Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 48 - Evidence, March 23, 1999
OTTAWA, Tuesday, March 23, 1999
The Standing Senate Committee on Banking, Trade and Commerce met this day at 6:00 p.m. to examine the state of the financial system in Canada (Equity Financing).
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: As we continue our discussion on the issue of equity financing for small businesses this afternoon, our witnesses are Mr. Douglas Hyndman and Mr. William Hess, both of whom have been before this committee on several occasions.
Just to give you some background on this, gentlemen, in many of the other studies the Banking Committee has done, particularly work related to the governance of various types of corporations and in our response to the MacKay Task Force, which both of you were involved in responding to us about, it became clear that the real difficulty with new businesses starting up in Canada was not loans, but was equity financing, and it was obvious that more public programs aimed at loans would not be helpful. The number of sources of debt financing is quite large, and what people need is not more debt and interest to pay, but more equity.
Considering those previous and completely different topics, we agreed to look at the question whether there is a role for public policy in trying to increase the amount of equity, or the funds available to invest in equity, of small business? This was not necessarily with a view to having a new government program in which the government would be in the business of buying equity, but was the notion that maybe there are things that can be changed that would provide incentives, such as making changes to the capital gains system.
The basic question is: Other than starting a new government equity infusion program, are there changes in public policy that would increase the amount of money and the number of sources of money for equity investment in small business?
Mr. Douglas M. Hyndman, Chair, British Columbia Securities Commission: Thank you very much, Mr. Chairman and honourable senators, for the opportunity to appear before you. Equity financing for small and medium-sized businesses is a very serious matter. I know you have been examining the issue by obtaining the views of the suppliers of equity capital and of the firms that seek to raise capital. I come before you from a different perspective, as a regulator of the capital market whose mandate is to ensure that the market is fair, efficient and worthy of public confidence.
In carrying out our role as market regulators or referees, securities commissions focus both on the protection of investors from fraudulent abuse of unfair market practices and on fostering a healthy market for investors seeking investment opportunities and businesses seeking to raise capital.
In your work you have no doubt focused on a variety of different sources of equity capital. In our world the basic market split is between the public market and the exempt market. Much of the attention of securities commissions is focused on the public market, where securities are listed on stock exchanges or quoted on electronic quotation systems and the issuers are required to maintain a high level of disclosure and to conduct their affairs in accordance with a fairly demanding set of requirements that are intended to protect the interests of their shareholders.
In British Columbia, we have a long history of dealing with the public equity market devoted to small startup businesses, primarily in the resource exploration business in the past but increasingly now in the high-technology area. It is a market that brings its own set of risks and problems, but between our commission and the Vancouver Stock Exchange we have developed considerable expertise in regulating it, a junior capital market. Over the past decade we have developed a set of regulatory tools and approaches to deal with the types of abuses to which junior markets are prone and we feel we have the best regulated junior equities market in the world today.
The challenge our market currently faces is competition from less regulated markets that have flourished, notably in the United States, in the current environment of equity market euphoria. In our view, the appropriate response to this challenge is to streamline our processes and enhance the efficiency of our regulatory system, but not to engage in a race to lower regulatory standards, which would only damage the confidence in our markets in the long run.
Over the last two years we have introduced in British Columbia several innovations to simplify the capital raising process for junior public companies. These have included the introduction of a system that permits listed companies to raise money through private placements that give the investor a shorter hold period of four months rather than the normal one-year hold period, if the issuer meets enhanced disclosure standards. Also included is the creation of the New Venture Capital Pool Program that allows companies to raise capital and create a public vehicle to seek business opportunities. That program is similar to the Junior Capital Pool Program that has been running in Alberta for a number of years. Currently, we have transferred to the Vancouver Stock Exchange the responsibility for reviewing all prospectus filings by companies listed or seeking a listing on the exchange in order to speed up and simplify the process for public offerings by junior companies.
We are currently working with the exchange on the creation of a new exemption for small retail public offerings that will allow listed companies that maintain enhanced disclosure to access the public market more quickly and cheaply.
You will of course be aware of the proposal announced last week under which the Vancouver Stock Exchange would be combined with the Alberta Exchange and would take over the Canadian Dealing Network in Ontario and the junior listings from the Montreal Exchange. This proposal to create a Canadian Venture Exchange, if it proceeds, should provide more depth liquidity and transparency to the junior market, a comprehensive system of surveillance and listed company oversight and a broader market for junior companies attempting to raise capital in Canada.
There are many details to be sorted out by the exchanges themselves and by the Canadian Securities Administrators, but we will be working with our colleagues in the other major provinces to examine the proposal and to coordinate consideration of regulatory approvals.
Our objective, whether or not the national exchange proposal proceeds, is to develop the Canadian junior markets as transparent and credible markets, with streamlined regulations that allow companies to raise capital efficiently while providing sufficient oversight to avoid the type of fraud and manipulation that we have seen in the past and that affects small issuer markets elsewhere in the world.
Turning to the exempt market, all start-up businesses must begin raising capital in the exempt market, and many businesses never move to the public markets. The exempt market by definition is not covered by the regulatory requirements of comprehensive disclosure and selling securities through registered dealers, and does not come under the same degree of scrutiny from regulators as the public market. However, as regulators we do see abuses in the exempt market. We frequently receive complaints from investors who have unwittingly found themselves in unsuitable investments. The exemptions available to small companies seeking to raise capital are premised upon circumstances where the investor does not need regulatory protection, either because of a pre-existing relationship between the issuer and the investor, or because the investor is sophisticated enough to assess the merits of the investment without any assistance.
In British Columbia, we have some unique exemptions that are widely relied upon by issuers selling to sophisticated investors. The major problems we see in this area arise from investors who declare themselves to be sophisticated without really understanding what they are getting into. We have addressed this to some degree with better disclosure and with forms that the investor is required to sign, but, frankly, our focus has been shifting increasingly to a program of investor education that is intended to arm investors with the tools to determine whether this type of investment is suitable for their particular circumstances. We want to ensure that we can retain our system of flexible exemptions that allow small businesses to raise capital without exposing our investors to inappropriate risks.
Finally, I want to share with you my observation that there is not really a problem with the availability of venture capital in Canada. As regulators we see lots of money around looking for good investment opportunities, but a shortage of promising well-managed small businesses to invest it in. If the government intends to intervene it should be on the side of reducing the taxes and regulations that hinder businesses in hiring talented management and expanding operations, and not on the side of providing investor tax incentives that benefit mainly professionals who structure the deals and often lead investors to make inappropriate investments just to get the tax benefits.
