HOW OVER-REGULATION IS AFFECTING
EMDS & ANGEL INVESTORS
;e unsung heroes – that's what PCMA
co-founder and director David S. Brown calls
exempt market dealers (EMD) and Angel Investors.
While Angels and EMDs serve as energy for the
private equity market engine, they are often subject
to over-regulation which slowly leeches their life
"Angels and EMDs, who are literally the lifeblood of
the private capital ecosystem, are being regulated out
of business. Angels, for the most part, don’t even
know it and tend to invest regardless of the
regulatory regime, but EMDs – who are regulated
creatures of statute – must follow the rules, which are
getting more complex and expensive to follow
yearly," he said.
For Brown, this was apparent in the way EMDs and
Angel Investors are regarded in the formation of the
cannabis industry in Canada. He said despite the
leap of faith EMDs had to take in the sector, they
remain unappreciated and are even “rewarded” with
a more complex sets of rules and regulations.
In this exclusive interview, Brown shares his insights
and hopes for industry regulation. He also shares the
signi;cant changes he witnessed in the industry –
from the early days of venture capital to the
;ourishing of the thriving private markets ecosystem.
Have you seen any significant changes in the
industry during your career?
I have literally witnessed the development and
segmentation of the private capital markets from the
late ’80s to present. When I started out in the area,
“Private Equity” did not even have a name. It was
only named “Private Equity” in the mid-’90s.
Early on, Venture Capital consisted of “if you needed
to expand and the bank won’t provide the capital
;nancing, we will provide a secured loan with
perhaps an equity kicker at an exorbitant cost of
capital”, that is to say there really was no segmentation or specialized ;nancing, especially in the earlier
stage knowledge-based industries (aside from a few
anomalies like Sir Terry Matthews, Michael
Cowpland and Ben Webster at Helix Investments,
who were all visionaries at the time, in a vein similar
to Jock Whitney, the father of modern American
;e type of companies that typically got funded
were, in the main, old school economy companies.
;at all changed with the introduction in the ‘90s by
the Federal and Provincial Governments of Labour
Sponsored Venture Capital Funds, which made
Venture Capital investing somewhat tax e;cient
to the retail investing public. ;is, to Govern-
ments’ credit, primed the pump for Venture
Capital (both formal funds and informal of the
type EMD’s source) in knowledge-based (i.e., high
tech, balance sheet light) companies, which led to
an explosion of micro-cap public companies
;nancings, which then resulted in the formal
Angel Group formation and investing, and ;nally
led to the Canadian pension funds allocating more
of their investable assets to Private Equity/Private
Capital (and the Canadian pension funds had
always been laggards as compared to their U.S.
pension funds counterparts).
Now we have our current situation of a literal
smorgasbord of private capital availability and
ecosystem, starting with the 3F’s (friend, family,
and fools), angel, venture capital (both formal
pools and informal of the type EMD’s typically
source), venture loans (i.e., secured loans with an
equity kicker) and bigger capital ;ows of what is
commonly referred to as Private Equity and which
we typically associate with the pension funds and
large cap private funds such as Onex and the like,
which also led to other government initiatives
such as Queens Park’s MARS and Ottawa’s
Venture Capital Catalyst Initiative.
What do you think are the most challeng-
ing issues facing the private capital
markets space today?
;ese views are personal to me, and are not those
of my Firm: Over regulation. Period. Full stop.
People tend to forget that EMDs are critical to the
piece, in that they source the necessary “gas in the
tank” when it is most needed and most risky. ;e
IIROC dealers tend to get the glory in the media,
but by the time an issuer gets to them and they
raise funding, the deal is pretty much derisked.
EMDs get involved with issuers when the deal is
not derisked. ;ey must make correct judgment
calls on a whole host of issues: “Is this unproven
management team capable?”, “Is this new industry
or product something that will ;ourish in the
future?”, to name a few. ;ese are tough things to
predict which only come with experience, yet
EMDs are called upon to make those types of
predictions all the time.
Look at the formation of the cannabis industry in
Canada. EMDs were absolute pioneers in
funding the space, arranging funding for them
when IIROC dealers wouldn’t touch them with a
10-foot pole. Yet who gets the glory through the
pro;le articles in the media once the cannabis
companies succeed? Not the unsung heroes, the
EMDs. ;ese folks were literal pioneers providing
funding for unproven industries which are now
;ourishing and creating hundreds of thousands of
direct and spin-o; jobs. ;e (non-independent)
IIROC dealers in the main tend to be gatekeepers
with no skin in the game (the independent
IIROC dealers are still very entrepreneurial, yet
are shrinking in number).
;e EMDs put their risk and reputation on the
line pretty much each and every deal they do.
;ey literally cannot a;ord to have losers. And
they are being ‘rewarded’ through increasingly
complex rules and regulations, which the IIROC
dealers can a;ord to spend hundreds of
thousands, if not millions, of dollars in terms of
compliance costs, but EMDs cannot.
Do you have any hopes for the industry
Yes, that the Ford Government follows through
on its promise to cut red-tape, especially so as it
relates to the raising of private capital in the
Province of Ontario, which ultimately results in
the business expansion and the creation of jobs.
Let us envisage a situation where the Province of
Ontario is a leader in area of rules and regulations
that encourage (and not inhibit) the formation of
private capital for worthy and growing companies.
And to be clear, this does not mean no regulation
at all – simply responsible and balanced regulation.
If you had the power to change one thing
about the private capital industry, what
would you change?
Well, it would not be surprising for you the hear
“deregulation” given the above. But I would also
say more pro;le for the unsung heroes in the form
of the Angels and EMDs who are not simply
gatekeepers but who really have the skin in the
game. ;e “Masters of the Universe” VCs and PE
folks get toasted and heralded (mainly by toasting
and heralding each other) in the social pages and
at industry functions, which are pro;led in the
media, while Angels and EMDs quietly go about
their business taking on the real early-stage risk.
;is needs to be heralded and rewarded, not
snu;ed out through senseless over-regulation.
An interview with WeirFoulds Partner, David S. Brown, PCMA Co-Founder & Director