What it means
Early-stage businesses often need outside money long before they have the profits and size needed for a senior exchange. A venture exchange fills that gap by setting lower thresholds for listing, while still requiring disclosure and oversight.
Companies listed there are often called venture issuers. Listings are grouped in tiers based on size and maturity, with the top tier set for the stronger companies.
As a company grows, it can graduate to the Toronto Stock Exchange, which has tougher financial and governance standards. Many large Canadian companies began on a venture board and moved up later.
The exchange is especially associated with resource exploration, where companies raise money to drill for minerals or oil before they have any revenue. It also lists technology, clean energy, cannabis, and life sciences companies.
Shares are priced in Canadian dollars and often trade at low prices, with large share counts. For investors, the main features are higher potential returns and higher risk.
Venture issuers typically have limited operating history, less trading volume and larger price swings, so it can be hard to buy or sell large amounts quickly. Some have few financial reports as they have no revenue, and can fail completely.
Finance teams that work with these companies should be aware of the lighter disclosure rules, the need for frequent financing, and the dilution that comes with each new share issue. The exchange also has its own rules on raising capital, such as price limits on placements, which affect how deals are structured.
Currency and cross-border issues also arise. Because the shares trade in Canadian dollars, foreign investors take on exchange rate risk, and international finance teams should translate results and funding plans carefully.
In practice
Real-world examples.
Example
A gold exploration company with no revenue lists on the exchange and raises $5,000,000 to drill a new site. Investors buy shares in the hope that a discovery will lift the price, knowing that most exploration projects find nothing of commercial value.
Example
A software start-up with $3,000,000 in revenue lists on the exchange to fund growth. After three profitable years and a larger market value, it applies to move to the Toronto Stock Exchange.
Example
An investment fund holds a basket of 40 venture-listed companies. It limits each holding to 2% of its assets because the companies are volatile and some are likely to fail. The fund manager expects a few big winners to offset the losers.
Formula
Calculation
Market capitalisation = Number of shares outstanding x Share price
A junior mining company listed on the exchange has 40,000,000 shares outstanding at a price of $0.50. Market capitalisation = 40,000,000 x 0.50 = $20,000,000.
It raises $2,000,000 by selling new shares at $0.40, which is 2,000,000 / 0.40 = 5,000,000 new shares. The share count rises to 45,000,000, and existing holders own 40,000,000 / 45,000,000 = 88.9% of the company instead of 100%, which is the dilution. Existing holders therefore give up 11.1 percentage points of ownership, although the new cash may raise the value of what remains.Case study
Seen in the real world.
Cedar Peak Resources is an illustrative, fictional exploration company that listed on a venture exchange with 30,000,000 shares at $0.25, a market capitalisation of $7,500,000. The CFO planned two financing rounds to fund drilling.
The first round raised $1,500,000 at $0.20 per share, creating 7,500,000 new shares. After encouraging drill results, the price rose to $0.60 and a second round raised $6,000,000, issuing 10,000,000 shares at that price.
The illustrative lesson is that financing is the main business activity for such a company. The CFO tracked dilution carefully, since the 17,500,000 new shares meant that the original 30,000,000 shares were only 63% of the 47,500,000 total. The company reported this figure to the board at each financing so that the cost of raising money was always visible.
Watch out
Common mistakes.
- Assuming a venture listing carries the same standards as the main board, when the requirements are lighter and the risk higher.
- Ignoring dilution, when each new share issue reduces existing holders' percentage ownership unless they buy more shares in the same issue.
- Buying large amounts of a thinly traded share, which can move the price against you.
Questions
People also ask.
What is the TSX Venture Exchange?
It is a Canadian exchange for early-stage companies, owned by TMX Group and linked to the Toronto Stock Exchange.
How does a company move from the venture board to the main board?
It applies to graduate once it meets the senior exchange's size, profit and governance requirements.
Are venture shares risky?
Yes, they tend to be more volatile and less liquid than shares on senior exchanges, and some companies fail, so investors normally spread their money across many holdings.
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