASDAQ.
Why Toronto? For starters, the TSX Group is the seventh largest stock exchange in the world with a market cap of $1.6 trillion, making it about half the size of NASDAQ. It is also an extremely deep capital market and a good place to raise public equity capital. For example, in 2006, the TSX was placed #4 in terms of total public equity dollars raised. The TSX Group is the #1 exchange in the world for the listing and financing of mining companies and the #1 exchange in the world for the listing of oil & gas companies.
Strength in technology - The TSX is the second largest exchange in the world (after NASDAQ) for the number of listings of technology and life science companies. The value of the technology sector on the TSX is approximately $60 billion. More than $19b. of public equity has been raised over the last 10 years for technology companies.
Liquidity - Liquidity is impressive in Canada. As of June 2006, the value of the trading of technology stocks in the TSX Group, on an annualized basis, was approximately $47b. or about 80% of the value of the sector. On NASDAQ, there was approximately three times this level of liquidity. But much of that liquidity is attributable to large cap highly liquid companies as opposed to small caps.
Long-term perspective - Of special interest to small-cap technology companies is the fact that Canadian investors tend to be long-term holders. They are less likely to sell a stock when there is the inevitable "hiccup" in performance or other market trends, unlike US investors.
International exposure to investors - Being listed on the TSX allows issuers to attract US and European institutional investors simply and cost effectively without having to comply with the requirements of SOX. Many US and European institutions are heavily invested in tech companies listed in Canada such as Research in Motion (wireless), Nortel (communications), ATI (semi-conductors), and Cognos (software) to name just a few.
Lower costs - The cost of going public is lower in Canada. This is driven by lower legal fees, accounting fees, listing fees and other costs. It costs only about $300,000 to $500,000 to go public in Canada (excluding underwriting fees) versus what is likely double that amount in the US. It has been said that in the US transactions costs are approximately 15% of the amount raised, whereas in Canada, they are about 10%.
Simplified legal framework and reduced barriers to entry - It is also faster and easier to go public in Canada because of the simplified legal and regulatory framework. Further, the ongoing cost of being public is also proportionally lower for the same reasons. Barriers to entry on the TSX are much lower as compared to NASDAQ; in contrast to NASDAQ, which has a minimum market capitalization requirement that can range from $8m.to $20m., a listing on the TSX can be accomplished for early stage companies with as little as $500,000 in net tangible assets on the junior exchange (TSX Venture), increasing to $10m. on the senior Toronto Stock Exchange (TSX).
Innovative listing programs - While an IPO is the traditional way to list on a stock exchange, the CPC Program, which is unique to TSX Venture, provides an alternative mechanism to go public through bringing together an experienced management team with a company in need of capital and management expertise. Under this program, a CPC, which is not an operating company, is created and listed through an initial public offering (IPO) (which can raise as little as $200,000 and as much as $2M) and then looks for a promising private company or asset to acquire within 24 months of listing (a Qualifying Transaction). Thus, an Israeli company could go public in Canada directly by merging with a Capital Pool Company (CPC) as part of a Qualifying Transaction, thereby entirely eliminating the market risk of an IPO failure. The shareholders may need to request a tax deferral ruling from the Israeli Tax Authority. Following such a transaction, as TSX Venture companies further grow their businesses they have the opportunity to utilize a streamlined process to graduate to the senior TSX exchange.
Solid regulatory regime - Despite this flexible structure, one should not assume that TSX Group is an unregulated market, as it is considered to have one of the most comprehensive regulatory regimes in the world.
Research coverage -In Canada, research coverage is more plentiful for small-cap technology companies. For example, a technology company with $50m.-$100m. in market cap has three research analysts covering it, on average. With a market cap of $100m. to $250m., on average, there are four analysts with coverage, and with a market cap of $250m. to $500m., there are 9.5 research analysts covering the company, on average. This compares favorably to companies of the same size listed on the NASDAQ.
Access to future capital - In Canada, there is great access to future growth capital at a reduced cost compared to the US. There are innovative mechanisms that reduce the cost of raising new capital and remove much of the market risk present with financing mechanisms in the US. There are also some innovative mechanisms that allow founders and principals to sell their position in a quick and inexpensive manner.
What about tax? Briefly, non-Canadian resident shareholders will generally not be taxed in Canada on dividends or capital gains from an investment in an Israeli company listed on the TSX. There may be tax in the shareholder's own country of residence. For example, Israeli resident shareholders will generally pay Israeli tax on such dividends and capital gains at a rate of 20% if they held under 10% of all means of control throughout the preceding 12 months (or 25% tax if they held more). Dividends from the profits of a privileged or approved enterprise may be taxed in Israel at a lower rate of 15%, generally. Canadian shareholders generally will be exempt from Israeli capital gains tax and can credit Israeli dividend withholding tax (15% under the Canada-Israeli tax treaty) against federal Canadian tax thereon, where applicable. Canadian corporations may enjoy "exempt surplus" rules in certain circumstances.
In summary, The TSX is a place to be for small-cap companies. It is a place where they can learn to walk before they run. And, when they are ready to run, the US market is just next door; there is a long tradition of great Canadian technology and other companies migrating to US exchanges when they are ready. And, in Canada, there is great respect for the strength of Israeli technology as well as a great understanding and affinity for Israel, generally.
As always, consult experienced legal, accounting and tax advisers in each country at an early stage in specific cases.
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Larry Jeremias is senior vice-president and head of Technology Investment Banking at Research Capital Corporation.
Henry A. Harris and Jason A. Saltzman are partners at Gowlings, a Toronto Law Firm. Both are in Corporate Finance, Securities and Public M&A and focus on assisting North American and foreign emerging companies in accessing the Canadian capital markets.
Leon Harris is an International Tax Partner at Ernst & Young Israel.