When Hive Blockchain Technologies Ltd. was looking to tap into the cryptocurrency fervor by going public, Canada's junior stock exchange was the obvious choice. The bar for listing was low. Retail investors, used to the rise and fall of penny stocks, were eager for the next hot thing. To help ensure a spectacular debut, Hive paid online promoters more than $750,000 plus options to sing the stock's praises.
"Our top stock suggestion for the history books!" gushed Daniel Ameduri, president of Future Money Trends LLC, which was paid to recommend Hive. "Quarterly filings from Hive could end up being big events, much like when Apple discloses its quarterly iPhone sales."
It all worked like a charm. Vancouver-based Hive, a cryptocurrency miner backed by mining maverick Frank Giustra, more than tripled on its first day of trading and would soar as much as 2,157 per cent. It hit a market value of $1.9-billion last month, making it one of the largest blockchain-related companies anywhere.
Canada, a bastion of financial stability with some of the world's soundest banks, has become a launchpad for the next big thing -- from lithium stocks to 80 marijuana start-ups and now bitcoin miners. The easy listing rules on the country's junior exchanges have sparked some early-stage winners like Hive and made quick millionaires as stocks soar.
Yet they can also open the door to blatant stock promotion, murky disclosure and spectacular volatility.
Liberty One Lithium Corp., a Vancouver-based penny stock tapping investor demand for the metal used in electric car batteries, soared 250 per cent in October thanks in part to paid promotion. The stock promotions by Liberty and others led to a tightening of rules by the OTC Markets Group, the U.S. exchange where Liberty One trades. Liberty One, which has dropped by almost two thirds since its October peak, couldn't be reached for comment.
In October, West High Yield (WHY) Resources Ltd., a tiny magnesium explorer in Calgary, surged almost 1,000 per cent in one day after it said it sold a mining asset for $750-million, or 46 times the value of the company. The financing fell through and the stock plunged when a five-week trading halt was lifted, wiping out $194-million in shareholder value.
"The long and short of it is there's a lot of scope for potential problems," says Douglas Cumming, a finance professor at Toronto's York University, who has studied Canada's exchanges. Rule of thumb, he says, the bar lowers with each hop from the New York Stock Exchange to the Nasdaq to the Toronto Stock Exchange. "And then it really drops off going to the Toronto Venture Exchange."
While Hive has been a hit with investors, the company's paid promotion, though legal, wasn't fully disclosed by the company and promoters. And just days before Hive got started by taking over a listed shell company in June, millions of shares in the shell traded hands without a disclosed price, as required by securities rules. Hive says it was a private transaction involving a predecessor company, and that it meets all disclosure requirements.
Hive fell as much as 22 per cent in the first half hour of trade in Toronto and was down 13 per cent to $3.16 at 10 a.m. after bitcoin plunged for a fourth day to about $12,000.
Two features make Canada optimal for overnight sensations and crashes: easy listing requirements and hundreds of "zombie" shells that are already on the exchange providing market access via reverse takeovers and other backdoor shortcuts to listings.
"It's not that our listing standards are lower, but they're tailored to those companies that are still in that venture stage and growing," said Brady Fletcher, who heads the Toronto Venture Exchange.
The TSX Venture's mining and oil and gas companies don't need to show any net tangible assets, earnings or revenue. Other sectors including industrial, technology and life sciences companies have to show net tangible assets and a "reasonable likelihood of revenue within 24 months."
Many fail, and over the years have spawned a graveyard of companies that do little more than pay their listing fees. The TSX Venture has a separate board, called the NEX, where about 328 companies that have fallen below the venture's listing standards trade, making fertile pickings for RTOs.
RTOs and other shortcuts to listings using shells don't require a full securities commission review. They dispense with the weighty prospectuses vetted by regulators and scoured by investors for potential pitfalls. Usually cheaper and faster than an initial public offering, RTOs have been used 265 times on the TSX Venture since 2001. By comparison, there were just 49 over the same period on the Nasdaq.
Reverse takeovers are "arguably the most efficient way to test the capital markets," said Fletcher. "It allows entrepreneurs to see if there's investor appetite in them being a public company" without all the upfront costs associated with an IPO.
Some of Canada's biggest companies have been built using the RTO, said Hive Chief Executive Officer Harry Pokrandt in an email. "It remains a useful method to quickly build and efficiently raise capital for major new companies, such as Hive."
Canada's widespread use of RTOs makes it an outlier. The U.S. Securities and Exchange Commission adopted new rules in 2011 that made it harder for private companies to use them, and the U.K.'s Financial Services Authority took steps in 2012 to close loopholes that had allowed some ineligible companies to list that way.
This approach has allowed dozens of companies to tap into the hottest corporate plays. The combined market value of Canada's marijuana stocks has soared to $20-billion, while the 19-plus blockchain and bitcoin-related firms are worth about $3-billion. GMP Capital Inc., an investment bank, said it expects as many as 50 cryptocurrency listings in Canada next year.
Hut 8 Mining Corp., another Vancouver-based bitcoin company, plans to debut on the TSX Venture Exchange next month via a shell listing.
"The benefit of a reverse takeover is that you can literally take a back door onto the exchange'' without dealing with regulators, Chief Executive Officer Sean Clark said in an interview.
Hive's case, meanwhile, shows how quickly a company in Canada can leverage the latest stock craze. Hive listed about three months after announcing that it had found its shell in Leeta Gold Corp.
Vancouver-based Leeta announced a pact for financial advisory services with Mr. Giustra's Fiore Management & Advisory Corp. on June 6, followed days later by its reinvention as Hive.
Prior to that, on June 2, two existing Leeta shareholders sold 29 million shares and 27 million warrants, while 34 million warrants were exercised. It's not clear what prices were paid by whom for the Leeta shares as they weren't disclosed. Canada's early warning disclosure rules require the sellers to say how much they were paid in such deals, as they represented more than half the outstanding stock, including warrants.
"There are some gaping holes in disclosure," in the Leeta-Hive transaction, said Rob Bruggeman, a former research analyst and principal of Alpha Advisory Services Inc., which consults for small miners.
The Leeta shareholders' sales were private transactions, not Hive's, Mr. Pokrandt and Mr. Giustra said. As far as they are aware, "all proper insider filings have been made," they said in separate emails. Former Leeta CEO John Brydle couldn't be reached for comment. The British Columbia Securities Commission said it doesn't comment on specific filings.
The involvement of Mr. Giustra, a prominent figure in Canadian deal making, was enough to prompt excitement about Hive on stock boards. The company partnered with the builder of the world's largest miner of ether, owns crypto mining assets in Iceland and has raised more than $200-million, says Mr. Pokrandt.
Hive's paid promotion may also have helped. Hive entered a three-year agreement starting Sept. 1 for "marketing services" with Future Money Trends, paid for with 1.3 million stock options and $1-million in cash, according to filings and disclaimers.
In the first week of trading, Hive shot up more than 500 per cent as nearly a dozen articles streamed onto three websites, exhorting readers to buy the stock.
Paying for promotion isn't illegal in Canada or the U.S. as long as the payments are disclosed and the content is accurate. Hive's Pokrandt said the agreements with Future Money Trends were filed as required with the exchange. No breakout of the $1-million cash payments to Future Money Trends appear in its filings, only the stock options. Mr. Pokrandt said in an email that $500,000 was expensed in the September financial statement and $500,000 will appear in December.
Mr. Cumming at York University says the light touch to listing and regulation come with a cost. The quality of companies that list on the TSX Venture through RTOs "is really low on average," he said.
"It begs the question, why do people ever invest in these Venture Exchange RTOs?"
His answer: "A preference for lottery tickets."