EXEMPTION ORDER | IT’S TIME CANADA HAD A NATIONAL EXEMPT MARKET ASSOCIATION
By: Craig Skuage
The goal when Craig Skauge formed the Western Exempt Market Association in 2011 was to unite companies and individuals in Canada’s four western provinces who were eager to change the regulations governing exempt securities, while also promoting their many benefits to investors. As it happens, WEMA gained traction from B.C. to Manitoba under Skauge’s presidency, but it has also attracted dozens of members from across the country.
Having surpassed his regional ambitions so quickly, Skauge is now setting his sights higher. Whether others in the industry like it or not, he wants WEMA to become the country’s first truly national organization that represents the interests of exempt market participants. “We didn’t want to step on anyone’s toes,” he says from WEMA’s headquarters in Calgary. “But I’m the type of guy that believes if you want something done right, you do it yourself.”
Exempt market securities are ones that can be sold without a prospectus, the information document generally required by law to sell publicly traded stocks, bonds and mutual funds. The exempt market in Canada has substantially grown since the global financial crisis in 2008. Last year, $86.5 billion was raised in Ontario alone, up from $78.6 billion the year before.
Skauge, who is also a business development manager at Olympia Trust Co., a company his father started by tapping the exempt market, says more entrepreneurs are being forced to turn to alternative methods to raise capital for their businesses. Large brokerages in the country won’t return prospective financing calls unless it’s regarding at least a $20-million deal and they certainly have no interest in financing requests for a million or two, he says. Canadian banks, meanwhile, have tightened their lending parameters in the past few years, making it more difficult for small businesses to qualify for loans and lines of credit. Exempt markets have also been fuelled by investors unhappy with volatile stock markets and near-zero saving rates.
Despite the industry’s growth and resulting investor attention, Skauge says the exempt market remains largely misunderstood and unfairly characterized by regulators as a kind of capital markets Wild West that needs stricter rules than public markets. For example, he doesn’t like that companies looking for seed money are required to provide audited financial statements when they go to the Street for exempt financing. “Management prepared statements used to be fine. Now guys are spending as much as $7,000 on an audit for a brand new company with $100 in an account,” he says. “The more regulation, the more cost, and it can drive guys out of business.”
Another frustration for WEMA members is the requirement to provide costly quarterly statements and perform mandatory “know your client” updates. “In the public market, if someone’s risk profile changes, you can do something about it, but in the exempt market, where securities are illiquid, once you’re in it, you’re in it,” he says. “It’s your advisor who should have given you proper advice to begin with.”
The biggest regulatory issue, however, is Ontario’s take on who can invest in exempt markets in the province. In the rest of the country, anyone can invest in exempt market securities -- to a limit of $10,000 in certain provinces unless they meet certain investor net worth or income criteria that would allow them to invest more. But only accredited investors or people who have $150,000 to invest in one deal can purchase exempt securities in Ontario. Skauge says the rule leaves more than 90% of the province’s investing population unable to access the exempt market.
“Our members have lists of thousands of Ontario residents who have attended their seminars, but have been told, ‘Sorry, until the rules change you can’t do it,’” he says. “Given the fact that the Ontario economy is not without its hardships, it is time to open up another funding mechanism for small businesses and give investors whose confidence is shaken another option.”
The Ontario Securities Commission’s recent decision to form an exempt market advisory committee in Ontario is at least partly due to WEMA’s exhaustive letter-writing efforts. Ultimately, Skauge wants to see regulations changed so that exempt markets in all 10 provinces and three territories are better aligned. “We’re not for freewheeling and no regulation, because that hurts confidence in the market and makes it harder to raise money. We’re just trying to help find the right balance.”
** Material reprinted with the express permission of: National Post, a division of Postmedia Network Inc.