Going to the broker, or not

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Published: October 24, 1996

SASKATOON – The prairie agribusiness sector appears ready to dive into capital pools found on the country’s stock exchanges, say a Calgary-based investment counsellor and a Saskatoon lawyer.

Elizabeth Nash, securities law specialist in Saskatoon and Jim Aronitz, president of Hemisphere Capital Corp., an investment portfolio management service, told the annual meeting of Ag-West Biotech Inc. last week that public ownership has great rewards, but also takes a lot of work.

Agriculture has lagged behind other sectors of the economy, such as mining, in raising money through share offerings.

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“I was recently at a mining conference and it was fascinating to see literally hundreds of small, start-up Canadian companies that are raising public equity and are exploring all over the world,” Aronitz said.

Entrepreneurs in agriculture have been distrustful of capital markets in the past and often turned to government financing for expansion, he said.

But things are changing.

Saskatchewan Wheat Pool’s decision to go public made a big splash and a handful of agriculturally related small companies are also swimming in these unfamiliar waters, he said.

The obvious benefit to going public is access to money. Aronitz called this shareholder money “patient” capital.

“A lot of companies don’t see a lot of turnover on their stock. Investors are there for the long term,” he said.

A publicly traded corporation also has a better image and recognition than most private companies, he said.

The disadvantages include the cost. Developing the document used to sell the shares, called a prospectus, and retaining legal and accounting expertise is expensive. Also, management will wind up spending a lot of its time addressing the requirements of provincial securities commissions and the chosen stock exchanges.

There is also loss of control and privacy to consider and the ongoing costs of meeting securities regulations, such as filing quarterly and annual reports with shareholders.

Going public and listing shares on an exchange is a big step and not the best plan for every company.

“The first question is how much money do you need. If you need a couple hundred thousand dollars, although it sounds like a lot, it’s not enough to warrant going public,” Aronitz said.

“You really have to be in a range that an underwriter would take an interest in …. You’d need an issue of at least $3-$5 million.”

There must also be interested investors. One of the underwriter’s jobs is to determine how the public would react to a share offering.

And public confidence will be inspired only if the company is already in solid financial shape. Going public is not the way to rescue a troubled operation, they said.

The process will take at least six months and possibly as long as 18 months.

Nash said many owners shy away from going public because they fear losing control of their company to shareholders. The reality is that a company with a diverse shareholder base experiences less outside control than one with a few large investors, she said.

“You wind up with a large number of shareholders who don’t tend to be activist, who don’t organize themselves,”she said.

“If you only do private placements with large shareholders, you may spend a lot of time babysitting them.”

Rather than listing on a stock exchange, there are less costly ways of raising smaller amounts of equity capital.

There is less red tape when selling shares to family and close friends, employees, customers or private investors. However, these private transactions still must meet regulations set out by the securities commission in the province where the shares are being sold.

But in all situations, potential investors are more confident if a company has a solid management team.

“When talking to potential investors, I have heard over and over again: Where is the management team? You can’t do this all yourself,” Nash said.

“If you only have one person doing everything, if something happens to that person, then the investment is wiped out … but if you have four or five people responsible, if one leaves the others can fill the gap.”

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