The Resource Market Downturn Isn't Related to Commodities - Here's Why

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Don Mosher of B&D Capital Partners, a member of the VCMA’s advisory board, explained why the association recently wrote an open letter to BC’s legislative assembly.

Earlier this week, the Venture Capital Markets Association (VCMA) published an open letter to all elected members of BC’s Legislative Assembly. In it, the non-profit, Vancouver-based group calls out the BC Securities Commission (BCSC), the Investment Industry Regulation Organization of Canada (IIROC), the Capital Markets Regulatory Authority and the banks that control the TSXV and TSX. 
According to the VCMA, together those bodies are “effectively killing the BC-based support industries that have been responsible for creating thousands of jobs in BC and around the world.” More specifically, they are creating barriers for companies looking to raise venture capital and for investors looking to invest in such companies. And while the VCMA is concerned with venture capital in general, it’s aware that the resource space in particular is suffering from those problems at the moment.
The Investing News Network had the chance to speak with Don Mosher of B&D Capital Partners, a member of the VCMA’s advisory board, following the letter’s release. He was able to shed some light on why the letter was necessary, why he doesn’t believe it will have much effect and what changes might save BC’s resource industry.

Strangulation by regulation

As all resource investors are by now well aware, the markets are not pretty. And while many have cited factors like low commodities prices and weaker-than-expected demand from China as responsible for the downturn, Mosher was adamant that the key issue is regulations. “I’ve been in the business for 35 years, I’ve seen downcycles,” he said. “This is not commodity related. This is pure regulatory blockage.”
One might be excused for thinking that more regulations are better than fewer. After all, regulations are supposed to help investors gain the information they need to make smart investment decisions.
However, Mosher made a compelling argument that too much regulation is not good. For example, he pointed out the BCSC funds itself “through fees and fines that it generates by policing its own regulations” (as opposed to being funded by the government). For him, that’s a concern because “they base their salaries on the amount of money that they generate for themselves” — in other words, the BCSC perhaps has a vested interest in creating and enforcing more and more regulations.
Aside from that potential problem, Mosher said he believes that while the BCSC, IIROC and the Canadian Securities Administration (CSA) have made it their mandate to protect the public, at this point there’s not much left to protect the public from — that’s because “the public’s just been completely excluded from the public markets.”
There are many ways that the public has been left out in the cold, but a big issue is IIROC’s client relationship model (CRM). John Kaiser of Kaiser Research, another member of the VCMA’s advisory board, has discussed the CRM at length in the past, commenting just a few months ago that a key issue is that it “has created a substantial liability for financial advisors by making them the judge of suitability.”
In turn, that is threatening the financial services sector as a gateway of capital for junior miners. “Venture capital listings will almost always be deemed ‘unsuitable,’ especially after a junior has failed to live up to its potential, ” he stated.

Dwindling options

Kaiser’s opinion is that investors should not be required to use financial advisors. However, as Mosher pointed out, even if an investor wants to use a financial advisor they may not be able to. “If you talk to any broker out there right now and ask him, ‘what’s the minimum amount of money I need to open up a full-service brokerage account, the answer’s going to come in at about $100,000,” he said. And of course, many Canadians simply don’t have that much money lying around.
There are also fewer brokers to choose from. Mosher commented, “in Vancouver, I used to be able to go to 35 or 40 broker/dealers to raise money for a venture deal … I’m down to six now, and of that six, two more are talking merger right now. And they’re not talking merger for any other reason than trying to have a large enough capital base to survive.”
Of course, that leaves banks as an option for both companies and investors. However, according to Mosher, they’re not a great option either. “The banks don’t give you a loan unless you’ve got collateral. So do you really think the banks could care less about venture funding? It’s not a piece of their business,” he said.
The story is similar for investors. While Mosher said that investors can certainly invest through banks, they only offer their own proprietary products — for example, ETFs. “They won’t actually put you in any equities. So how does the equity market survive if we end up with only six to 12 large institutions that only sell you portfolios of proprietary products?” he asked.

A “footnote in history”

Though Mosher and the VCMA certainly see problems with BC’s venture capital situation, Mosher doesn’t necessarily expect the open letter to change anything.
“The reason this letter went out was basically we decided it would be a footnote in history. In 10 years, when people wonder whatever happened to the venture market, there will be a historic footnote there — there was an association that warned that this was going to happen. That’s the level of frustration on our part,” he explained.
And while that might sound dire, Mosher is convinced that if the situation doesn’t change, eventually there will be repercussions. When asked about the worst-case scenario he could imagine he brought up the TSXV’s “zombie miners,” an issue that has been cropping up more and more as surviving in the resource sector becomes increasingly difficult.
“There’s 700 companies [on the TSXV] that are not compliant. They don’t have any money,” said Mosher. “The first thing that’s going to happen is those 700 companies — unless there’s some radical change here — will end up getting demoted down to the next board and quit trading. And then the ones that are currently struggling along, but still meet the minimum standards, will follow, and they’ll get delisted.”
Ultimately, he said, he “foresee[s] the entire board disappearing.”
As mentioned, that’s a worst-case scenario; however, Mosher doesn’t see it as unlikely. “If the TSX cared about what was going on, there’s some things that they could do,” he pointed out. “But because they’re a for-profit organization, and although they say all the right sound bytes … the fact of the matter is if they did care, they would have suspended the CPC program two years ago.”
TMX Group describes the CPC program as “a two-step alternative to a traditional IPO,” and in Mosher’s opinion, it’s contributed to the proliferation of “zombie miners.” He suggested that in addition to suspending that program, the TSX could take steps such as “put[ting] some sort of a reclamation program in place where we do not do any more IPOS, we set a limit to the number of listings on the Venture board — 1,500 or 2,000 companies — and build intrinsic value into the existing publicly traded companies.”

What’s the solution?

Mosher noted that Bill Bennett, BC’s minister of energy and mines, and Andrew Wilkinson, minister of advanced education for the province, have given the open letter their support, which is a step in the right direction. However, he believes “the only way this is going to work is if [resource sector members] all band together.” He noted that he’s attempting to get the support of various Canadian mining associations, though some market participants fear negative repercussions for taking a stand.
In conclusion, Mosher said, “the majority of Canadians have lost their right to invest and create wealth — that’s the biggest thing out there.”
 
Securities Disclosure: I, Charlotte McLeod, hold no direct investment interest in any company mentioned in this article. 
Related reading: 
What Does the BCSC’s New Proposed Prospectus Exemption Mean for Junior Miners?

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