That concludes my prepared remarks, Mr. Chairman. I will be happy later on to answer any questions you may have.
The Chairman: Thank you, Mr. Hyndman. Before turning to Mr. Hess, may I ask you if you and your colleagues in the Canadian Securities Administrators have a technical definition of the difference between a junior equity and a senior equity? In other words, what will be the dividing line between Toronto and yourselves?
Mr. Hyndman: The answer is that that is being worked on by the exchanges. It is essentially a business matter to try to define the various market niches that they are in. It is not a definition we would be inclined to impose on them. They are really looking at the cut-off level.
The Chairman: At some point, presumably, someone who starts out as a junior equity grows to the point of being a senior equity and therefore moves exchanges. Is that correct?
Mr. Hyndman: That is the general concept. However, there are still some details to be worked out. As I understand it, they will define the listing requirements at the Toronto Stock Exchange. That would be the cut-off point, so that once an issuer is listed on, say, the Canadian Venture Exchange and reaches that threshold it would be a relatively automatic graduation process to move up to the senior exchange.
The Chairman: Is the threshold likely to be a market-cap threshold or a revenue threshold?
Mr. Hyndman: I think it would be a combination, but there would certainly be a revenue or asset size test. You could not rely solely on market capital. Another issue would be whether there is a relegation process, where issuers that are on Toronto but slip below the threshold should be moved down to the junior market. That is another issue.
The Chairman: Thank you very much.
Mr. William L. Hess, Chair, Alberta Securities Commission: As part of our new Securities Regulatory System in this country we try to avoid duplication so I will avoid repeating many of the things that the chairman of the CSA said today, but I will adopt what he said as my own comments.
I would like to add a few things from the Alberta perspective. Certainly we have the same sort of approach to investor protection, and the same sort of approach to providing ways for small businesses to access the exempt market. We participated with British Columbia in one of these initiatives, and that was the initiative Doug was talking about with respect to reducing the hold periods.
I also wish to point out the success of the Alberta Stock Exchange in fostering the growth of junior companies. Doug referred to the Junior Capital Program which has been in existence on the Alberta Stock Exchange since 1987. More than 1,000 companies have started up under that program and over 80 of them have graduated to senior exchanges.
Another point Doug made is the fact that an important part of our mandate is investor protection. We always have to balance that with the ability of companies to raise capital. When we have looked at that issue, we have had much the same sort of feedback and evidence as Doug referred to, in the fact that venture capital tends to be available. When talking to the venture capitalists, the biggest issue for them is finding the types of business, the types of management that they are willing to invest in.
We have worked with the stock exchange to address this problem by jointly setting up the Alberta Capital Markets Foundation, which has a two-pronged mandate. The first part of its mandate is to enhance investor education in this province. The second part of its mandate is to find ways to assist entrepreneurs in learning how to acquire management skills and develop business plans -- the types of things that they have to do to access capital.
It may very well be, when they study the situation, that accessing public capital at the wrong time is a mistake. So Alberta Capital Markets Foundation, partnering with the private sector and with members appointed from the private sector, will be leveraging on initiatives to try to enhance small business capital formation in this province.
That is all I have to say by way of an introduction.
The Chairman: Before turning to Senator Oliver for the first questions, would you comment on Mr. Hyndman's last comment, which was that he was not in favour of what I would call a tax incentive program. He was more in favour of programs that would encourage the hiring of competent management, et cetera.
When I spoke earlier of a tax incentive program, I was thinking not of a specific program, but of an illustrative program. Just as the corporate income tax on small companies earning less than $200,000 a year in net income is at a much lower rate than it is for large companies, one could contemplate, theoretically at least, that capital gains taxes to investors in companies that are small would also be at a much lower tax rate.
That is the kind of tax idea I meant. I am not quite sure what Mr. Hyndman meant. He may want to elaborate on that. However, what do you see generally as the pros and cons of public policy putting in tax incentives versus some other kind of public policy approach?
Mr. Hess: If a tax incentive has an effect on the underlying viability of the business, that is something that an investor can take into consideration when deciding to make an investment. The concern I would have is the type of tax incentive that skews an investment decision. There is only a certain amount of money available for investment, which of course could change depending on the tax regime. If there is $100 available for investment, if you provide tax incentives for certain types of investment are you telling investors to cash in their senior company investments and invest in a junior company? Would they be doing that because of some tax refund that they would get? Might they as a result end up in an inappropriate investment? A tax incentive that would make something a better investment is one thing. A tax incentive that skews investment decisions is another.
The Chairman: Thank you. That is a topic to which we will want to return.
Senator Oliver: I should like to ask a few questions of Doug Hyndman. They all relate to what you referred to as the exempt market as opposed to the public market. Could you tell us a little about the size of the investment that you are talking about when you talk about exempt? What are some of the standard conditions on an exempt market investment? What protections are there for the person making the investment? Finally, what are some of your definitions for a sophisticated investor in that exempt market area?
When you talk about a pre-existing relationship as being one of the things that you look at in determining whether they qualify for this exempt market, are you referring to one or two previous transactions? How big would those previous transactions have to be in order to make up a relationship that you would find acceptable?
Mr. Hyndman: We have several exemptions that small businesses generally rely on to raise capital. The private issuer exemption is available to an issuer that sells securities to persons who do not constitute the public. Who is and who is not the public has been judicially defined over the years. Generally, and this is what I meant by the pre-existing relationship, issuers can sell securities to relatives, business associates, friends, et cetera, of the business promoters or managers without having to worry about very many, if any, of the Security Act requirements. They are not considered to be in the public. There is no restriction on the size of the investment. The numbers of investors can be capped. Essentially, the limit is 50 investors outside of employees of the company.
That exemption is usually used by smaller businesses. In fact, companies use it every day without realizing it. They have never heard of the Securities Act, but they are selling shares in their business to members of their families. Companies can get to a fairly advanced stage relying on that exemption but once they want to get beyond that close circle of associates, friends and relatives, they move into other exemptions that have more restrictions. There are essentially three.
