As you can see, the existing system could be subject to
manipulation. So what about the average retail investor who
would like to invest in alternative assets to increase diversification
and potentially enhance portfolio returns?
In 2009, the provinces jointly enacted a new legislation to
regulate the registration of dealer and advisors in Canada under
National Instrument 31-103. It created a new dealer category
called the Exempt Market Dealer. The Canadian Securities
Administrators placed greater regulatory oversight over private
market transactions and alternative investments. It also provides
that the individuals selling alternative investments have a licensing
requirement and must complete a suitability assessment for
their clients. Though Ontario adopted this legislation, it has not
adopted the Offering Memorandum exemption.
Ontario has previously stated that the Offering Memorandum
exemption may place investors in Ontario at risk as the offering
memorandum is a non-vetted prospectus-like document provided
to non-accredited investors who may not have the ability to
withstand financial loss and thus has maintained the status quo (
see page 14 of OSC Staff Consultation Paper 45-710).
However, although these are valid concerns, Ontario has not
provided any economic data to validate its position. Moreover,
there is little evidence that the Offering Memorandum exemption
is broken in the rest of Canada. Surely, the British Columbia
Securities Commission and Alberta Securities Commission would
revoke the Offering Memorandum exemption after all these years
if it had serious concerns.
Although Ontario has declared its intention to consider
adopting a form of Offering Memorandum exemption under its
proposed new capital raising prospectus exemptions, its unclear
whether it will be a harmonized or non-harmonized approach.
Ontario’s first proposed form of Offering Memorandum was
essentially crowdfunding without a portal or registrant and really
didn’t integrate at all with the rest of Canada. Thankfully the OSC
is now seriously considering a form of exemption modeled on the
Alberta Offering Memorandum exemption.
So, what are Ontarian’s missing then? In 2012, $104 billion
of prospectus exempt capital was raised in Ontario. This dwarfs
Canadian initial public offerings and net redemptions in mutual
funds in the same year.
Moreover, the average Canadian invests in the stock market
through mutual funds and segregated funds. An institutional
investor, with far larger amounts of investable capital, would not
dare allocate their assets to mutual funds.
The fees are high and the alignment with the fund managers
is limited, if not non-existent. In fact, institutional investors preach
investment alignment as an ever-present priority. This can be an
area where alternative investments excel, as investment structures
are often scrutinized for their ability to motivate and punish the
performance of management.
Exempt market dealers in particular, service the small and
medium sized company or investment fund in their raising capital.
Generally, medium sized enterprises are too small to enable a
public offering to make economic sense. Retail investment capital
is becoming more important to these managers as institutions
have displayed a flight to greater sized fund managers. Funds
under $100 million are ideally placed to raise capital in the exempt
market. In fact, American alternative investment managers have
recently been entering the Canadian investment market.
Some people confuse the exempt market with start-ups and
seed technology financing. Small enterprises and start-ups make
up a small subset of the exempt market, as many start-ups rely
on the friends, family and close business associates exemptions.
Average investors may actually reduce their risk by investing in
venture capital funds that pool investment that is managed by
professionals that may have a better ability to assess the potential
of a technology or product in the Exempt Market.
While investors need to be protected from rogue or unethical
managers, National Instrument 31-103 is improving the safety
of the private markets by shifting greater amounts of risk onto
dealers and advisors. Though there are plenty of headlines in
Western Canada about investor losses (generally perpetrated
prior to the new EMD regime in 2009, , the public markets have
not found foolproof mechanisms to protect investors. Just last
year, $6 billion of investor capital was erased in the Sino Forest
scandal – in the public markets.
As institutional investors reallocate capital in the new
paradigm shift of modern finance, the everyman/everywoman
should be allowed to follow suit. Planning for retirement and
financial independence is difficult enough. The options currently
available to most investors have not been providing them with
adequate inflation-adjusted returns over the previous 10 years.
Now is the time to liberate capital and investors and allow them
into the private markets in Ontario. The retail investor needs new
solutions to give them the opportunity to build wealth through
investments, today more than ever.
For more information contact: