Q&A with Craig Skauge
Introduction by Phil Du Heaume
When Craig Skauge asked me to write the introduction for his profile in this issue’s Exempt Edge, I would be lying if I didn’t acknowledge being a little gun-shy. After all, since the creation of the modern ‘NI 31-103’ exempt market in Western Canada, Craig hasn’t exactly shied away from taking controversial positions as an industry advocate. Take, for example, the first sentence of his comment letter to the CSA and OSC in June of 2014: “The biggest risk to the exempt market at present is regulator risk.”
To an outside observer, statements like that might sound a little bombastic. It’s basically accepted by now that robust securities regulation is the new (and very necessary) normal. Before NI 31-103, too many rogue industry participants viewed Canadian investors as cows to be milked instead of fields to be sown. People only familiar with Craig’s NEMA advocacy might be surprised to hear that he ardently shares this belief. When you talk to him about the exempt market, you quickly discover that he’s one of the biggest supporters of investor protection you’ll ever meet. It’s a passion for protecting investors that’s only rivaled only by a fearlessness in demanding that the elimination of the ‘bad guys’ doesn’t come at the expense of the ‘good guys.’
Nothing typifies this exercise in contradiction more than Craig’s advocacy work regarding recent amendments to (and in the case of Ontario, the introduction of) the Offering Memorandum exemption. There’s a better exempt market out there somewhere and Craig is committed to help make it a reality. His approach is bound to ruffle a few feathers along the way; but to quote James Carlos Blake, “If you're afraid to defend your convictions because you might get your ass kicked for it, you're not really fit to advocate for them.”
You spent a lot of time and effort pushing to get the OM Exemption adopted in Ontario. Why was this so important?
The inability of issuers to aggregate and dealers to raise capital in the biggest province in the country left a large hole in our industry. It wasn’t rare to hear the frustrations of Ontario companies being unable to raise money beyond their innermost circle and often even having to come West to fund businesses in their own province. From an investor perspective, it’s no secret that the banks dominate Ontario and as such investors there have historically had very limited options as to where they could invest. There are a lot of great investment opportunities in the modern day exempt market and Ontario citizens should have the same rights to diversify outside the markets as does every other Canadian. After nearly four years of efforts, I’m happy to see that finally become a reality.
Creating regulatory and policy change like this is not easy. Why did you undertake this challenge on as a strategic initiative?
Honestly, I was naïve as to how much it was going to take to get this across the finish line when I started. The biggest spark that prompted me to take this on was the sheer amount of people that told me it would never happen. I didn’t like hearing that and didn’t understand why there was this notion that the OSC wouldn’t even consider it. I came to understand their rationale for not adopting this exemption pre NI 31-103 but figured that they may give it a consideration with the new regulatory environment. I figured that in the big picture, having this exemption would be beneficial for the industry as a whole as it would give EMDs a better shot at getting the critical mass needed for a viable business model, give Issuers access to a lot more potential investors, and even just create a larger general awareness of the retail exempt market across the country. Like it or not, Toronto is the epicentre of our capital markets and when something gets adopted there, it usually grows at a much quicker pace.
Have you found much has changed in the years you spent educating people in Ontario on the Exempt Market? Do they understand its potential importance?
As can be expected, I’ve gotten mixed reactions and the general theme has changed over time. Most recently, I think people have become a bit apathetic as it’s taken what they perceive to be a very long time to get this change finalized. We’ve even had Advisors from other sectors of the markets join EMDs in anticipation, only to move back to their old IIROC firms thinking that it was taking too long or just plain not going to happen. The OSC Exempt Market Advisory Committee was only formed 3 years ago and accomplished a lot in a relatively short time frame. I understand that people think 3 years is a long time but when you’re talking about exemptions that will impact billions of dollars, the underlying changes can’t be made overnight. They need to be well thought out. I think the marketplace is starting to recognize that this is actually happening and the optimism is returning. There’s still a lot of work to do in regards to educating the masses, including outside advisors but I don’t think it will take long to get the message out.
What was it like working on the OSC’s Exempt Market Advisory committee?
Considerably different than what I expected when I walked in there on day one. Being an Alberta boy, I had a preconceived notion about people from the East, particularly those in downtown Toronto. Add to that, we’re talking about regulators here, and I wasn’t expecting a warm and fuzzy welcome. I was wrong. The experience had its ups and downs, but all in all, it was great.
The OSC selected a very well rounded group of individuals to work towards adoption of these exemptions in a balanced manner in terms of capital formation and investor protection.
They had some of the best and brightest minds in the country from the legal community and investment industry but brought in representation from FAIR Canada to ensure we gave everything a sober second thought in terms of what’s right for the investor, not just the business community.
At the staff level, the OSC couldn’t have selected better people. The staff overseeing this committee gave everyone’s opinion the weight it deserved but never hesitated to challenge us if they thought we were out of line.
