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STRANGULATION OF CANADA’S FUTURE |10
ALSO IN THIS ISSUE:
|44
THOMAS CALDWELL
KEY PERSPECTIVES ON RISKCHRISTOPHE VOEGELI
F
ISSUE 7WINTER 2013/14NEMAONLINE.CA
@ NEMACANADA
|18
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POWER TO THE PROVINCES BRYCE TINGLE
THE MERCEDES NEXT DOORMATT MCKELLAR, ALEX KAUMEYER, & MAX WANG
PAGE 6LETTER FROM THE EDITOR CORA PETTIPAS
PAGE 14DEGREES OF SEPARATION MARCIN DROZDZ
PAGE 22BUSINESS RESOLUTIONS CHRISTOPHER YEUNG
PAGE 24IN A NUTSHELL CRAIG SKAUGE
PAGE 32CENTRAL BANKERS BEGIN TOSEE THE PAINT STEPHEN JOHNSTON
PAGE 17FILL IN THE BLANKS DARVIN ZURFLUH
PAGE 9WELCOME NEW MEMBERS
TABLE OF CONTENTS
ISSUE 7WINTER 2013/14WINTER 2013/14
PAGE 38DIFFERENT PAINT SAME BRUSH MICHAEL EDWARDS
PAGE 34WAISC VANCOUVER RECAP
PAGE 40DO IT RIGHT IN ONTARIO PETER FIGURA
PAGE 48THE DEAL THAT WASN’T DONE JOSH WILL
PAGE 56CONFLICT DISCLOSURE PHIL DU HEAUME
PAGE 58THE LIGHTER SIDE
PAGE 52NOT ALL CREATED EQUAL ZACK SIEZMAGRAFF
PAGE 50MEMBER PROFILE ALITIS INVESTMENT COUNSEL
PAGE 26THE MERCEDES NEXT DOOR MATT MCKELLAR, ALEX KAUMEYER, AND MAX WANG
PAGE 10THE STRANGULATION OFCANADA’S FUTURE THOMAS CALDWELL
PAGE 18POWER TO THE PROVINCES BRYCE C. TINGLE
PAGE 44KEY PERSPECTIVES ON RISK CHRISTOPHE VOEGELI
ON THE COVER
CORA PETTIPAS
DBA (Candidate) M.Sc, FCSI, [email protected]
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LETTER FROMLETTER FROMLETTER FROMTHE EDITORTHE EDITORTHE EDITORTHE EDITORTHE EDITORTHE EDITOR
As the days get shorter, and the weather gets noticeably colder, this is a very
ood time of ear for re ection s s rene their registrations and EMDs and Issuers focus on their strategic plans for the upcoming year, it is also eneficial to contem late here e are going as an industry, and what NEMA can do to assist with these goals.
We have already come a long way as an industry. Our progress can be credited to our members and their efforts. We have some of the most rilliant financial and entre reneurial people in Canada as members; and we have been able to do great work towards the betterment of this industry through efforts from our board of directors, individual
members, and the work of our committees. Our committees have member volunteers that work on various issues and projects in our industry.
NEMA’S COMMITTEESOur Education Committee has recently built an education website, exempteducation.ca, and has been working with the Canadian Securities Institute to bring more quality and timely information about the Exempt Market to roficienc courses
Our CCO Committee shares best practises, training, and provides access to government and legal experts for CCOs, of both Issuers and EMDs. It also provides a casual forum where CCOs can discuss practices and procedures with experts and each other. We would like to thank Kathleen Black for
founding and chairing the committee in its first ear
The Due Diligence Committee, co-chaired by Mike Wellwood and Scotty Grubb, is our biggest committee, with eight sub-committees. Its mandate is to create efficient and standardized best practises for the Due Diligence processes for Issuers and EMDs.
Our newest committee, the Advisor Committee will be co-chaired by Darris Cameron and Yvonne Martin Morrison. Congratulations to them on this initiative. The committee will address issues s ecificall affectin our s
including E&O insurance, compensation to a corporation and best practises for roficienc
MEMBERSHIPOur members are our lifeblood, and their support and participation are the key reason for NEMA’s success in such a short time. We are here because of them and to serve them. We welcome the 138 new members who joined in 2013. All our members can be viewed on our website, nemaonline.ca. We have overwhelming positive feedback on the Exempt Edge, which is directly attributed to our engaged and talented members who contribute with articles and ads.
WITH PENDING RETAIL FRIENDLY CHANGES TO THE EXEMPT MARKET IN CANADA’S LARGEST CAPITAL MARKET, ONTARIO, AND CONTINUED MOMENTUM FROM THE GOOD GROUNDWORK LAID IN 2013 BY OUR ORGANIZATION AND OUR MEMBERS, 2014 LOOKS TO BE A VERY PROSPEROUS YEAR FOR OUR INDUSTRY.
Cora is currently the Vice President of NEMA. Cora is also the editor of Exempt Edge Magazine, the industry trade publication on the exempt market/private equity. She is also currently representing Canada on the editorial team of Financial Planet, for the Financial Planners Standards Board. She holds a Bachelor’s degree from McGill University, a Master’s Degree (Finance and Controlling) from Swiss Management Center University, as well as the following designations: CFP, FMA, CIM, and FCSI. Cora has had tenures with several �nancial institutions in the capacity of �nancial advisor, wealth management, and �nancial planning. Her most recent previous position was as a Professor at Mount Royal University, where she taught Finance and Financial Planning. Cora is also the founder and Co-Owner of Melodic Twilight, a successful business venture which is internet based and sells in 19 countries. She has her work published and presented internationally.
