By: Cora Pettipas
Where there is change there is opportunity - and there is always change. What is most significant for the Canadian exempt market is that we are seeing a vitalisation and fortification of our industry. Just like a hardy seedling growing from a tree stump, the exempt market is creating something exciting and new from antiquated and traditional regulatory structures. In order to nurture this growth, industry needs to be armed with accurate information and pragmatic policy in a spirit of collaboration.
Due to the pioneering efforts of a few of Canada’s top scholars, such as Bryce Tingle, Jack Mintz, and Vijay Jog, we are developing a body of available knowledge on the exempt market for the first time. As the excellent cover article Against All Odds by Bryce Tingle highlights, “Multiple economic trends have been pulling resources out of the public markets and into exempt issuers.” The exempt market is growing and is serving to fill a void left by the failings of traditional public markets for business.
The exempt market is not a panacea for investors and the Canadian economy, nor is it a space operated by corrupt disingenuous businessmen. These absolutisms are simple minded. In his recent paper, The Exempt market in Canada, Vjay Jog recommends a central repository for private securities data to find the middle ground of accurate information on investment structures, sectors, duration, and investment performance, “This lack of information is lamentable since this type of information is necessary to investigate the efficacy of this market in matching borrowers and investors by showing the range of realized rates of return. These data, if they were to be available, might lead to regulatory changes with respect to the degree and quality of information and they can provide another signal for investors about this market” As interest from the public continues to grow about the exempt market, it is distressing that the primary source of information for them is through regulators, often is inherently incomplete, and is negatively biased based on their experience with the worst case scenarios.
Another unchallenged assumption is that the regulators have a ‘dual’ mandate. That fostering fair and efficient capital markets is separate and mutually exclusive from investor protection. It has been quoted ubiquitously from regulators that a ‘pendulum’ swings between investor protection and efficient capital markets. I am not sure the origin of this ‘truth,’ but have found no basis for it, and research suggests otherwise. Maybe it is just a case that something is repeated enough that it becomes accepted as a fact, like the exempt market has more fraud than other areas of the capital markets. It is simply not substantiated by fact, which means it is simply an opinion.
Fair and efficient capital markets have investor protection implied, not because investors earn 20% each time and never lose money, but because information is widely available, products are transparently priced and efforts are made continuously to detect and deter fraudulent activities. NEMA, and the exempt market industry does not want frauds happening in our space, as it negativity effects everyone. Both industry and regulators are on the same side: we are both adamantly anti-fraud.
Right now the exempt market and its investors are operating on misleading signals, primary coming from regulators and media. This information asymmetry has destructive real world costs. “Moreover, since there are no such readily available data, a single investment gone bad gets undue attention and leads to calls for increasing scrutiny and additional rules,” Vjay Jog accurately states. Instead of spending resources ‘educating’ the public with public service announcements that offer questionable value such as the ASC’s current ad I see every time I enter my office elevator: “creativity is subjective but the truth isn’t” – they should be allocating those resource’s to making the capital markets better through open communication with academia and industry and every effort imaginable of fraud prevention.
It is time for the regulators to be held to the same standards of transparency, fairness, professionalism, and accountability that our industry is now held to. It is time to step up the game. It is time to ask ourselves – Why are we on opposite sides if we both want integrity of the exempt market? There is an imbedded conflict of interest when the regulators research, create policy, regulate activities, and enforce, all with in a vacuum with no transparency or formalized oversight. This situation is like the analogy that the police, judge, jury and the executioner are all the same person. This lack of accountability can lead to abuses based on the power and informational imbalance; all destructive to wealth. This is the unfortunate reason of why associations are so important, as industry registrants live in fear that any perceived slight may affect their livelihood and the ability to serve their clients.
The regulators need to collect valuable data on our market and disseminate it. Academics can analyze it indicating systematic trends and weaknesses, and industry can add qualitative meaning to the data and adopt pragmatic best practises for industry.
The regulation structure should be the support that fosters the nourishment of efficient capital markets, nourishing a seedling into a structure that is strong and flexible enough to persevere with environmental threats. Although it is a robust seedling, it can still be sat on by bad policy and crushed. That is in no one’s best interest. NEMA will continue to work with regulators to affect pragmatic changes to the exempt market to facilitate efficient use of capital, especially now, when the Canadian economy needs it most, as NEMA is the voice of the exempt market.