The first is what we call the "$97,000 exemption." That is the private placement exemption where an issuer can sell to anyone, If it is not advertised and it has no particular disclosure requirements, as long as the amount invested is at least $97,000. The reason for that threshold is lost in the mists of time. It used to be a standard level across the country, although now it varies. I think that in Ontario and Quebec, the limit for that exemption is now $150,000. Alberta and British Columbia have a limit of $97,000 and other provinces generally have limits of one or the other. If the exemption is advertised in the newspaper or somewhere, the company is required to provide an offering memorandum giving certain information. That offering memorandum is less extensive than a prospectus but contains certain information certified as not being misleading.
The next exemption often relied upon is the "sophisticated purchaser exemption," for which there is a minimum threshold of $25,000. It requires preparation and presentation of an offering memorandum and can be sold only to persons who meet our sophisticated purchaser definition. I do not have all the numbers at my fingertips but that is something like, for an individual, an annual income of $75,000 or, for a couple, an annual income of $125,000. There is an asset, or net worth, threshold of, I think, $400,000. In addition, the person has to declare that they are able to assess, that is, that they have the level of sophistication to assess the investment without the benefit of receiving advice from a registered dealer.
Senator Oliver: Is there any limit to the amount that you can raise through this type of sophisticated investor?
Mr. Hyndman: There is no limit on the number of investors or on the amount that can be raised.There is just the minimum threshold of $25,000.
Regulations restrict to whom you can sell it. The level of disclosure required by our offering memorandum form is less than a prospectus but contains basic information about the company. We do not review the offering memorandum, but we will often look at complaints and if we find them to be misleading or to have been sold to inappropriate people we will take enforcement action. There is no prior review of any type by the commission.
Senator Oliver: Could you tell us the amount of money that is raised on this exempt market on an annual basis?
Mr. Hyndman: I do not have current numbers at hand. We did a survey a few years ago in British Columbia and it seems to me that for the latter two groups of exemptions that I talked about, it would be somewhere in the area of $800 million to $1 billion. We have no idea how much is raised under the private issuer exemption, the first exemption I talked about, because no filings are required at all in those circumstances. For the other two, the issuers are required to file forms with us after the offering. That is sort of the ballpark in this jurisdiction.
The Chairman: Mr. Hess, in terms of the dividing lines and so on, are the numbers in Alberta more or less the same as those Mr. Hyndman mentioned?
Mr. Hess: The exemptions are quite similar in Alberta.
Could I respond to several of Senator Oliver's comments?
The Chairman: We do not want this to be directed. You should both feel free to comment on any question.
Mr. Hess: You have to appreciate that those exemptions are available to any issuer. We can do what we call "stacking the exemptions." In a start-up situation in this jurisdiction, you can offer shares under the exemptions to all of your friends, business associates and employees, in Alberta to another 50 people, and to anyone who will subscribe for $97,000. You could have dozens of investors.
I do not have the figures regarding how much money is raised in this exempt market, but it does not necessarily relate solely to small business. Big issuers use the exempt market to issue stock options to their senior employees. Those numbers do not relate to small business financing.
I would argue that the current exemptions are probably sufficient. The current exemptions in Alberta were brought in based on the recommendations of an industry group of which I was the chairman at that time. We constantly consult with people as to whether the exemptions are the issue. Quite frankly, the advice we get is that they are not. There are lots of exemptions. The problem is that start-up operations using the exemptions are still not listed companies. The shares that go out under the exemptions are not freely tradable. You will not attract big money for shares that are lettered, shares that are not freely tradable. You have to find a system that makes the shares freely tradable.
The JCP program in Alberta was successful in creating 1,000 new, very small public companies. After their initial offerings they found it easier to use the exempt market because they were offering shares that after a period of time would be freely tradable as opposed to shares that would never be freely tradable.
Many of us are quite excited about the prospect of a national junior exchange that could bring those developments nation-wide. On the other side of the ledger, it would attract more capital simply through the size of the exchange and it would get more notice nationally and internationally.
The bottom line is that when looking at financing, you have to look at liquidity and the ability of the purchaser of the capital to be able to trade at some time in the future. If people do buy the shares they will want to buy them at discounts because they are illiquid.
Senator Kroft: Mr. Hyndman, did you say that even if the major market initiative, as recently announced, does not necessarily go ahead, you would be hopeful that a national junior market could begin in any case?
Mr. Hyndman: That is not what I said but I think that it is a possibility. Discussions between the Vancouver and Alberta stock exchanges were running parallel to the broader national discussion so it is possible that that would proceed without the larger project.
I was suggesting that even if that merger does not happen, we still want to work, certainly in Alberta and B.C., to ensure that we have credible, well-regulated junior markets to allow our companies to raise capital here. We want to ensure that it will be sustainable in the long haul and not vulnerable to the risks that we think are present in the over-the-counter markets in the U.S, for example.
Senator Kroft: Is there a hope, then, that what we might call the cultural attributes of the B.C. and Alberta markets might well find acceptance in an investment community across the country?
Mr. Hyndman: We should certainly like to see that.
Senator Kroft: We have spent a fair amount of time in the last few weeks talking to two kinds of providers of venture capital. The first is the professional venture capital industry or the structured, institutionalized venture capital industry, which, as you know, is organized into an association with a national agenda particular to that industry. The second kind of venture capitalist is not so readily accessible: the private investor, angel or the individual entrepreneur who is often looking to repeat the success of an earlier round of entrepreneurship.
What sort of interaction or mutual support exists between the desire to develop a junior market and the professional venture capital organizations? Are you working in tandem? Are you developing common approaches to thresholds? Do you see one another as allies or do you see one another as possible roadblocks along the road? I am trying to get a picture of the source and matching of funding and, ultimately, the public manifestation of that. I would appreciate your comments on that.
Mr. Hyndman: We do not hear much directly from the professional venture capital group or the angel investor group at the commission or at the regulatory level. But from my observation and from the discussions that I have, their interests are primarily the ones Mr. Hess was just talking about. They are interested in getting into companies at a relatively early stage, once those have established themselves to the point of having a business plan and some prospects. Those investors want to ride up with those companies to the point where the company goes public and ultimately provides an exit route for the venture capitalists. They want the liquidity down the road. It is in their interest to see a national venture capital market as a place for their exit strategy on their investment. It gives them more scope to get into deals with the knowledge that ultimately they can get out.
There is some degree of competition with the public capital markets. Many issuers are reluctant to raise capital from the formal venture capital market because they see themselves as giving up control over their companies. They have to give away too many seats on the board or too much equity. Often times they will see the public capital market as an alternative to going that route. It can give them the advantage of being able to retain control of their company while raising capital.
