By Zack Siezmagraff
The MFDA Agent at the Cocktail Party
Shortly after I started working as head of sales and marketing for Everest, a real estate exempt market Issuer, I found myself at a financial services cocktail reception. I struck up a conversation with a seasoned Financial Planner from the MFDA world. When I told her I was in the exempt market industry, and inquired as to whether she had ever sold or referred any exempt market products, she sneered at me and said, "Yeah right! I don't want my clients crying in my office because they lost their life savings."
I was absolutely floored that a well-educated, experienced, successful Advisor in the financial services industry would have such closed mindedness about an entire class of investment products. Then I had a sobering thought: “If this is how financial professionals view the exempt market, then what does the average retail investor think?”
It is not news that our industry has perception problems. The only time the exempt market makes the news, it is because of a ‘blow up.’ Bad news stories sell. In addition to the few fraudulent companies, we also have to deal with seemingly ‘neutral’ organizations like FAIR who are incredibly biased against the exempt market. Finally, as we observed during the battle over the proposed 45-106 changes last year, even the regulators themselves have a misperception and lack of understanding of the exempt market.
I'm a marketing guy. I think in terms of perception, brand identity, consumer behaviour, and emotional connections. I was brainstorming how the exempt market industry can improve its perception one day in my office, when an email landed in my inbox.
"Subject: [Exempt Market Issuer] First Property Exit"
A fellow real estate Issuer, just announced a fantastic return for its clients - an almost 50% return in just over seven months. This is great news! There are many other success stories like this in the exempt market. There are REITs and MICs delivering 8% - 10% per year monthly, every month, like clockwork. But the average person, including the agent at the cocktail party, and the analyst at the Alberta Securities Commission, do not know about these success stories.
It's not their fault. It's our fault. We haven't told our success stories.
Look up any mutual fund and download their ‘Fund Facts.’ A potential investor can see how well or poorly the fund has performed. In some cases, this reporting can stretch back several years. It's all right there - the good, the bad, and the ugly. And that is how it should be. Data lovers can even aggregate this information and compare fund performance by asset class, portfolio manager, strategy employed, and other variables.
For most exempt market products, this currently cannot be done. Some fixed-income types, such as MICs or REITs, could have their historical data communicated in such a way. But not flow-through shares. Not real estate Limited Partnerships. Not investments in tech start-ups… not yet!
The Proposal: The Exempt Market Performance Database
We need to come together as an industry and begin telling our good news stories, and we need to tell them loudly and proudly. To this end, we need a regulator initiated database of exempt market investments and the returns that those investments have generated. A lot of people have made money in the exempt market, and we need to aggregate and quantify that information for everyone to see.
The next time I am at a cocktail party and someone mentions a blow up, I want to pull out the database and show them the money investors made in other Issuers. The only way to fight back against fear and misinformation is with pragmatism and facts.
This project will require substantial initial regulator cooperation, resources, and an ongoing industry commitment, as many investments do not deliver returns for several years.
The Criteria for Success
In order for this initiative to succeed, I propose several criteria that must be met.
1. It must be public. The perception of the exempt market is that since we are exempt from ongoing disclosure requirements (for now, anyways), that we have something to hide. This database must be public and searchable.
2. It must be robust. Like the mutual fund historical performance data, the exempt market database must show all returns - good, bad, and ugly. Furthermore, as many issuers as possible must agree to participate, and must not be permitted to withhold information if returns do not end up being as good as anticipated.
3. It must track not only actual returns, but targeted or projected returns. It is important to measure actual issuer performance against projected or targeted returns.
4. It must allow issuers to tell the whole story. The actual return may be higher than projected - but perhaps the investment was in the U.S. and a large percentage of that return was due to a falling Canadian dollar. Alternatively, the actual return may be much lower than the projected return. The issuer must be able to tell the story and explain exactly why there is a discrepancy.
5. It must allow for principal cross-referencing. In addition to searching by Issuer name, it must also be able to be searched by principals, so that a potential investor can assess the performance of key management across multiple products.
6. It must provide aggregation by asset class. For first-time or newer issuers, there will not be any historical data for that issuer. However, with aggregation, there will be data on risk and return by asset class (real estate, energy, MICs, etc.) and even by sub-asset class (Canadian real estate LPs vs. American real estate LPs, etc.).
7. It must be administered in a transparent and bias-free manner. NEMA is a natural choice to administer the database, but is out of their capacity in terms of data collection and funding. The CSA would be the logical choice in terms of practicality, it could even be initiated in conjunction with electronic data collection initiative, which is now open for comment entitled CSA Notice and Request for Comment Proposed Amendments to National Instrument 45-106 Prospectus Exemptions relating to Reports of Exempt Distribution (published August 13, 2015).
In addition to providing hard data that will demonstrate the exempt market's potential for excellent returns, it will also provide a more balanced and complete picture of the true risk weighted returns involved in the exempt market. This data can be used to combat the fear and misinformation that permeates FAIR, the regulators, and the agent at the cocktail party.
Furthermore, it will also provide an additional incentive for issuers like me to be truthful and conservative in their marketing and investment return projections, knowing that both my target and my actual will end up in a public database for all to see.
Zack Siezmagraff is the Director of Sales and Marketing for Everest Development Group and a proud member of NEMA. He is the author of several articles for the Exempt Edge magazine. He can be reached at firstname.lastname@example.org or on twitter at @ZackEDG.