How do you make sure listed companies are not selling investors a fake bill of goods?
Over 200 years ago in Britain, investors happily bought shares in a company whose product was “yet to be revealed” – even to itself! Today, companies like this would be drummed out of business. But lots of perfectly legitimate companies offer little more than promise. Should these companies be allowed to sell shares to the public?
One of the biggest challenges facing regulators and stock exchanges is how to strike a balance between protecting investors and ensuring valid ventures have access to capital. The company that shows little more than promise today may deliver results tomorrow. Or, it could go out of business. If a stock exchange sets too stringent listing standards to help protect investors from potential business failures, a growing venture may never get off the ground.
The industry has responded with variable listing standards. The TSX Venture Exchange, for example, has standards that are more likely to encourage companies that are brand-new. The more senior exchanges are the Toronto Stock Exchange and the Montreal Exchange and stocks here tend to have been around for a while. If you are looking for a stock on the venture capital exchanges, be very aware that the company may have no track record. That means it’s going to be risky. If the stock is not listed anywhere, you have even less knowledge or reassurance. Look closely at the prospectus and be prudent!
Over and above setting listing standards, all exchanges in Canada require listed companies to disclose full information to shareholders and potential shareholders. This includes prospectus-type information for new issues as well as a requirement for continuous disclosure. If anything new happens that will affect the company’s business, the company is obliged to release that information widely so all investors have access to it.
The industry believes that full, plain and true ongoing disclosure is good preventative medicine. It won’t stop companies from going under, but it might stop you from sinking, too!