It also presents the risks that Mr. Hess talked about earlier. Companies could go public prematurely in an effort to avoid the clutches of venture capitalists. If you go public prematurely, you find yourself burdened with the obligations of a public company before you have really developed the size and infrastructure able to handle it. The management of the company worries about stock prices instead of the underlying business.
There is a bit of tension there between the two groups, although to a degree it is probably a healthy tension.
Mr. Hess: We have not heard very much on venture capitalists formally, but we certainly talk to them on an informal basis. They are not the investors that we feel we need to protect, but we are certainly interested in their views. As I said, the Alberta Capital Markets Foundation was trying to find ways for the entrepreneurs to access that source of capital.
Senator Kroft: Consider a well-funded venture capital group with a five- to seven-year threshold, as we have typically heard, looking to reach certain levels of profitability. I am thinking of the levels of accessibility of the senior exchange. Would you be concerned that, as the venture capital industry becomes stronger and develops their companies larger and stronger, they would in fact skip your market and move right into the senior market?
Mr. Hyndman: I do not see that as a problem. That may well happen. In fact, it does happen now. You will see companies doing initial public offerings and listing immediately on the Toronto Stock Exchange. That would not cease to happen with the national venture market, although if the TSE raises its listing standards as part of its definition, it may be more difficult for them to do it. I do not see that as a threat to the junior market. It is an alternative route for companies to get to the senior markets, but I do not think a little competition like that hurts anyone.
Senator Austin: My questions are along a different line. When Ron Begg, President of the Canadian Venture Capital Association, was before us, he was concerned that in terms of reward and exit strategy, the current regime is too restrictive, particularly of what he called the love capital, the seed capital and the angel capital. He talked to us about your proposal for a national escrow regime. As you know, that proposed national instrument does materially change the escrow regime in Canada, particularly by lengthening escrow periods to apply to emerging companies that are doing an IPO.
The concern is that by creating a longer hold period you will drive people to the over-the-counter market and away from more transparency and more disclosure. Do you have any response to that comment?
Mr. Hyndman: I would respond in two ways. First, when designing the escrow proposal, we attempted to ensure that formal venture capitalists would not be covered by it. It appears from the comments we have received that we did not succeed in doing that in the way that we constructed the proposal. Therefore, we are going back to try to figure out how to ensure that the venture capitalists can participate in the financing without being caught by escrow at all.
Second, we received comments on the length of periods as well. We have not yet discussed it at the level of the CSA. Members of our staff are sifting through the comments. I would be surprised if we do not come back with a revised proposal with shorter time periods. That is probably about as much as I can say at this point. We are sympathetic to both of the concerns you raise.
Senator Austin: I have always been interested in the escrow hold period. Of course, it affected my law practice and my clients in ancient times. I should like you to state for the record the reason for it so that when we are doing our own work, we will have a clear understanding. Why do you require escrow holds?
Mr. Hyndman: The primary purpose is to tie the founders of a company to the company for a reasonable period so that the investors who are participating in the initial public offering have some assurance that the people they are relying on and investing in will be there for a reasonable period of time. It does not say what a reasonable period of time is, but it generally takes at least four or five years to bring a non-resource junior company to a point where it is making profits and perhaps providing a reasonable return to the shareholder.
Traditionally, in the pricing of securities, escrow also tried to balance the interests of the people who bought before the company went public and the initial public offering. In designing the current proposal, we gave up on that second aspect and focused on tying the principals to the company. The debate will go on about whether that is necessary and, if it is necessary, what period is required, but that is essentially what we are focused on. When investors go into a start-up company in an initial public offering, they are really betting on the management because there is not much else there. We should like some assurance that the management will be there the day after the offering is completed and money is put in.
Senator Austin: Could you not do that by contract? That particular long-term investor is pouring their blood into the business. Along come the venture capitalists. They cream the profits in a business cycle. They get out. The people who really should be rewarded, as much as anyone, are the entrepreneurs. I am talking here about honest people, of course, and only honest people. They should be able to participate seriatim in the progress of their company and not be held up for a very long time.
Mr. Hyndman: Our escrow proposal for the most junior companies has a six-year escrow hold period, but that is not for all of the stock. It is a gradual release over the six years. I forget the exact number, but I think you escrow 85 per cent of the person's holdings at day one and then 15 per cent a year gets released so that by the sixth year only a small part of their original investment is still tied up. They are able to liquidate a significant part of their investment as time marches on and they may well end up with an even shorter period.
Senator Austin: I realize that my point is much like the Goldilocks/porridge question: What is just right? You do not want the venture capitalists in for too short a time. You want them in for a time so that they pay attention to the development of the business because their capital is in it. Therefore, you do not want to let them out too soon. On the other hand, you do not want to discourage the venture capital business by holding them in longer than they need to be there. I realize it is a difficult question.
If Mr. Hess has a comment on that, he could start there, but I have a list from the web site that indicates that 127 Canadian companies are listed on Nasdaq. Why did they go there? What do they get from Nasdaq that they do not get from Canadian stock exchanges?
Mr. Hess: I will start with that question. Other people, perhaps from the investment banker's side, could answer that better than I can, but the bottom line is that they get a better price. The U.S. is the biggest capital market. Certain types of stocks, such as Internet-based stocks, do particularly well there. This is not an Internet stock, but, for example, Big Rock Brewery was a successful local brewery in Alberta. Ed McNally, a former lawyer, a strong Albertan and a strong supporter of the Alberta stock exchange, did his IPO on Nasdaq simply because a firm out of Los Angeles offered a much better multiple than any Canadian firm. That has nothing to do with stock exchanges or the costs of listing on a particular stock exchange. It was, quite simply, a better price. That is the reason for most of them.
At the other end of the spectrum, the largest Canadian companies list in the U.S., not necessarily on Nasdaq but on the New York Stock Exchange. There are huge institutions in the U.S. that can invest only or must invest most of their money in a stock that is listed on the New York Stock Exchange. That is why you see banks and other large Canadian corporations go down there.
Senator Austin: I can understand the large corporations seeking to be recognized as global players wanting to reach U.S. and international investors who are looking for LargeCap security and management performance. Our study looks at the other end of the scale at the SmallCap start-up equities.
Did you say that Canadian investors are more averse to risk than American investors? Will we, therefore, never be the best home for venture capital activity or for initial public offerings?