The OSC Exempt Market Advisory Committee was a refreshingly cooperative effort between regulators and industry, with everyone’s best interests in mind and I hope other provincial regulators take note. I’m happy that the ASC formed a similar committee this fall and look forward to participating in a similar capacity in my home province.
On the last OM Exemption comment period in 2014, the OSC received an unprecedented 920 letters from industry and investors. What do you feel was the reason?
I think there were 2 reasons. The first being that their proposal (regarding $30,000 investment limits) wasn’t well received. It was disliked by issuers, dealers, advisors, and investors alike and none of these people were afraid to express their opinion. The second reason was that everyone stepped up to the plate and not only wrote letters, but got their colleagues and clients to do the same. NEMA gets a lot of credit (both good and bad) for all those letters but the truth of the matter is that we were just the first stone thrown…it was a ripple effect. I was very proud to see our industry, which can at times be too divisive, put up such a united front.
Given that the Ontario OM investment limits are being imposed elsewhere, some people have said that Alberta, Saskatchewan, and Quebec are ultimately sacrificial lambs in getting the OM Exemption adopted in Ontario. What’s your take on that?
I can see how it looks that way, given the timing and ultimately other jurisdictions following Ontario’s lead but it would be naive to think changes weren’t coming elsewhere, whether Ontario adopted the OM exemption or not.
Considerable money was lost in the retail exempt market in Alberta prior to NI 31-103 and it’s undeniable that some investor protection mechanisms were needed. From what I’ve seen in the last 5 years, the EMD regime seems to have resolved a lot of the concerns but the ASC wanted to put in another safety net. Philosophically, I totally disagree with limits but in Alberta we have a government that won’t even have this on their radar given the current economic conditions we’re faced with, nor will we have a lot of luck getting it there. While some Albertans are ultimately going to be upset with the loss of the historic right to invest how much they want in these securities that will hopefully be offset by there not being stories of unsophisticated investors putting too much money into one place. From what we’re hearing at the Dealer level, these limits will only affect a limited amount of trades and are ultimately workable in their business models.
To date, there hasn’t been a lot of OM related distributions in Quebec so while it may seem odd to people that there are caps, I don’t think it will be an overly contentious issue there as they’re losing something they’ve historically not used that much. I think the same can be said for the smaller jurisdictions signing on to this as well.
In Saskatchewan, the perceived following of Ontario is simply a part of the much bigger picture that is harmonization efforts under the Cooperative Regulator Regime, which Saskatchewan signed on to long ago.
I think it’s interesting to note though that Alberta, whose not signed on to the cooperative regulator is participating in these harmonization efforts, while British Columbia, who is signed on to the CCMR, is not adopting these changes and maintaining their historic OM exemption which has no investment limits for anyone.
Are you pleased with the final form of the OM Exemption coming to Ontario and eventually being adopted elsewhere?
Ultimately yes. Are there some things I would change? For sure, but overall I think it’s a workable and well-rounded model.
For those in industry that aren’t happy with where things have landed, you need to remember that the Ontario OM push started when the CSA looked to significantly decrease the number of accredited investors in Canada by adjusting qualification criteria to 20 years of inflation.
We also need to remember what the initial OM proposals looked like. People seem to have forgotten that the very first OSC proposal for the OM exemption looked just like the forthcoming crowdfunding regime, with $2,500 per issuer investment limits. We now have $100,000 per 12 month period limits and even related party EMDs getting to use this tool.
What I like the most about this model is that it recognizes the value of the registrant. It creates a clear distinction between OM trades by a registrant versus an unregistered salesperson, as (eligible) investors are limited to purchasing $30,000 a year unless it’s done through a registrant. To date, we haven’t had that distinction and have had the undesired consequences of unregistered salespeople effectively having no limits as they’re not bound by suitability.
If the ASC, AMF, and other regulators were intending on following the Ontario model all along, these small limits could have very well found their way to other provinces too. It would’ve been an industry killer and that’s why we fought so hard to get the Ontario model right. Because we knew it was going to set the stage for the majority of Canada.
Having the needle moved 40 times the original proposal is a pretty significant accomplishment in my mind. People need to focus less on the rare circumstance where more than $100,000 per annum would be suitable for an eligible investor and see that overall, this model makes a lot of sense.
What about Issuers using this exemption having to now provide annual audited financial statements and report certain material events? Doesn’t that just bring these companies closer to being public which kind of defeats the purpose of being “exempt”?
The exempt market has evolved and the rules needed to evolve with it. We’re now in a world where multiple EMDs, and accordingly hundreds of advisors may raise money for the same issuer. We’ve seen this result in issuers having over $100,000,000 of other people’s money. Whether they’re ‘private’ or not, there’s some transparency owed to investors.
The unfortunate reality of the vast amount of regulations put in place under 31-103 is that the retail exempt market isn’t able to service the small business community like it should and have a financially viable business model at the same time. Small issuers can’t afford the fees EMDs need to charge in order to stay in business themselves. As such, we’re servicing larger and larger issuers that can afford the costs of entering and operating in this market place.
