CALGARY - The Canadian Venture Exchange (CDNX) is clamping down on exploration companies re-inventing themselves as e-commerce firms, and making investment dealers more accountable for such deals, amid concern the trend is motivated by speculators seeking investor attention.
The changes follow a rash of reverse takeovers of dormant shells and business changes pushed through in recent months. The transformations are one of the engines behind the explosive increase in trading on the CDNX since this year.
Gerry Romanzin, executive vice-president for the CDNX, said the exchange is tightening the rules to ensure such transformations are motivated by sound business practices.
"We want to make sure that any change of business is done for the right reason, that there is a good business plan and that it's not flavour of the week," he said.
The rush to transform into dot- com firms has been led by junior mining companies, which have been out of favour with investors and -- as a sector -- have a long history of stock promotion.
Some observers say the changes look suspicious and appear to be motivated by speculators looking for investor attention without the know-how to run successful high-tech businesses.
"The way we see it, it's the old mining promoters that happened to catch a faster train," said one Calgary broker, who asked not to be named. "Some of us see it as a promotional play. There is a management team, a shell, and you just change the shingles. We're buying and selling air."
Mr. Romanzin said the exchange is stepping up its due diligence, and will make more detailed management checks and business plan reviews.
From March 1, the exchange will make investment dealers more accountable for the companies they sponsor.
For example, change-of-business transactions and reverse take-overs will require the same onerous reviews as those currently done for initial public offerings and capital pools, Mr. Romanzin said.
In addition, the exchange will conduct unannounced audits on dealers to ensure they have followed through.
Since January, 15 mining companies trading on the CDNX have applied to change their business or do reverse takeovers of dormant companies.
Last year, during the six months leading up to the merger of the Alberta and Vancouver stock exchanges that resulted in the CDNX, there were 15 reverse takeovers and 25 change-of-business transactions on the VSE.
At least 30 of these cases involved companies switching to Internet-based or related technologies, said Don Gordon, director of business development at the CDNX.
For instance: Bronx Minerals Inc. of Vancouver became Las Vegas From Home.Com Entertainment Inc., focusing on gambling via the Internet; William Resources Inc. acquired MagiCorp Inc., a private Toronto company developing a chain of high-tech entertainment centres; and Afrasia Mineral Fields Inc. took a stake in BroadcastMusic.com Inc. to become a Web-based broadcasting company.
Beng Lai, an investment banker with Jennings Capital Inc. who specializes in high-tech companies, warned investors to be careful with out-of-favour companies switching industry.
However, others say the rebirth of these companies is a cheaper and faster way for a new technology company to become publicly traded and the trend is creating a windfall for existing shareholders.
"Right now, there is a huge demand for these speculative junior technology companies. The quickest way to supply that market is to do these RTOs [reverse takeovers]," said Jeff Rath, a small cap analyst at Canaccord Capital Corp. in Vancouver.
"It's not about hard selling. It's because the brokers, the entrepreneurs in the financial community, see it as a way of suppling the market with what it wants."
Dorothy Atkinson, a mining analyst with IPO Capital Ltd. in Vancouver, said that, while some of the change-overs are surprising, companies in the mining sector have always been quick to change businesses in the past if faced with lack of investor support.
"To get shareholders some value they look to other ways of increasing their share price and at the moment there's no doubt that that lays in the Internet and technology stocks."
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