Mr. Hess: I was just repeating what I have been told. I assume that there are studies to back up the fact that multiples paid for listing in the U.S. are sometimes higher. You get a better price. If you were selling something, you would go to wherever you would get the best price for it.
Senator Austin: What is the reason for that? What is wrong with a picture where U.S. SmallCap companies come to Canada and list on your exchange and on the Vancouver exchange because we offer a better opportunity to raise capital? That was once the case on the Vancouver Stock Exchange.
Mr. Hess: It still is to some degree, senator.
Mr. Hyndman: The thresholds for listing on the Vancouver Stock Exchange and the Alberta Stock Exchange are lower than those on Nasdaq. Let me distinguish Nasdaq from the NASD over-the-counter bulletin board, which is the true market in the United States.
Senator Austin: They call it SmallCap Nasdaq.
Mr. Hyndman: Yes, but SmallCap Nasdaq still has a higher listing threshold than the Vancouver Stock Exchange and you see U.S. issuers listing here and developing to a certain stage. Once they qualify for Nasdaq, then they go back and get quoted there.
I hear the same thing as Mr. Hess. I think that companies get a better multiple on the stock price earnings multiple, particularly when you get out of the resource field, which is what our exchange and our securities industry have specialized in over the years. In the high-tech business in the U.S., many institutional investors will be more likely to invest in a company if it is on Nasdaq rather than on one of the Canadian stock exchanges.
One would hope that the creation of a national venture exchange would give a higher profile to the market here and, perhaps, overcome some of that. As Mr. Hess said, perhaps it will generate foreign investor interest. We will have to see how that develops.
Senator Austin mentioned a list indicating that there are 127 Canadian companies on Nasdaq. I would be surprised if there were that few.
Senator Austin: That is what my list said, although it could be many more. I am not that good on the Internet yet.
If I understand you correctly, you see the new Canadian junior capital market as an incubator exchange for the growth of Canadian enterprises. Those enterprises can then move either to the senior levels in the Canadian system, hopefully, or into the U.S. system. That is a perfectly valid role for that particular exchange. Is that correct?
Mr. Hyndman: Absolutely.
Mr. Hess: I certainly agree with that. I was talking about better prices in the United States. Mr. Hyndman is the economist but, since he practices law sometimes, I will practice economics.
If you have more purchasers, you will get a better price. If price is driving some of this, having a larger junior exchange will be helpful. I want to emphasize its incubator role. Comments were made earlier about our market, our exchange. The securities commissions do not have a market. The proposal is for three national exchanges, which we will be involved in regularly. It would eliminate what little competition there is now. The Alberta stock exchange has always taken pride when a company has graduated to a senior exchange.
Where the cut-off is on listings is not a regulatory issue. The people who own the exchanges must determine that. Certainly, the junior exchange will be a feeder to the senior exchange.
I should like to make a couple of comments on the escrow policy. First, you must appreciate where we are starting. In my practice, I also had difficulty with the escrow policies. There are policies in each province and in each exchange. They are all different, and probably no one in the country could tell you what they all are. We are looking to rationalize them into one.
The escrow period is not being made longer. Escrow, in most jurisdictions now, depends on performance. You might argue that escrow is indefinite. We must look at the length of periods and we must ensure that the professional venture capitalists are not caught unintentionally. We are looking at a more consistent period that, if the company is successful, may be shortened considerably from the six years.
The Chairman: Mr. Hyndman, do you have any additional comments in response to Senator Austin's questions?
Mr. Hyndman: No. I agree with Mr. Hess's comments. I have nothing to add.
Senator Angus: I am from Montreal. There has been much animated discussion in the past few days since the proposal became public. Could either one or both of you let me have your insights as to how you feel the synergies would be with Montreal as it presently exists?
Many of the Montreal issues would be natural for a new national junior exchange. How would the transition take place? How would the differences between Montreal as it exists today and your exchanges be reconciled in the transition?
We have something called the Quebec Stock Savings Plan, which was designed to be a very substantial inducement, and probably should have been more of an inducement than it has been. I do not think it has been properly exploited in recent years. How would that be accommodated in the new set-up?
Mr. Hyndman: Again, this is the exchange's proposal, not ours, but I think the concept is that the junior exchange would have a Montreal office that, at least initially, would be comprised of the staff who are now at the Montreal Exchange. They would deal with the 100 or 200 issuers listed on the Montreal Exchange that are moved over to the junior exchange. The intention would be to provide as good service to the issuers as they get now from the Montreal exchange, or even better service.
As far as the Quebec Stock Savings Plan is concerned, I am not sure what, if anything, the exchanges would have to do to accommodate that. That is a program, as I understand it, that provides tax credits or tax deductions to investors who purchase stocks, and they would have to be Quebec investors. I do not think there is anything that would prevent that from continuing. I have some doubts about the merits of that kind of incentive program, as was discussed earlier, but I do not know that any particular adaptation would have to be made. That is something the exchanges would have to examine.
Senator Angus: Mr. Hess, do you have any comments on that?
Mr. Hess: There is no question that a national junior exchange would be able to accommodate whatever programs there are in Quebec. First, it would have an office in Montreal. Issuers would deal with the exchange through the Montreal office and they would deal with the Quebec Securities Commission.
With respect to how different laws and exemptions work, I think you will find that, with the development of the national exchanges, the various provincial rules will come together; but they do not have to be the same. Companies listed on our Canadian stock exchanges can issue shares in any province, but they can also issue shares in any country. For instance, these companies will be able to issue shares in Switzerland according to the Swiss rules, and it would not be necessary for the Alberta rules or the Quebec rules to be the same as the Swiss rules. The exchanges can accommodate different laws in different jurisdictions, just as they do now. There are companies from, I believe, every province listed on the Toronto Stock Exchange, but the provinces have different rules. It is really not an issue.
Regarding what else may be going on in Montreal, I am sure you have heard this from other people, but the idea of Canada's developing a world-class derivatives exchange is very exciting. To me, that is one of the big pluses of what the stock exchanges are proposing.
Senator Angus: I want to get on to the derivatives market in a moment, but before doing so I have another question. I find it difficult to envisage the transitional process.Just continuing, if I may, with the Quebec Stock Savings Plan, as I understand the program at the moment, for the investors in the particular junior company involved to qualify and to benefit from this kind of relief, the stock has to be listed in Montreal. It is comforting to hear you say that the new national junior exchange will be able to accommodate some sort of hybrid group of junior companies that have different rules, but obviously the proof will be in the pudding. Perhaps you can just demystify it for us. It seems so clear to you.
