TMX Group, which owns and operates the Toronto Stock Exchange (TSX) and TSX Venture Exchange (TSXV), has launched TMX dealLINX, a new automated private placement platform that aims to help companies issue securities and raise money more easily.
The move follows a 57 percent year-over-year increase in total private placement value on the TSX and TSXV last year, according to the TMX-produced December 2020 MiG Report, which collects and summarizes data from both exchanges.
“TMX dealLINX is a game changer as it potentially solves two major problems.”
–Daniel Tut, Ryerson University
TMX claims its new dealLINX platform will help companies raise capital faster and more cheaply by reducing their compliance risk and administrative overhead. The financial services company launched the automated platform earlier this month, targeting both private and public companies that raise capital via non-brokered private placements.
“We know that resources are always stretched and with TMX dealLINX, issuers can access capital more efficiently through private placements and free-up senior resources so they can focus on their growth ambitions rather than administrative tasks,” Claire Johnson, president and CEO of TSX Trust told BetaKit.
TMX dealLINX is backed by TMX-subsidiary TSX Trust, an OSFI-regulated trust company. The new platform is powered by Vancouver-based investment software provider Katipult. It provides online tools and “enhanced user experience” to help companies raise funds, control expenses and manage distribution, collaboration, and compliance.
The total value of private placements issued on the TSX and TSXV rose to $14.54 billion CAD in 2020, compared to $9.28 billion in 2019, according to the MiG Report. During this time, private technology placements also increased by 41 percent, rising from $504.5 million in 2019 to $711.5 million in 2020.
Daniel Tut, assistant professor of finance at Ryerson University, attributes this rise to COVID-19 and the reduction in supplementary public offerings, which decreased 24 percent.
“Private placements have become an attractive means of raising equity financing, especially during this ongoing pandemic,” Tut told BetaKit, adding that a significant percentage of equity funding that might have otherwise been raised through an IPO in previous years was secured with private placements.
At the same time, Tut noted that the total number of issuers and the number of financings on the TSX and TSXV in 2020 increased by only one percent and 18 percent, respectively. He said this suggests the majority of last year’s increase in total private placement value was driven by “a few larger and relatively well-established firms in the technology and financial sectors.”
“This is not surprising as the pandemic has accelerated adoption of fintech and digital banking, making firms in these sectors very attractive to sophisticated investors,” he said.
According to TMX, dealLINX will “reduce money flow friction,” allow companies to accept funds from retail and institutional investors, and give users “real-time visibility into deal progress.” It automates the subscription process, digitizes deal distribution, provides end-to-end cash management services, and offers detailed deal reporting to satisfy regulatory requirements, storing associated documents securely on the cloud.
“Historically, raising capital via the private placement route has been a manually-intensive process consuming a tremendous amount of administrative resources,” said Johnson. “Automation brings efficiencies and cost-saving benefits to the capital-raising process.”
“TMX dealLINX is a game changer as it potentially solves two major problems in raising capital via private placements, especially for small firms and for startups,” said Tut.
The first is “the matching problem,” the difficulty companies face in securing the ‘right’ investors. The wrong investors can sometimes lead to conflicts over control “that might adversely affect the long-term trajectory of the firm,” said Tut. He anticipates dealLINX could make it easier for companies to find the right investors. The second is regulatory compliance, which dealLINX standardizes.
“Historically, raising capital via the private placement route has been a manually-intensive process.”
–Claire Johnson, president and CEO of TSX Trust
“I expect that in the immediate future, dealLINX will be a very attractive platform, especially for young, small and tech startups [looking to raise] external equity financing via private placements,” said Tut, who also expects it will bring “much needed publicity” to private placements in Canada.
Over the last four years, the total value of tech private placements per year on the TSX and TSXV has steadily increased, rising from $371.8 million in 2017 to $711.5 million in 2020. During the same period of time, the total value of overall private placements per year on the TSX and TSXV has fluctuated. Last year’s $14.5 billion figure directly follows a four-year low of $9.3 billion in 2019.
According to a CIBC Asset Management report on the private placement landscape in Canada, distributing securities through a private placement is often more straightforward and cost-effective than going public, because the process involves a lower regulatory burden, as only annual financial statements are required to be audited and issued to invested parties, rather than the entire market.
Private placements generally target a limited number of accredited investors, including large financial institutions and asset managers, and involve lower issuance and administrative costs, because they do not require underwriting or a prospectus.
Tut said private placements are typically a suitable alternative for small firms and tech startups with “significant growth opportunities” that want to raise capital but don’t possess the track record to conduct a successful IPO or SEO. He also noted the suitability for larger firms that need short-term, immediate financing for ongoing projects. Private placements also allow companies to avoid constant market scrutiny and protect future growth options, he added.
There are also some possible risks associated with raising capital through private placement given that shares in private placements tend to be sold at a discount, “which dilutes the value for existing shareholders,” said Tut. “Young startups [also] risk giving up a significant fraction of ownership and control to investors,” he added.
According to Johnson, for companies, another disadvantage might include access to a smaller pool of potential investors. For investors, she said, risks could include “limited liquidity of private securities and the absence of due diligence done by a dealer.”
Long-term, if a firm fails to meet target financing through private placements, it might be harder for them to conduct a successful IPO or SEO, “as it signals to potential investors and the market that the firm might not be in good financial health as it cannot attract ‘smart money via private placements,” said Tut.
Three Canadian tech companies recently raised financing with private placements: Toronto legaltech Dye & Durham ($225 million), which went public last July, as well as Vancouver’s WeCommerce ($60 million) and Toronto healthtech Think Research ($33 million), which both went public last month.