There are lots of issuers on the Venture exchange with market caps under $1,000,000. It doesn’t make any sense that a thinly traded public company has to provide ongoing audited financial statements and reporting to investors yet a ‘private’ company that is 100 times larger doesn’t.
Having said that, I still think that there are cases where ongoing audits don’t make sense or necessarily add value. There should be a mechanism that allows investors to dispense with the audit and save the cost if the majority agree it’s sensible to do so.
In addition, there should be a threshold of capital raised where ongoing audits aren’t necessary. Some issuers raise as little as a couple million dollars under an OM and to subject them to audits for years may not be economically feasible. I’m not saying I know what the threshold is but there should be one as not all issuers using the OM are alike.
Ultimately though, I’d rather see all issuers subjected to these requirements than none.
What are your thoughts on the Private Capital Markets Association (PCMA)?
I think that just like NEMA, they’re doing important work advocating for the exempt market. People may perceive us as rivals but the fact of the matter is that in the bigger picture, we’re fighting the same fight. NEMA obviously wants and needs support of the industry but my hope is at the very least, those who are earning a livelihood in this industry will support one, if not both of us.
There’s been industry buzz about a merger between NEMA and the PCMA. Do you think we’ll ever see that?
We got the OM exemption adopted in Ontario so nothing’s out of the question. The fact of the matter is that a merger between any two groups isn’t a yes or no question. It’s a question of what would a merger look like. Who would be the executive team? Who would be the board of directors?
The PCMA has some really good people on their board and executive team. For a merger to happen, some of those people may not have the same position, if any, on a go forward and the same would go for the great team we’ve assembled at NEMA. Would that really be in our industry’s best interests? For some of our best and brightest to be pushed to the sidelines?
I think that the PCMA brings a lot of expertise from the legal and accounting community to the table and we balance that off with people from within the industry itself. I started NEMA wanting to ensure that our industry has representation from those that are on the street, raising capital, meeting clients, etc. but I see a lot of value in both.
All I know for now is that we collectively provide a bit of a one-two punch to regulators and we may not want to give that up just yet.
Now that there will fundamentally be a national OM Exemption, what is next for NEMA in terms of advocacy?
It all depends on what regulators come out with. Given that we have finite resources, we have to pick our battles carefully. Depending on our new federal government’s position on the Cooperative Regulator, there will ultimately be considerable resources needing to be dedicated to ensure industry’s voice is heard regarding the prospectus exemptions that are produced from that piece of legislation. Assuming those come out for comment as indicated when the Conservatives were in power, we’ll likely be spending a good amount of our summer and fall on those.
The OSC EMAC Committee also came out with a final form of the Crowdfunding Exemption, due to be implemented early next year. How do you feel about equity crowdfunding generally being adopted across the country?
There’s no question that we’re at a crossroads where mechanisms need establishing in order for small businesses to access capital. I’m just not sure crowdfunding is the magic bullet some think it is. I’m rarely one to agree with FAIR Canada but I share the concerns about the marriage between unsophisticated investors and entrepreneurs. I can’t see anyone with a great level of sophistication wanting to put only $2,500 into a deal and can’t see a seasoned entrepreneur wanting to manage an investor database of 600+ in order to only get $1,500,000. I think Kickstarter is a phenomenal idea and I’ve happily supported some entrepreneurs through it myself but when you add an ROI expectation as opposed to a widget, I think there’s going to be problems. Hopefully I’m proven wrong.
Is there anything else you would like to share with readers?
If I’ve learned anything in the last five years it’s that our regulatory environment is anything but stagnant. I recognize that the constant barrage of proposals and changes can be challenging but there’s little we can do to change the pace at which these things come out. Our industry has been fighting an uphill battle in order to show and prove over these past five years and a lot of positive strides have been made. Having said that, the battles are far from over. If you’re an industry member andreading this, be you a Dealing Rep, Issuer, Lawyer, Accountant, etc., I’d encourage you to become a member of our association if you aren’t already. The time for advocacy has never been more important and as a small industry we need all the support we can get. If you’re already a member, thank you very much for your continued support.
Craig Skauge is the President, Chairman, and Founder of the National Exempt Market Association. Currently a member of both the Ontario Securities Commission Exempt Market Advisory Committee and the Alberta Securities Commission Exempt Market Dealer Advisory Committee, Mr. Skauge is recognized as a leader and national subject expert on the Canadian Exempt Market. Mr. Skauge is the Executive Vice President and a Director of Olympia Financial Group Inc. (TSX: OLY) and Olympia Trust Company. Mr. Skauge has privately consulted on over 500 exempt market offerings and is also the president of an investment company dually listed on both the TSX-V and CSE. Mr. Skauge has been featured in the Financial Post, Globe & Mail, and Investment Executive and is a regular speaker at industry events.