Mr. Hess: I cannot give the answer to that, but that rule, I am sure, came in when there was a stock exchange there, and it would be simple enough for the Quebec government to change the rule from specifying a stock exchange in Montreal to a recognized stock exchange in Quebec. We will have to be making similar types of rule changes.
Senator Angus: On an unrelated matter, I have a question regarding the comparison of the senior exchange with the envisaged junior exchange. As you know, there has been a revolution in corporate governance among senior public companies as a result of the TSE guidelines that grew out of the Dey report.
From my practice, I have found that it is very expensive for junior companies to comply with and to implement big, grown-up kinds of governance rules and procedures when they are just getting off the ground. Would you have a lower standard in the new exchange?
Mr. Hess: First, the regulators -- and I include the exchanges in this -- do not have mandated standards. The approach we take is to let the market decide. You disclose what you are doing and investors can decide whether they are going to invest in that company based on what they know about the corporate governance. Junior companies will be competing with junior companies for investors, and senior companies will be competing with senior companies for investors. As long as you have disclosure, as long as investors can assess the risks, I do not foresee regulators ever getting into mandating to the extent of the recommendations that are in the TSE corporate governance material.
Senator Angus: A lot of witnesses have come to this committee and said just that, that it would be a backward step to mandate or legislate the kinds of rules that are contemplated by the guidelines, and that to maintain them as guidelines is the way forward. Having said that, in your contemplation, would the new exchange have similar guidelines, recognized as such, but perhaps tailored to a SmallCap or SmallerCap junior company?
Mr. Hyndman: It is possible they might develop a policy. Frankly, the junior exchanges now do not have corporate governance policies per se, along the lines of the TSE policy. Corporate governance is sometimes an issue with junior companies but I think you are quite right, the standards that are contemplated in the Dey report are completely unrealistic for the small start-up business. The question for the new junior exchange, or for that matter the existing exchanges, is whether it would be worthwhile developing a stripped-down version of the policy, one that is tailored to junior companies. My guess is that that probably will not be the first thing on their agenda. They have a lot to do to create this new exchange. However, it is something that could come.
Senator Angus: The reason I am interested in pursuing it a bit more is that I am finding, in terms of investor confidence and in terms of attracting those dollars into those junior companies, that one of the mitigating factors arises from the concern that the insiders may have squirreled away more shares than they should. Is there really ever a board meeting?
I think it is one of the areas in which people like yourselves could really provide an environment that would enhance the flow of funds to SmallCap companies.
Mr. Hyndman: One of the things we have been focusing on over the years in dealing with junior companies, at least at our commission, is raising the standards of accountability for persons who want to be directors of those companies, not through issuing any guidelines but just by calling them to account for carrying out the duties to the company that they already have at law as directors of public companies. We have had hearings in the past at which the directors of companies met each other for the first time.
Through our enforcement actions and so on, we have been trying to impress upon people that becoming the director of a public company entails responsibilities to the company and to the shareholders of that company and that the director will be held accountable for the execution of those responsibilities.
Frankly, I think that is the best way to get at that issue.
In our disclosure forms we now require that the directors of a company doing a public offering disclose public companies they have been involved with in the past so that investors can see whether there is a history of dealing with ventures that head off in the wrong direction, or a history of disciplinary problems with the director and so forth. That helps the investors decided whether this is a person with whom they want to entrust their money.
Senator Angus: In the reconfiguration and modernization of our stock exchanges, how would you feel about a digital stock exchange in Canada? The papers are full of talk today about the Internet, and people are trying to get training on it. What do you think of the concept of a digital exchange, especially for smaller companies?
Mr. Hyndman: I am not quite sure what you mean by a "digital exchange."
The Chairman: I think he means "virtual exchange."
Mr. Hyndman: The existing exchanges, at least Vancouver, Calgary and Toronto, have all eliminated their trading floors. They are all entirely electronic exchanges. Are you talking about a market where the investor can deal directly with other investors through cyberspace?
Senator Angus: Yes, that is what I meant.
Mr. Hyndman: That is something that presents a lot of risks to the investor and a lot of challenges to us as regulators. It is not something we can turn a blind eye to, because it is likely to happen in one form or another, whether we like it or not, and as regulators we are trying to get our arms around that.
In my prepared remarks I talked about the need for investor education. More and more we need to ensure that investors are armed with tools to enable them to understand what they are getting into, rather than our restricting the things they are allowed to get into, because it is harder and harder to do that. It may be that there will be more of that trading over the Internet in the future, but we need to ensure that investors know, when they venture into that market, that they may be exposed to risks they would not encounter if they stuck to a more regulated environment.
Senator Callbeck: Mr. Hess, I have a question on labour-sponsored venture capital, which I understand is used a great deal in British Columbia to raise financing for equity but is not used in Alberta. In your opinion, Mr. Hess, why does Alberta not use it?
Mr. Hess: I am sorry that I do not know the answer to that question, but I will say that I am not particularly unhappy that they do not use it. That goes back to my comments about skewing investment decisions.
Senator Callbeck: You mentioned junior capital pools. Did I understand you to say that the shares can be traded on an exchange?
Mr. Hess: Yes. That is, if I may say so, the whole point of them -- the fact that you have a start-up situation that has liquidity right from day one. In other words, they have an idea, if you will, and they can go out and start up a business. They can make an acquisition, because they have a currency that is valuable; that is, they have shares that, if not immediately, then after a period of time are liquid, are tradable, as opposed to shares that you get but can never resell. What is the inherent value of a share if you have no opportunity to sell it in the future? So it deals with the liquidity problem right from day one and that is, quite frankly, why it has been such a success.
Senator Callbeck: What would be your role, as regulator, over the companies in which they invest their money?
Mr. Hess: Well, they become public companies, so we have the ongoing market disclosure type of supervision, as we do over any public company; that means that the standard of disclosure that they make is better than the standard of disclosure that is made by private companies. That is part of the basis for having liquidity, because there is information out there on which people can trade.
Senator Callbeck: Mr. Hyndman, I believe you said that you had established in British Columbia something called creation venture capital, which is similar to the junior capital pools. How does that work?
