The Marathon of Private Capital Change in Canada: NEMA’s Comment Campaign to the OSC’s 45-710 Consultation Paper
By: Ryan Hoult
The Results Are In
After a sprint to the finish of the OSC Exempt Market Review Consultation Paper 45-710 comment period ended March 8, 2013, we took a look at the comments the OSC received and what they tell us about the market today. After reading through all 97 letters published on the OSC’s website, there is one very apparent trend: people overwhelmingly support the offering memorandum (OM) exemption in Ontario. Of the letters received, 76% supported the adoption of the OM exemption in Ontario; while only 5% were against the change (19% did not address the OM exemption). Given the active discussions over the past few months, we knew the OSC would be receiving comments from all types of people. However, we did not expect such overwhelming support, especially from key financial players outside the retail exempt market.
Reasons for supporting the exemption were quite varied, but most boiled down to the simple logic NEMA has been pushing since its inception: the OM exemption works. In letter after letter, people point to the growth of small business in western provinces due to easier access to capital being provided. Regular Ontarians talk of wanting to invest in something besides the TSX, and of not wanting to pay a 3% MER to do so. Investor Roland Lee puts it simply, “I believe that [an] ordinary person like me, in Ontario, should be allowed to purchase exempt market securities, just like our counterparts in the rest of Canada… I understand the need of investor protection, which is why I believe that I should be well informed by the EMD dealers. But once this is done, I should not be restricted to what I can invest based on my net worth or investment amount.”
With regards to monetary limits on the OM exemption, writers were not supportive of the OSC’s proposed limits, noting that they were entirely unreasonable and unworkable. As noted by Friedman & Associates, the OM exemption as proposed “barely moves the needle in terms of real progress and unnecessarily introduces a new regime that is unlikely to be of any practical benefits to our clients.”
The need for harmonization was another consistent theme in a significant majority of the letters. Writers constantly pushed for the CSA to move towards harmonization on exemptions and dollar limits in order to encourage and simplify multi-jurisdictional offerings. “Should the OSC proceed with such an exemption, it should work with other jurisdictions to ensure that there is one consistent OM exemption, rather than adding to the range of OM exemptions that complicate and increase the costs of inter-jurisdictional capital-raising,” asserts Barbara Amsden, representing Investment Industry Association of Canada.
A pleasant surprise in the comments was the support of IIAC, Portfolio Management Association of Canada, Alternative Investment Management Association, TMX, RBC, and the CFA Society for the adoption of the OM exemption. In their letter, RBC states, “We do not object to the introduction of the Offering Memorandum exemption in Ontario. We believe harmonization of the exempt market is important to ensure that both investors and market participants have equal access to the exempt market regardless of the jurisdiction in which they reside.” The TMX was among the most supportive respondents to the OSC declaring, “[We] support harmonization of the prospectus exemptions across the country. We are also unaware of any negative issues that have arisen in jurisdictions that have the OM exemption available and therefore believe any reservations Ontario had regarding this exemption have been alleviated.”
Many Miles to Go
However, as supportive as the letters were, they also pointed to areas where exempt market participants need to do better. Foremost, we need to better educate the public and other industry players about the workings of the marketplace. Many of the same letters that were supportive of the OM showed significant lack of understanding of EMDs and the regulations they operate under. There were calls for mandatory registration, KYP rules, KYC rules and fee disclosures; all things that already exist in the post NI 31-103 environment. This was not just limited to small players, even a national law firm expressed concern that no due diligence would be performed under these exemptions, clearly unaware of EMDs role in the retail exempt market.
While many of these commenters were from Ontario and have little or no exposure to the modern retail exempt market, it still speaks to a need for our industry to better promote itself. The exempt market industry has already made huge strides this through the creation of NEMA, but this is not a job NEMA can do on its own. We must all seek to promote the exempt market in all our daily activities, whether to clients, friends or other professionals.
This industry is not just about raising money, it is about funding the small businesses that drive the Canadian economy, while enriching its investors in the process. Investor proponents, the Canadian Federation for Advancement of Investor Rights (FAIR), offered in their letter a very poetic reminder for the exempt market industry: “Capital formation is much more than just capital raising. By itself, selling a bond or a share of stock doesn’t add a thing to the real economy, no matter how quickly or cheaply you do it. True capital formation requires that the capital raised be invested in productive assets – like a factory, store, or new technology – or otherwise used to make a business more productive. The more productive those assets are, the greater the capital formation from the investment – and, importantly, the more jobs created.” Our industry must heed these words; positive change in the private capital markets is a marathon and not a sprint.
What remains to be seen is whether the OSC will take note of the overwhelming support and evidence in favour of the OM exemption. If they are honest, we should see a workable model adopted in the near future; failure to do so will leave the industry questioning if the whole exercise was merely lip service, as many had foretold