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[Editor’s note: This is an Op-Ed by Delilah Panio, of the Toronto Stock Exchange, explaining why we’re seeing some Silicon Valley companies opt for Canada for public listings.]

After a banner start in the first half of 2007, the U.S. IPO market has fizzled in the past few months. In the third quarter, just 12 venture-backed companies managed to raise $945 million via IPOs, about a quarter of the amount raised the previous quarter.

Most of these are large, with market values of $200-$300 million or more. For smaller companies, those valued at less than $100 million, completing an IPO on a U.S. exchange is difficult – and economic conditions won’t make it any easier.

Several pharmaceutical companies that hoped to go public have struggled recently. Bioheart and Merrion Pharmaceuticals both failed to complete their scheduled IPOs and then cut their planned initial price ranges by nearly half.

But one pharmaceutical company successfully went public last week: NovaBay Pharmaceuticals. The Emeryville, Calif., biopharmaceuticals company started trading on October 26 on AMEX and Toronto Stock Exchange. It raised $20 million with its dual U.S.-Canadian listing, valuing the company around $80 million.

Why Canada? As U.S. IPO markets continue to tighten, particularly for smaller companies, Toronto Stock Exchange is seeing growing interest from U.S. companies. Building on a 150-year history, the Canadian capital markets have a credible infrastructure to finance, grow and support micro- and small-cap growth companies. Now, more U.S. venture-backed technology and life science companies, like NovaBay, are turning to Toronto Stock Exchange and Canada’s micro-cap market TSX Venture Exchange to raise public capital earlier than they traditionally have been able to do in the U.S.

Many U.S. companies have listed on London’s Alternative Investment Market (AIM), and more adventurous companies have sought listings in Hong Kong, Singapore and Dubai. But AIM, until recently one of the most well-publicized foreign small-cap markets, has suffered setbacks. In the 12 months ending August 2007, AIM had 365 admissions and 259 cancellations, giving it a net gain of 106 companies – the smallest year-on-year percentage rise since it launched 12 years ago, according to a recent article in The Financial Times. TSX Group, meanwhile, listed 283 new companies in the first six months of 2007. What’s more, AIM suffers from low liquidity: During the first six months of 2007, AIM recorded 2.1 million trades at a total value of C$84.3 billion, while TSX Group had 58.3 million trades valued at C$843 billion.

Both Toronto Stock Exchange and TSX Venture Exchange, which are owned by TSX Group, have a strong corporate governance regime – similar to the U.S., but with key exemptions for small public companies. As on Nasdaq or the NYSE, investors take comfort in knowing that companies have to pass published financial and sector-specific tests to list on Toronto Stock Exchange or TSX Venture Exchange, while AIM does not have listing requirements but relies solely on nominated advisors (NOMADs) to determine a company’s suitability for listing. Even early-stage firms that might otherwise seek to raise venture funding are welcome in Canada. (The average market cap of a public company on Toronto Stock Exchange was $1.35 billion, and just $29.1 million on TSX Venture Exchange, as of June 30, 2007.) By welcoming companies of varying sizes and development stages, TSX Group has grown to have more listed public companies (upwards of 3,900) than any other exchange in North America, including Nasdaq and the NYSE, and is home to more than 340 technology companies and over 140 life science companies. As a sizeable exchange group, TSX Group plays a significant role in the global capital markets, placing fifth in the world for total equity raised in 2006.

For its part, NovaBay will use the $20 million it raised in its IPO to finance clinical trials of its antimicrobial drug candidates, one on which aims to treat and prevent Methicillin-Resistant Staphylococcus Aureus (MRSA), the highly-contagious “superbug” making headlines in the past few weeks as it sweeps through U.S. schools and hospitals. This new public funding will be critical in helping NovaBay achieve its growth strategies.

Companies that list on Toronto Stock Exchange and TSX Venture Exchange have the added advantage of benefiting from Canada’s strong dollar and healthy economy – forecasted to grow at almost double that of the U.S. in 2008 – as well as strong demand from Canadian retail and institutional investors, many of whom are used to trading small-cap stocks. As U.S. companies like NovaBay are discovering, going public on an exchange tailored to small-cap companies is a viable alternative, or complement, to raising venture capital.


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