Mr. Hyndman: That is venture capital pools on the Vancouver Exchange. It is very similar to the program Mr. Hess just described. Essentially, a promoter or group of individuals will create a company and get it listed before having any real business activity. Then, having the public vehicle, they can go out and acquire business activities. They will often indicate, when they take it public, that they are looking for a business in the resource area, in the electronics field, or whatever. Then they will go out and find a promising start-up business and bring it into the public company vehicle. As Mr. Hess said, at that point they are dealing with shares that are immediately tradable, or tradable after a hold period.
Senator Callbeck: So it is very similar to junior capital?
Mr. Hyndman: Absolutely, yes.
Senator Kelleher: One of the reasons we are doing this study is that everyone seems to be told these days that there is no money available for people who want to start up businesses. Frankly, I am not inclined to accept that totally. I think that there is money there, but one of the problems is that the people who want to acquire that money for their businesses do not know how to access it. They do not know where to go.
You mentioned that you had set up programs on how to prepare business plans and things of that sort in order to help educate the people looking for this money. That, I find, is quite interesting. First, do you agree that this is a serious problem? Second, how are your plans operating for the education of the people seeking capital? Are they accessible to everyone? Do you believe that they are successful?
Mr. Hyndman: I should clarify that the education programs I was talking about are directed toward investors and issuers rather than persons raising capital. They are directed towards teaching investors how to assess a business and where to go for advice, and so forth. Having said that, we are interested it doing more. We have not done very much in this area and we are interested in doing more to help businesses understand the capital raising process and the obligations they get into once they have raised capital.
I cannot say at this point how it is working, because we have not done very much in that area yet, but I agree with you that it is something that is needed. I also agree that there is lots of money around and that, generally, issuers either do not know how to access it or they really do not have a well-thought-out business plan that an investor would be prepared to bet his money on, which is why, when you talk to the institutional investors at venture capital companies, their real problem is not a surplus of investment opportunities; their problem is finding good, young companies with good business concepts and solid management to put their money in.
I think that is where the help is needed -- on management, on preparation of business plans, on developing business concepts, and so forth. We cannot, as securities regulators, go very far down that road, other than helping to educate businesses on how to deal with our regulatory standards and how to get into the capital markets. Things like management, preparation of business plans and so forth are probably something our educational institutions should be looking more at, or private educational businesses might want to focus on, because that seems to be where the big deficiency is in the small business area in Canada.
Senator Kelleher: Do you think you could successfully play a role as a catalyst in trying to get the so-called educational institutions to do something in this area by explaining to them that it is a problem and that there is a need for these kinds of programs? Is this something that the B.C. and Alberta regulatory authorities could look into?
Mr. Hyndman: I think I should defer to my colleague Mr. Hess, because he has done more in this area with the Alberta Capital Markets Foundation.
Mr. Hess: First, senator, I will agree with you that the evidence we have is that there is a fair bit of capital there for risky ventures. Perhaps there would be more capital there if the tax system did not penalize risk capital quite as much, but that is another issue.
Certainly, part of the problem is the fact that the entrepreneurs do not know how to access the capital; an equally important problem is that sometimes they go to the public markets too soon. If we have had a problem with some of these junior companies, it is just that: people did not have the proper business plan and they were going public and looking for that type of capital at the same time.
As I said earlier, we have started the Alberta Capital Markets Foundation with the mandate to help entrepreneurs in this area. It is not something necessarily that securities regulators should be doing, but we have been self-funded for a number of years through some very good markets, and it was decided that part of our reserve could be dedicated towards setting up this foundation together with the Alberta Stock Exchange. Now, they are just starting the process. They are just receiving their first submissions. They are supposed to work with the private sector and leverage private sector activities.
For example, if an educational institution wanted to set up a course for entrepreneurs, the foundation would fund the study. However, they would not pay for the entrepreneurs to take it, and it would be expected to sustain itself over time.
They are also doing research. They will hire someone from one of the business faculties to look at what sort of programs are currently available and to try to leverage on what is available. I think this is a very promising approach to dealing with the problem of small business formation without skewing investment decisions through incentives.
Mr. Hyndman: One other initiative that we have had running in British Columbia for a number of years touches somewhat on the governance issue that was raised earlier. Simon Fraser University, through its downtown campus in Vancouver, operates a set of programs to educate directors and officers, usually of junior companies, in how to organize and manage a public company; they are taught about the obligations they take on in becoming a public company and so forth. I would think that by now several thousand people have gone through that program, and I am sure it has made a material difference in the level of understanding of the capital markets and regulatory system by people at the junior company level.
Senator Hervieux-Payette: You were talking about educating the entrepreneurs. What about educating investors? When telecommunications were deregulated in Canada, very few investors were willing to put money into companies that were going in that direction. I remember that some Internet companies had a very hard time finding money, but now people are throwing money at them. Other examples are computer science applications and biotechnology.
The investors are not doing their homework in order to be able to evaluate the technology, look at the marketplace and see where this technology fits in. You could have the most sophisticated business plan, and it would not make any difference. I can tell you that I have various examples where it does not work. The people are there, but they look dumb because they do not understand. They need to do some more homework.
In your area, do you have mechanisms through which you can educate these investors of capital?
Mr. Hyndman: That is really not something that we can do as securities regulators. You are talking about educating institutional investors on figuring out a good place to put their money. I am not sure we have the expertise to do that, or the mandate.
That does touch on the issue we talked about earlier of companies going down and listing on Nasdaq, partly because the institutional investors in the U.S. are more attuned to high technology businesses. There are more analysts in the securities industry in the U.S. who know how to analyze those companies and can produce research reports on them and so forth. I think it is just a matter of seeing that develop in the Canadian capital markets. It may be that that has not been a big enough sector for those companies to focus on. Over the years, we have focused primarily on the resource businesses in Canada, and there may be a shift we have to go through. I hope the creation of a national venture exchange will help that happen. It is really a maturing process that our capital markets need to go through. I do not think the securities commissions can help them through that.
Senator Hervieux-Payette: Maybe you will have to find yourself a new role, because in the future I envisage more and more huge funds with fewer and fewer private investors, meaning the ordinary people, individuals, who need to be protected by regulations and by organizations like yours.
Perhaps you could give me the figures for your exchanges. How much comes from large funds compared to private investors? Is it approximately an 80-20 split?
