The Canadians are coming.
As America's economic clout has sagged amid a huge balance of payments deficit (much of it from imported oil) and borrowing to finance wars in Iraq and Afghanistan, our neighbors to the north have fared better.
The Canadian "loonie," for years worth a lot less than a buck, today is worth slightly more.
To add insult to injury, an increasing number of U.S.-operated companies are listing their shares on the Toronto Stock Exchange or its sister, the Toronto Venture Exchange, for small-cap companies.
From Duluth Mining, a $200 million market value copper-nickel exploration firm operating in northeastern Minnesota, to Rapid Brands of Chanhassen, a toner-cartridge refill franchiser, increasing numbers of U.S. outfits have found a financial home in Canada.
Patrick Donahue, vice president of corporate finance at Northland Securities, which raised millions of dollars for Duluth Metals and Franconia, another exploration firm on the Iron Range, said large investors made the companies promise that they would avoid a U.S. exchange listing for several years because of the large cost of complying with the federal Sarbanes-Oxley Act. The costs of compliance, which involves extensive auditing procedures and process documentation, hit harder on smaller companies.
"For a small company of $50 million or less in market capitalization, Sarbanes-Oxley is another $1 million in expenses, and the investors would rather they spend it on the business," Donahue said. "Moreover, there's a big public misconception in northern Minnesota that all these foreigners are coming in. They are Minnesota companies as far as operations go. The people and assets are here. About 70 percent of all the mining and [energy] exploration firms are on the Toronto exchange."
That's sweet music to executives of the Toronto Stock Exchange (TSX), one of the world's 10 largest but still smaller than the New York or Nasdaq exchanges in the United States.
The execs were in Minneapolis this week to woo clients, particularly for the small-firm-oriented Toronto Venture Exchange.
"We talked about private placement or a public offering before going public last year," Rapid Brands CEO Roger Block said. "Sarbanes-Oxley compliance would cost up to $800,000 for us. The level of liability for officers, directors, accounting and legal firms is elevated, and it's an administrative burden.
"We went public through Black Mont Capital of Toronto. The due diligence was more than for a private company, but the cost of listing and related compliance is only about $100,000 a year for us. We did three meetings and raised $4 million. We are a U.S.-based company, but we had to incorporate in Canada. It's been a positive experience. And we have liquidity for our stockholders."
Sarbanes-Oxley was the 2002 regulatory response to the boardroom scandals that shook U.S. markets in the wake of the Enron and WorldCom book-cooking scandals and securities industry frauds.
As usual, after regulators had fallen asleep at the switch, Congress responded with what some consider an overly burdensome remedy.
"The regulatory framework of the [Toronto exchanges] is really sized to the size of the company and proportionate regulation," TSX Group Chief Executive Rik Parkhill said. "We require what is essential and necessary. We require CEO and CFO certification of the financials. But we don't require outside auditor attestation on internal controls. The U.S. law is very prescriptive. In Canada, corporate governance speaks to the principals of disclosure."
In short, TSX officials didn't blindly follow Sarbanes-Oxley into the detailed minutiae that cost of lot of money. And more rules and regulations are not going to stop a crooked CEO anyway.
The Canadians are particularly proud of their small-cap venture exchange, compared with the unregulated pink-sheet market in the United States.
"We admit these companies early in their development," said Kevan Cowan, president of TSX Venture. "We have right-size, proportionate-size regulations. The pink sheets and over-the-counter markets in the U.S. have none. It goes from pink sheets to Nasdaq. We are an alternative for a growth company looking for an alternative to private financing."
U.S. customers account for about 40 percent of the orders placed on the two Toronto exchanges.
Neal St. Anthony • 612-673-7144 • email@example.com