In greed they trust | What Happens in the Shadows of the Capital Markets
By: Craig Skauge
Tales of greed in the financial industry are nothing new. It seems that not a week goes by without another story hitting the papers about some unscrupulous promoter or Ponzi scheme resulting in investor losses in the millions. While there has been no shortage of these stories about the exempt market, you do not have to look far to find similar tales in the public markets either. However, the most seemingly unbelievable of these stories seem to involve promoters that do not operate in the public or EMD world, or even under the NW exemption. Instead, they tend to involve those that operate in the shadows of regulators and industry alike. It is these non-registrant ‘guaranteed’ deals, and those that flog them, that pose possibly the greatest reputation threat to the investment industry.
Given the vast number of financial skeletons that have come out of the closet over the past few years, I rarely see a story or regulatory press release that catches my eye anymore. I guess like many of us, I have grown desensitized to the stones constantly thrown at our industry because of the evil deeds of those bad apples that we as an industry have since sent packing. A recent press release from the British Columbia Securities Commission (BCSC) however did warrant more than a glance. No, it was not that the accused, Doris Nelson raised any more money than the other sociopaths in the pre NI 31-103 days. And it was not because she claimed the investment was ‘risk free’ – that is not a new trick either. What did catch my eye were the unfathomable interest rates Nelson was offering investors for purchasing promissory notes to finance her ‘Little Loan Shoppe’ business – and the fact that people actually bought these ‘securities.’
Nelson managed to convince at least 355 BC based investors (to the grand total of over $69 million dollars) that her business was so profitable she could afford to pay them anywhere from 40% to 60% interest per annum on their money and still make a tidy profit for herself. Imagine that; earn 60% interest per annum risk free! These allegations show a major approach that scammers know and rely upon regularly: some investors can be just as greedy for euphoric returns as the promoters themselves are for other people’s money. If you throw a large enough yield or projected return out there some investors will ignore any evidence of a bad deal and sign up on the spot. Worse than that, throw in a referral fee, as Nelson did, and they will get their friends and family to sign up right alongside them.
It may seem shocking to the general public and even industry members that someone can raise (and ultimately steal) 5, 10, or even 100 million dollars without a regulator knowing it, but to expect the regulators to account for every dollar in the financial system and to protect every investor is unrealistic. When considering how large the capital markets are as a whole, the limited budgets of regulators, and analyzing how these rogue participants raise their funds in the shadows, it is not hard to realize how this can and will continue to happen. The fact of the matter is that regulators have finite resources and scammers know and rely on this. While regulators focus a vast (maybe too much) amount of resources ensuring compliance by those of you that are registered, there is a huge underground to the financial markets that is a way bigger threat than you may think.
As champions for this reborn industry, we should all take it on ourselves to know how to spot these types of scams and to not turn a blind eye when we see them. While we need to be cautious about creating a culture of snitching unnecessarily (and trying to get competitors in trouble for reasons of self-interest) industry members should keep their eyes open and contact either NEMA or better yet the regulators directly when they see something that is obviously not above board…like something that offers 60% interest per annum.
By working with regulators and putting the Little Loan Shoppes of the world on their radar before they raise millions, you will not only be helping the regulators (and investors) but you will be helping the credibility of our industry and ultimately yourself too. We as industry all know the difference between the old exempt market, the underground financial world, and the new viable part of the capital markets we now participate in. However many, including some regulators, do not get who we really are yet, and what we do for small business. We are all just one and the same in the exempt market to many. By curbing the operation of these rogues we will ultimately create a more credible exempt market in everyone’s eyes which should help us all in the long run.
Telling the whole story
Knowing the tactics of these unscrupulous promoters, the BCSC has undertaken an aggressive ‘Investright’ campaign alerting investors to scams in the ‘private markets.’ While the BCSC should generally be applauded for these investor protection efforts, certain of these campaign materials inadvertently paint the regulated exempt market with the same brush as the Nelsons of the world. There are certain Investright campaign materials that could overly alarm investors (which is the point) but is that necessarily a bad thing?
At first glance, I felt that the BCSC was out of line and was outraged….but then I gave it some thought and arrived at a different conclusion. First off, the more materials that help keep people from investing in the Nelsons of the world the better. Those deals only make it harder for everyone, public and private, to raise money. Secondly, we can spend our time and efforts trying to convince the BCSC to change a government mandated campaign or we can spend it becoming educators ourselves and work with the BCSC in a collaborative effort.
I am of the opinion that our members would be best served by addressing these anti-fraud materials head on with investors. Registered Dealing Representatives should explain to investors that not all investment offerings or ‘salespeople’ are created equal. It is okay to put a bit of fear into investors hearts when you have a tool to alleviate it. Tell clients that unlike those that the BCSC Campaign targets, you not only operate outside of the shadows but operate in broad daylight as a registrant fully under the scrutiny of regulators. You have worked hard to differentiate yourself from the rest of the pack so why not enjoy the fruits of your labour?
The bottom line is that even though our industry has seen significant growth and revival under NI 31-103, reviving the reputation of the retail exempt market has not been, and will not soon become, easy. But through educating regulators and investors about how things have changed and bringing a bunch of additional eyes to the streets looking for bad apples, we will find our industry getting the credit it deserves a lot sooner. Visit your local securities commission website to find out how to best report a potential scam.