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KYI – Know Your Issuer

By Larry Radomski

I have been an Alternative Investment Advisor for over twenty years, starting out in Canmore Alberta in the mid 90’s, selling hotel syndications when they were the rage. Over the years I thoroughly enjoyed my job advising clients on alternative investments. Most investors were pleased to see investments outside of their stock and bond portfolios.

I worked as an independent prior to September 2010 when the regulators set up the exempt market as we know it today. So, I sourced alternative investments on my own. Not that there was a shortage; especially during 2006 to early 2008 when Alberta’s economy was on fire.

However, the crash came, and both public, as well as private based investments, tumbled. Some alternatives that were victims of the real estate crash due to the economic climate were excusable since not many people predicted the 'great recession;' especially not here in booming Alberta.

But there were many alternative companies raising capital that were based on greed, had inexperienced managers, and had unsound business plans. Up until around 2010, the hangover of failed alternatives continued. It was not pretty for the investors.

And this was the toughest part of my job as an Advisor. To tell investors they lost their hard earned money. When an insurance adjuster notifies a homeowner they will be losing a portion of their home to fire or water damage -  it’s also a tough job. However, unlike the adjuster who is just the bearer of bad news, there is a tremendous sense of responsibility and possibly even guilt for us ethical advisors. No one wants to feel remorseful of advising a client (who has given you their trust) into a bad deal. But I had to repeat this bad news explanation over and over again.

I’m resilient and recovered, and almost all my clients directed little or no blame my way. But then came the regulated exempt market in 2010 which was to change most of that. With the introduction of dealers and new regulations, investors were to be better protected. And in most cases, the investors are better protected. However, we are still seeing failing exempt issuers. In hindsight, some of these failed issuers can be explained as ordinary business failures, but many failures cannot be justified.

So what happened? Why are Advisors still having to make these difficult calls to notify their investor clients their investment is having problems and losses are looming? Why after building up trust and developing relationships do Advisors see much of that goodwill evaporating when one by one we continue to see some issuers hit the ditch?

Advisors are arguably the most important link in the chain in the exempt market. If Advisors start to drop out of the industry, the dealers will be the first to feel the pain and issuers will look elsewhere to raise capital. This is unfortunate since there are many excellent issuers and some great exempt products for wealth building.

I am a firm believer that the exempt industry is on the cusp of becoming mainstream. However, we still have work to do. Before regulators say 'enough is enough' and before investors consider the exempt market 'too risky' to invest in, we need to do our absolute best to ensure we are providing the best products available. How do we do that? 

KYI – Know Your Issuer

I believe the first step in ensuring the exempt industry offers quality investments is to have proper due diligence done more so on directors and managers of the issuing company than on the deal itself. Good management will do their best should, in the worst case scenario, a deal go sideways. As well, proper due diligence on the people behind the deal will help prevent, in most cases, those that are in way over their heads. Proper background checks will expose those with embellished resumes or outright misleading statements. What’s more important: the deal or the people behind the deal?

In addition to addressing management risk, ongoing due diligence is also important. I feel an annual 'check up' is imperative, this should be easier to implement with the new OM rules of annual Issuer audits. Most business leaders do not start out with the intent of fraud. However, once the cash starts rolling in, temptation overcomes ethics. And the once 'good guy' turns bad. But if that person knew once a year spot checks on their bank books and deal flow would be inspected, one of two things would occur. One: that same issuer would be very hesitant, or outright would just not take unauthorized funds, from his company. Or two: if sketchy occurrences get noticed, then the dealers would stop raising capital immediately before things got out of hand.  Just the threat of a spot check may be enough in most cases to prevent an issuer from perpetrating any sort misdeed.

So, the question now becomes: Is it up to the dealers to do this type of annual spot check? Maybe not. However, what’s the upside? Possibly preventing your Advisors from having to go to their clients with the news a deal they are invested in will be incurring a loss, not due to economic conditions, but because the issuer was mismanaging the fund. The results: less business moving forward for the dealer.

Now the downside. Possibly the issuer will say no, they do not want spot checks. But other issuers who have confidence in their products and processes will welcome the spot checks. If I am an Advisor and am presented with two potential real estate opportunities for my clients; one that encourages annual spot checks and the other that does not – which one would I be more comfortable and confident presenting to them? The dealer does not need to turn down the issuer that does not want spot checks. However, after some time the issuer will see its in their best interest since some advisors may shy away from their deal.

If the initial due diligence and the checks and balances are done by a third party, then the liability should also be passed on to the third party. It would be difficult for investors to attack a dealer or Advisor for an investment loss when that the dealer is just doing their best to interpret the information provided – as opposed to being the one that may have been one-sided or biased when acquiring that information.

Collectively, we can make the exempt market more mainstream by having professional advisors, strong dealers and maybe most importantly – excellent investment opportunities that deliver.

Larry Radomski had been an Exempt Advisor for over 20 years. Recently he has left his advisor position and is now a partner with Fifty3 Degrees North Consulting Group, a company that specializes in due diligence background checks for the Exempt Market. Larry can be reached at 587-487-6300 or