The PCMA does not support any restriction on investment
funds under the OM Exemption for the reasons set out below.
(a) Investments funds are an important financing vehicle
Investment funds are an important financing vehicle that use
the OM Exemption and should be continued, especially in Western
Canada. We respectfully submit that prohibiting investment funds
is in appropriate and overreaching if the real concerns involve
disclosure and related issuer matters. We believe that the CSA
should do a review of the form disclosure requirements involving
different types of issuers and discuss various safeguards and
controls to manage any conflicts of interest where a dealer is
related to an issuer.
(b) Investment funds can be used to help SMEs
Investment funds can be used to help finance SMEs and
provide diversification of risk for investors. Some investors would
like to participate in an investment vehicle that invests in equity
or debt securities of SMEs which would not be permitted if the
investment fund prohibition is adopted.
Issuing debt securities or securities that are convertible into
common shares of an issuer should be encouraged by the CSA
which would provide certain types of SMEs access to capital and
investors with a diversified portfolio of companies.
(c) Investment funds that have a registrant adequately protect
investors
PCMA believes that certain investment funds that are
managed by a portfolio manager (PM) adequately protect investors
and such investment funds should not be prohibited under the
OM Exemption. The involvement of a registrant provides added
protections for investors.
It is not clear why issuers such as flow-through limited
partnerships (FTLPs), which are investment funds and utilize a PM,
should be barred from using the OM Exemption. The investment
fund prohibition will have serious capital raising implications
for FTLPs and issuers particularly in the mining and oil and gas
sectors and a significant amount of capital is raised in Canada
under the OM Exemption for such issuers.
(d) The definition of the term “investment fund” is not well defined
or agreed upon by Canadian securities regulators
The term “investment fund” is defined under securities
legislation and means a mutual fund and a non-redeemable
investment fund. Under securities legislation, a “non-redeemable
investment fund” means an issuer (a) whose primary purpose is
to invest money provided by its security holders, (b) that does not
invest with a view to exercising control of an issuer or with a view
to being actively involved in the management of an issuer, and (c)
who is not a mutual fund.
We note there is disagreement about these investment
fund definitions between the corporate finance and investment
funds branches within certain CSA members and between
CSA members. Although there has been some recent guidance
provided by certain CSA members involving mortgage investment
corporations, it is still not consistently applied within, and between
CSA members. This uncertainty is not in the public interest.
We are concerned that uncertainty could lead to an offering
of securities by a fund that a market participant does not believe
is an “investment fund” (often based on advice of counsel and/or
opinions solicited from an investment funds branch or corporate
finance branch of a CSA member) and have another CSA member
object to such an offering and require it to be withdrawn. This
uncertainty and potential to force the withdrawal of an offering by
an issuer relying on the OM Exemption is inconsistent with our
mutual interests of fair and efficient capital markets.
14) Are there certain types of issuers that should be excluded
from using the OM Exemption?
No, all issuers, whether investment funds, corporate issuers,
trust or limited partnerships should be able to use the OM
Exemption regardless of industry or asset class.
15) Should issuers that are related to registrants that are
involved in the sale of the issuer’s securities under the OM
Exemption be permitted to continue using the OM Exemption?
The PCMA strongly believes there should be no restriction on
registrants distributing the securities of related issuers, provided
that the issuer addresses its conflict by providing the requisite
disclosure as required under applicable securities law. We note
this is the practice across major sections of our capital markets
and the proposed changes are inconsistent with that reality.
In addition to disclosure, there are various safeguards that
can be put into place to manage conflicts of interest. We strongly
believe this is an industry issue that needs to be addressed
generally, not just under the OM Exemption, but under all
prospectus exemptions. We remind the Participating Jurisdictions
of the work that was done in the mutual fund industry in dealing
with conflicts of interest, which we note, has successfully
addressed these scenarios.
Banks, investment dealers and mutual fund dealers regularly
sell proprietary product and therefore banning EMDs from selling
securities of related issuers is inconsistent and inadequately
addresses a matter that requires a more thorough analysis outside
of any one prospectus exemption.
