The Marketing Mousetrap | A Marketing Executive’s View of the Exempt Market
By Zack Siezmagraff, with Neil Hutton
I joined the Exempt Market industry about a year ago as head of Sales and Marketing for Everest Real Estate Investments, an Edmonton-based developer and an issuer of Exempt Market securities. As an incoming marketer to an unfamiliar industry, I initially used two guiding principles:
Assess the competitive landscape - how are our competitors marketing their products, and how can we emulate and build on what they do?
Play up the strength of our product, position to our target markets, and use specific media; I can say whatever I want, as long as it’s true.
These are two tried-and-true tools that incoming marketers use for all industries, and therefore I should be able to use them in the Exempt Market industry; Right?
While these two basic approaches would be fine for just about any other industry, I soon discovered there are major flaws with this reasoning.
The major one is the regulatory framework. There are thirteen different securities commissions governing each province and territory in Canada. While many rules and policies are harmonized, not all jurisdictions have the same prospectus exemptions. For example, how I market an investment product to an Accredited Investor in Ontario is different than how I market the same product to investors in Saskatchewan using the Offering Memorandum Exemption.
Also, following a competitors approach to marketing Exempt Market products does not assure you that the applicable securities commission(s) will be in agreement with that approach. Just because someone else is doing it, does not mean I should be too.
Finally, the risk acknowledgement form that the investors must sign under the Offering Memorandum Exemption has little value to the marketer. Since an investor signs a form stating they are investing at their own risk, they could lose all their money, my initial view was that the regulators would not scrutinize the marketing materials to the same extent as they scrutinize the Offering Memorandum. This has proven to not be correct.
After almost a year in my current position, I have come up with the following best practices, which I am grateful to share with the Exempt Market industry:
Best Practices for Marketers of Exempt Market Securities
1 ) Don’t make any representation that is not true.
Obviously. This means everything - from the past performance of the issuer, to the details of the security being offered, to the use of funds. I interpret the term ‘representation’ as broad as possible.
2) Be able to back up everything.
This is the natural corollary to Best Practice #1. Due diligence is my motto. I question my firm on everything. If my boss says we have a development permit in place for a 140-room hotel, I ask to see it. Making sure everything I market is accurate and that it can be backed up adds a level of care and due diligence to the process and strengthens our firm and our industry as a whole.
3) Watch your Language!
Unfortunately, the crystal ball is not working today. I cannot guarantee a 2-year return of 60%. What I can do is project a return, I can target a return, and then I can support these numbers with all the assumptions and risk mitigation strategies used in our modelling. Of course, all forward looking information and future orientated financial information must comply with the requirements National Instrument 51-102 Continuous Disclosure Obligations by stating the risks, identifying the assumptions and most importantly stating that actual results may vary.
Will the final development have a hotel for sure? Or do we simply have the zoning in place for one? “Will include a hotel” and “may include a hotel” are very different representations. Bottom line, the language used, specifically the qualifiers around future events and performance, is extremely important.
4) Ensure complete congruencey between the marketing material and the Offering Memorandum.
As a marketer, I make it my responsibility to know the Offering Memorandum backward and forward. I ensure I am engaged in the Offering Memorandum update and amendment process, and I advocate within my organization for marketing input on the Offering Memorandum. Not only to ensure complete congruency with my marketing materials, but also as a marketing best practice, which then becomes an integrated marketing communications approach.
I go so far as to include a basic brochure appended to the Offering Memorandum as an example of our marketing material. All other forms of my marketing - be they slides in a PowerPoint, comments in a webinar, or a promotional blurb in an email blast - are derived from the basic material appended to the Offering Memorandum. All marketing material should include a caution that there are risks involved in the investment and potential investors must request and review the Offering Memorandum before investing.
5) Know Your Numbers (FLI vs. FOFI)
One of our investments has a great projected return, and we have a pro-forma to back up these numbers, with 4-year projected expenses and cash flows, using conservative figures, detailed research, and proper econometrics. So the marketer in me wanted to plaster that all over our material for all the world to see. Section A.12 of the Instructions for Completing Form 45-106F2 sets out that any forward-looking information (FLI) used in marketing must be contained in the Offering Memorandum. If an extract or summary of the FLI or Future-Oriented Financial Information (FOFI) appears outside of the Offering Memorandum ii must be balanced and contain a cautionary note stating that the information is not completed and the complete FLI/FOFI is contained in the Offering Memorandum.
NI 51-102 Continuous Disclosure Obligations makes a precise distinction between FLI and FOFI. Our auditors are of the opinion that FOFI is held to a much more rigorous standard, and as such, I limit my marketing to FLI and avoid FOFI. Also, a general cautionary statement about FLI and FOFI is not sufficient. NI 51-102 has specific requirements if an issuer discloses FLI or FOFI in its Offering Memorandum.
I train all dealer representatives and sales partners that everything they say, do, write, or tweet is marketing. The securities commissions, through the Securities Acts of each jurisdiction, have broad powers of interpretation when it comes to the disclosure in the market, much of which involves ‘marketing.’ This includes websites, email solicitations, LinkedIn ads, investor PowerPoint presentations, and even how Dealer Representatives personally market the investment products. Therefore, I make it my priority to ensure that all our representatives selling Exempt Market products are aware of their disclosures and representations. I have a rigorous training program for new representatives, and I also educate other executives in the firm who would not normally consider themselves to be marketers. I have built internal compliance systems to address the review of policy and procedure documents at regular intervals to ensure all such information is current, relevant, and accurate.
7) Have adequate controls in place to monitor dissemination of information.
This is the natural corollary to Best Practice #6. In addition to regular touch points with my sales partners, I ensure that I lock PDF documents, have strict branding guidelines, and that I build into all contracts clear and precise guidelines for use of branding and marketing materials. I also regularly inspect and obtain copies of what my Dealer Representatives and sales partners are using with respect to cover letters, emails, and social media.
Unlike most industries, the biggest learning curve was that the self-governing best practices and ethical standards that generally apply to marketers are not adequate in the exempt market industry. Instead, there is a complex and diverse set of laws, regulations and policies spread amongst securities legislation and national instruments that impact how I carry out my job. Although this was a significant adjustment as a marketing executive, I have come to appreciate the role of regulatory compliance in the ultimate pursuit of investor knowledge, transparency, and informed choice in the Exempt Market