Mr. Hyndman: On the junior markets, I think it is a much higher proportion of retail investors, individual investors, than on, say, the Toronto market. I do not know what the number is now, but I am sure over half of the trading would be by individual investors.
The Chairman: Mr. Hess, do you want to comment on that? Is part of the reason for that difference that many of the stocks traded in the Vancouver and Alberta exchanges are not investment grade? Is that the problem?
Mr. Hess: That is the reason that it is a lower percentage of institutional investor. Part of it is investment grade, but part of it is also just they are not on the radar screen of the institutions. To the extent that they get bigger, they are more likely to be on the radar screen.
As to the issue addressed in the question, there is no doubt that Canadian stocks generally have been resource-based and that that is what the analysts have followed. However, as we open up the markets and get more institutional interest, as we allow for competition by letting foreign funds and foreign dealers in, the foreign dealers will bring in their expertise in some of the emerging areas, and I expect that the competition will cause our local dealers to pay more attention to those areas. When you look around in Calgary, it is sort of natural that people invest in oil and gas stock, and the wider picture is just coming onto the radar screens.
The Chairman: In your opening comments, you both stressed the importance of what you called investor education. I found that kind of surprising. I would like to understand that. Is it because you think you have some moral obligation to help buyers beware, or do you think that investor education is a necessary prerequisite to attracting additional retail investors into your market? In other words, right now do people think your two exchanges are too risky, or do they not know enough about them?
What is the rationale for the high priority both of you place on educating investors?
Mr. Hyndman: I think it is both, but primarily the former. We come at it from the perspective that over the years securities commissions have had the responsibility of protecting investors from unfair treatment or fraudulent treatment by market participants. With development of the Internet and the opening up of markets internationally, and so on, it is difficult for us to do that by controlling the type of product that is made available to investors or the type of people with whom they can deal. It becomes much more important for the investor to be aware of the risks inherent in the market, the opportunities inherent in the market, where to look for information, whom to go to in order to get advice, and so on.
If we do our job well in educating investors, raising their consciousness about how the markets work, how the regulatory system works, where they should get advice and assistance, and so on, that will both help to protect investors from abusive activity and make our jobs easier in terms of enforcement, and so on, and will also help to raise the level of confidence in the market so that investors will feel more confident and able to get into equity investing. I think both aspects are relevant.
Mr. Hess: I agree with that. We have the obligation to protect investors, but that is what makes for a fair and efficient market. Knowledgeable investors are the best defence against fraud. If we cut down on the number of frauds in the market, more people will be willing to invest. They feed on each other.
The Chairman: Both of you have stressed the knowledge that your organizations and investors in your region have on natural resource industries -- that is, oil and gas in one case, and broader natural resources in the other. What makes you think you will have the necessary expertise to run a national venture capital program for small businesses across the spectrum?
In other words, if we were dividing up the Canadian market, one could perceive a situation in which you would divide up the Canadian market with the other exchanges on the basis of the type of industry. For example, all natural resources would be traded in the west and all manufacturing in the east, or something like that.
First, will you have a problem getting the expertise required to run a SmallCap market across the full spectrum of industries? Second, how do you get your new exchange onto the radar screen of investors in the east, who are not used to looking to the western exchanges as a possible place in which to invest their money?
Mr. Hyndman: I think I should clarify that we will not be running the exchange. The exchange will be running itself under our supervision.
The Chairman: That is correct.
Mr. Hyndman: Although Alberta obviously deals heavily in oil and gas and Vancouver heavily in mining, both have a substantial component now of non-resource listings, particularly in the high-tech field, computer-related services, electronics, and so on.
The Chairman: Can you give me a percentage of that? My sense would be that it is probably 90-10 or 80-20. Am I far off?
Mr. Hyndman: I think it is more like 30 per cent non-resource in Vancouver. I do not know the number for Alberta.
The Chairman: Mr. Hess, what would the number be in Alberta?
Mr. Hess: I am looking at the breakdown with some statistics that the stock exchange provided me. In 1997, 145 listings were JCP, so they do not have a category. Industrial was 31; oil and gas 30; mining 13. Most of the JCPs would be oil and gas.
As to the types of major transactions these JCPs have been doing, in 1998 4 per cent of them were in Quebec. I do not think they were all oil and gas.
The Chairman: Frankly, I am very surprised, and judging from the looks on the faces of my colleagues around the table that is a surprise to them. We would never have guessed that oil and gas was not the overwhelming dominant piece of the Alberta Stock Exchange.
Mr. Hess: It is by far the largest.
If I could address the first part of your question, I wish to remind you how the responsibilities break out for regulations. For regulating the trading activities of the junior exchange, Mr. Hyndman and I, and our organizations, would be regulating the trading activity just like Ontario would regulate the trading activity of the TSE and the CVMQ would regulate the trading activities of derivatives exchange.
The regulation of the companies is quite a bit different. Under the mutual reliance system that we have told you about, the home jurisdiction regulator regulates the company. As far as trading activity of members goes, the exchange will regulate that with the supervision of Mr. Hyndman and me, but that company in Montreal will be regulated by the commission in Quebec, just as it is regulated now.
The Chairman: Given the relative lack of knowledge, or top-of-the-mind awareness, of western exchanges on the part of central Canadian investors, how do you begin to change that, or do you think simply changing the structure will change that?
Mr. Hyndman: I think the exchanges are hoping that the dealers, their larger member firms based in the east, will become more interested in dealing in the junior markets.
All of the big firms are members of all the stock exchanges now, but they do not participate much in the junior markets -- for example, bank-owned national dealers, and so on. Assuming it goes ahead, the junior exchange will be pushing to get them to participate more in that junior market and, presumably, bring more of their clients based in Eastern Canada into it.
The Chairman: Mr. Hess, do you want to add anything to that?
Mr. Hess: The phrase that comes to mind is, "size matters." If you are a broker in Toronto or Montreal and your clients are in the appropriate asset mix, they will have a small amount of their money in the junior markets. That is appropriate, depending on their risk profile. However, in order for people to deal with that, they must look at a number of different screens, because there is a fragmented market; whereas, here, you will have it all together. It will be easier and it will be a bigger market so that there will be a higher percentage of their clients' assets in it. Also, I think the industry will encourage it.
The Chairman: Gentlemen, thank you very much for taking the time to be with us. It was good of you to do so. This is the second or third time we have called on you in the past year, and I am sure we will have other issues to discuss with you as the year goes on.
The committee adjourned.