The Chance to do it Right in Ontario | Learning from past lessons
By: Peter Figura
Changes in the offering memorandum (OM) exemption in Ontario appear to be imminent. Although the procedure cannot be seen as a ‘slam dunk’ as some observers have suggested, at least the changes, and their direction (following the Alberta model), are clearly in sight.
Adoption of the OM exemption will definitely provide significant opportunities for the Ontario economy, as more and more investors will be able to allocate parts of their portfolios to assets that traditionally were available only to accredited investors, who because of the very high threshold (income level and investible assets) represent only approximately 1% of the population.
The upcoming solution (regardless of the legal ramifications of the new regulations in Ontario) will definitely increase inflow of funds into the private equities sector, and although the new regulations may not necessarily open the ‘flood gates’ as seen by some market observers, the proposed changes will definitely increase cash inflow to OM products.
With the difficult market conditions over past few years, private equity products faced significant challenges in raising capital. The very limited population of accredited investors, realizing the value of the investments, as well as some liquidity related issues made the capital raising process extremely difficult.
The proposed, or perhaps at this stage predicted, changes will not only create an opportunity for economic growth in Ontario, but also for some significant growth in securities offerings through various market participants.
This however can create some challenges. The unregulated and relatively unknown OM exemption market can create problems for dealerships, issuers, and ultimately – the investors. These problems can be created when an issuer enters this market without significant market research, diligent approval process, clearly determined distribution network, and reporting. Any failure, or even a hint of an unclearly defined environment, can in the long run create a feeling of uncertainly in this type of investment, and ultimately lower the level of interest among investors.
The Exempt Market has an enormous opportunity to use the time between now and the implementation of the new rules, to develop the necessary processes that would make the new regulations more easily absorbed by all market participants.
Following the Alberta model creates an enormous opportunity to implement the OM Exemption in Ontario the right way. Not only from the legal ramifications of the process, but in particular from the implementation angle. Rarely in the investment world have we had an opportunity to use 20/20 hindsight. This time, the Alberta experience with the OM exemption should, in my opinion, be studied very carefully and diligently, to significantly reduce the possibilities of market failures by either both issuers and dealers.
Just because there is going to be a significant cash inflow into private equities sector market participants cannot act blindly, and assume that no regulatory work is necessary because investors are knowledgeable and are comfortable with all the aspects of the securities industry and its regulations.
It is hard to draw any parallels because there is probably no such situation in the past where the regulatory environments are being adjusted so all provinces have almost identical regulations, but I can think of the situation from the mid 90’s of the past century when the Labour Sponsored Investment Funds (LSIFs) rules were implemented in Ontario.
The relatively low LSIF investment amount (in most cases lower than $5,000), attractive tax treatments (additional tax credits both provincially and federally), and an opportunity to participate in the ‘exciting’ part of the market created a significant inflow of funds. In many cases, the inflow was so significant that funds could not be deployed in a manner that would even create a chance of decent returns. In other situations the volatility of the sector created first robust returns, and consequently more significant cash flow into the funds, and then nearly collapse situations.
Based on those experiences, careful study of the OM market in Alberta, and introduction (with clear vision of implementation process) of the rules that would prevent most of the pitfalls can create a healthy environment for the OM products to play more significant role in the securities market in Ontario, and a broader sense in Ontario economy.