The Conversation (0)
It can sometimes be difficult for junior mining companies to connect with retail investors through private placements. However, a new proposed prospectus exemption in BC, Saskatchewan and New Brunswick is aiming to change that.
Last Thursday, the British Columbia Securities Commission (BCSC), together with regulatory authorities from New Brunswick and Saskatchewan, put out a proposal for a new prospectus exemption that would allow securities to be distributed to investors who have “obtained advice about the suitability of the investment from an investment dealer.”
Of course, there are a number of prospectus exemptions available, the most common one being the accredited investor exemption.
However, the accredited investor exemption leaves retail investors out in the cold. Meanwhile, other exemptions that would allow retail investors (who are not existing security holders) to participate in a capital raise still require offering documents that can be costly and time consuming to produce, meaning that many Canadian issuers simply don’t use them.
“Because issuers rarely use the prospectus exemptions intended for sales to retail investors, retail investors have limited opportunity to invest directly in issuers,” reads last week’s proposal. “This means retail investors do not have an opportunity to participate in the more favourable terms generally offered through private placements, such as a discount to the current market price allowed under exchange policies.”
To help change that, BC, New Brunswick and Saskatchewan are providing another option with an exemption that would require advice from an investment dealer. According to Thursday’s media release, the new exemption wouldn’t be available to restricted dealers, exempt market dealers or dealers that have received exemptive relief from providing suitability advice.
“We think it would address the inconsistency in our securities legislation that retail investors can purchase any amount of securities of a reporting issuer through the secondary market based on the issuer’s continuous disclosure but cannot purchase any securities directly from the issuer without obtaining some form of offering document,” states the notice.
However, for John Kaiser of Kaiser Research, the new proposed exemption doesn’t go far enough. “This is a useless proposal because the client relationship model has created a substantial liability for financial advisors by making them the judge of suitability,” he said.
As Kaiser has explained during presentations at conferences such as PDAC and VRIC, he sees numerous problems with the client relationship model; namely, he sees the current system as threatening the financial services sector as a gateway of capital for juniors. “Venture capital listings will almost always be deemed ‘unsuitable,’ especially after a junior has failed to live up to its potential, ” he stated.
Explaining further, Kaiser stressed that there’s an intrinsic conflict of interest in requiring the use of financial advisors, and suggested that it would be better to allow investors to cut out the middle man altogether.
“The real problem is that the financial advisors have a conflict of interest because they get paid by the company for placing a financing with a client,” he added. “There is no way around this problem other than to allow individuals to make their own decisions about the suitability of a private placement where there is no intermediary being compensated for the completion of the transaction.”
According to the provinces proposing the exemption, the involvement of an investment dealer is “a key condition for investor protection” given the obligations that must be met by such professionals.
BC, New Brunswick and Saskatchewan are inviting comments on the proposal until June 15, 2015.
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
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