By Craig Skauge
The Fall of the TSX-V
The TSX Venture Exchange is in trouble. And while much of the blame for its highly publicized struggles can rightfully be attributed to a flailing resource sector, a full look under the hood would implore one to review the underlying regulatory regime governing junior public companies in Canada. The infrastructure surrounding the public markets has become a business in and of itself. While well intended in its early days with the aim of protecting investors through informed decision making, the exchange and those who serve it’s issuers have not crafted today’s robust continuous disclosure regime solely out of the goodness of their hearts; it’s a business and a BIG one at that. This regime feeds the paycheques of lawyers, accountants, brokers, transfer agents, and even regulators themselves. Job security and income of many of these professionals can be linked to the amount of regulation in our financial markets. The more rules, the bigger the paycheques. Unfortunately, in many cases, it’s these very people who steer the direction of securities regulation in Canada; people who are financially motivated to create more complex rules under the guise of them being in the ‘best interest’ of retail investors; investors who often don’t even understand the most basic fundamentals of investing.
While lost on retail investors who just think their portfolio of junior resource stocks is underperforming in tune with falling commodity prices, the exchange that hosts a majority of Canada’s junior companies is in poor health with little signs of improvement on the way. And these troubles aren’t just anecdotal. The amount of money raised in TSX-V public offerings in 2015 was significantly less than the amount raised by private companies via the Offering Memorandum exemption, even without Ontario’s participation in the latter (as that exemption was just adopted there in January 2016). In the same year, listings declined by 9%, trading volume declined by 15%, and the number of trades by an even further 29%. Add to this the approximately 600 ‘zombie’ companies, allegedly retaining their listing status without merit, and the picture gets even worse. While perhaps overly harsh and a bit crude, Tony Simon, co-founder of the Venture Capital Markets Association recently described the TSX-V as “a restaurant (with) 1,500 things on the menu, and if you’re lucky, only 50 percent of them will give you diarrhea.”
While investors obviously deserve current information when making an investment decision and ongoing accountability when their money is with a company, there is ample evidence that the quarterly reporting cycle and immense ongoing costs to be public (amounting to $200K a year by many estimates) are a nail in the coffin for a struggling company.
On the other end of the spectrum, you have the retail exempt market. A regime that, while historically welcoming to entrepreneurs (with little to no ongoing reporting requirements), was viewed as overly high risk by many investors for the exact same reason. The hesitancy of investors created by the lack of ongoing accountability by issuers and unlicensed sales representatives made capital formation difficult there as well.
So in the case of the TSX-V, we have evidence of too much regulation and in the exempt market of old, not enough.
The Rise of the Exempt Market
With the implementation licensed Dealers and Representatives provided by NI 31-103 over 5 years ago and the recent introduction of ongoing audited financial statement requirements (and notice of material events) for issuers who rely on the Offering Memorandum exemption, the modern retail exempt market is quickly becoming a place where investors can confidently placea portion of their investment portfolio, while entrepreneurs can focus on the long term vision for their core business, not quarterly results, and avoid death by overregulation.
But we’re still missing something; liquidity.
Truth be told, the TSX-V doesn’t offer it in many cases either. The fact of the matter is that the majority of companies that ‘trade’ on the Venture are extremely thinly traded, meaning liquidity, if it can be found at all, often comes with a large haircut to the seller. Where’s the Risk Acknowledgment form for that? I’d even go so far as to say that many TSX-V companies are in fact less ‘liquid’ than a number of the larger issuers in the exempt market who offer redemption to investors, often times at or near face value.
Even the poster boys of being public, the TMX Group, have taken note of the rise of the exempt market, attempting to launch their own version of a private market exchange over the past couple years, which if successful will bring even more liquidity to ‘illiquid’ securities. Imagine that, the guys who’ve made their living off of the world of publicly traded securities wanting to get involved with those that don’t trade.
So if capital for issuers is hard to come by, liquidity is barely there or having unintended consequences, who exactly is being served by the venture exchange, beyond service providers? What role is being filled by the Venture that the modern day exempt market isn’t filling? The costs and complexities of running a public company have deterred many entrepreneurs from starting out public or ever going that route. Combined with increasing availability of capital to private companies through retail Exempt Market Dealers, and the attractiveness of the exempt market is bound to grow for the foreseeable future.
Enter the Wolf
While this all may be welcome news to those of us who earn our living in the retail exempt market, it of course doesn’t please everyone. While organizations like the TMX Group have seen the opportunity presented by the modern day exempt market, others simply see it as a threat, and rather than trying to figure out a way to make it viable for themselves, spend their time and efforts trying to discredit our industry, take it down, or even take it over.
Foremost in these efforts is the Investment Industry Association of Canada (IIAC) and their oft quoted president Ian Russell who has recently been promoting the idea of requiring the retail distribution of exempt-market products to go through IIROC-licensed investment dealers only.
IIROC, like the TSX-V, has been struggling with decreasing membership due to regulatory strangulation that is driving out independent firms. Regulatory strangulation that is ultimately pushed by the big banks, who not shockingly make up a bulk of the board representation at IIAC.
So we have a case where an ‘industry’ organization, who’s allowed, even promoted, the vast regulation that has killed small independent IIROC brokerages is now calling to regulate the distribution of exempt product under the guise of enhanced investor protection and improving the livelihoods of the last few small independent firms they supposedly care about. Would it be any shock to us that if they got their way they’d do to exempt market dealers, the exact same thing they’ve done to the independent IIROC firms…kill them with regulation that can only be afforded by the largest institutions in the country?
Regulators and politicians alike should take note of what happened the last time they let groups like IIAC steer the conversation…they basically killed Canada’s foremost junior exchange and any independent IIROC brokerages. Investor choices have shrunk considerably all under the guise of protecting them and access to capital for small businesses went right along with it.
We’ve got point of sale disclosure, scary risk acknowledgement forms, investment limits, suitability, Know Your Client, Know Your Product, and suitability requirements. Plus we’ve got direct regulation, without the insulation of a Self-Regulatory Organization between us. Why in the world would be need IIROC oversight?
Regulators and politicians across Canada need to further open their ears to the business community and independent brokerage industry, like both the Ontario Securities Commission and Alberta Securities Commission have with implementation of their respective Exempt Market Advisory Committees, and pay less mind to paid mouth pieces like Russell and industry associations solely made up of those who benefit from more rules, regardless of the costs to investors and the economy itself.
Craig Skauge is the President, Chairman, and Founder of the National Exempt Market Association. Mr. Skauge is a member of both the Ontario Securities Commission Exempt Market Advisory Committee and Small and Medium Enterprises Committee, as well as the Alberta Securities Commission Exempt Market Dealer Advisory Committee. Mr. Skauge is the Executive Vice President and a Director of Olympia Financial Group Inc. (TSX: OLY). 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. A recognized as a leader and national subject expert on the Canadian Exempt Market. Mr. Skauge has been featured in the Financial Post, Globe &; Mail, and Investment Executive and is a regular speaker at industry events. For the record, Mr. Skauge is not paid by NEMA.
 Four Ways to Fix the ‘Broken’ TSX Venture Exchange By Peter Koven – Financial Post December 29, 2015
 ‘Walking Dead’ on the TSX Venture Exchange By Peter Koven – Financial Post April 6, 2015