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PUBLISHERCraig Skauge
EDITORCora Pettipas
DESIGNERJenelle Miller
AUTHORSCora PettipasCraig Skauge
Alex KaumeyerBryce C. Tingle
Christophe VoegeliChristopher Yeung
Darvin Zur�uhJosh Will
Marcin DrozdzMatt McKellar
Max WangMichael Edwards
Peter FiguraPhil Du HeaumeStephen Johnston�omas CaldwellZack Siezmagra�
ADVERTISERS982 Media
A2A CapitalAG Capita Farmland FundsAlitis Investment CounselBlueprint Global Partners
Canadian Coyote Energy TrustEquicapita
Exempt ExpertsGrant �orntoniFund IncomeInvico Capital JSS Barristers
Miller �omson LLPMoneyTalks
Olympia Trust CompanyPrestige Capital
Rockspring CapitalScott Venturo LLP
Sloane Capital CorpSolar Income Fund
Tandem AssetsTitan Equity Group
Triview CapitalUrban Star Capital Wealth Professional
NEMA LOCATIONSuite 1020, 140 - 10 Avenue SE
Calgary, Alberta T2G 0R1
�e National Exempt Market Association does not assume any responsibility for the contents of articles or advertisements. For reprint permission of any
articles, please contact [email protected]
IF YOU WOULD LIKE TO SUBMIT ARTICLES,
ADVERTISEMENTS OR GIVE FEEDBACK,
PLEASE CONTACT US AT:
EVENTSNEMA has participated in several conferences this quarter, to help educate people about our industry. Industry events are really enjoyable and intellectually nourishing, because we get to hear great ideas and discussions. WAISC Vancouver took
place November 7, and was a great success, with 250 industry people attending this inaugural event. The feedback from our members was positive, and we look forward to the WAISC events next year.
NEMA also attended the Moneytalks and Independent Financial Brokers events in Calgary. Moneytalks was a great event with Mike Campbell, and 400 investors in attendance (which was no small feat as it landed on the day of al ar s first sno storm ould also like to thank Director Marcin
rozdz for s ea in at the event on behalf of NEMA. NEMA is looking forward to the next Moneytalks event that features the Exempt Market, in Vancouver on January 31, 2014. Our President and Founder, Craig Skauge will be opening the Exempt Market portion of the event to an anticipated 1,200 investors.
The IFB conference was well structured and attended by Advisors outside the Exempt Market. I would like to thank member Darris Cameron for volunteering his time and talents to NEMA for the IFB event in Calgary. NEMA looks forward to participating next year, and Craig Skauge will speak at the spring and fall IFB events.
WE WELCOME THE 138 NEW MEMBERS WHO JOINED IN 2013.
2014 – THE YEAR OF THE EXEMPT MARKETWith pending retail friendly changes to the Exempt Market in Canada’s largest capital market, Ontario, in addition to the continued momentum from the groundwork laid in 2013 by our or anization and our mem ers loo s to be a very prosperous year for our industry.
We have got positive momentum and do not intend on letting it go. We cannot thank you enough for your faith in us and all you have done this past year. We look forward to continuing to work alongside you in the evolution of the Exempt Market in what should prove to be our best year et as oth an industr and an or anization s
always, keep in touch, as NEMA is your voice, your industry, your future.
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CORPORATE MEMBERSCORPORATE MEMBERSCORPORATE MEMBERS
DEALING REPRESENTATIVESDEALING REPRESENTATIVESDEALING REPRESENTATIVES
WELCOME NEWWELCOME NEWWELCOME NEWMEMBERSMEMBERSMEMBERS
ALEEM VIRANI, KV CAPITAL INC
STEPHANE MALBEOUF, SLOANE CAPITAL CORP
CHRISTOPHER BIASUTTI, SLOANE CAPITAL CORP
COLIN PARTRIDGE, SLOANE CAPITAL CORP
GIGI CHENG, TRIVIEW CAPITAL
DON WATT, TRIVIEW CAPITAL
DAVID NELSON, PRIVEST WEALTH MANAGEMENT
SHANNON PINEAU, WEALTHTERRA CAPITAL MANAGEMENT
LARRY RADOMSKI, RAINTREE FINANCIAL SOLUTIONS
IVO DAMME, RAINTREE FINANCIAL SOLUTIONS
DARRYL BANDORO, RAINTREE FINANCIAL SOLUTIONS
MARILYN GILL, PINNACLE WEALTH BROKERS
RALPH ALTENRIED, PINNACLE WEALTH BROKERS
CARL MARAGNO, PINNACLE WEALTH BROKERS
BY THOMAS S. CALDWELL
T he task of an investment manager is to identify a trend and work with it. The trend I plan to discuss in this article, we must work against because of the existential threat it poses. I believe this may be the most important and possibly the most dangerous topic I will ever discuss. My concern is I do not communicate the
topic effectively in the space allotted, or my comments are relegated to just ‘a cry in the wilderness.’
We are now at a point where a major impediment to economic growth, job creation, innovation and business formation is regulatory strangulation
ithin the financial services sector
Before I am pounced upon by regulators and media, let me state that I have, throughout my career, been a strong advocate for intelligent, clear and effective securities regulation for the protection of investors, the securities industry and our country’s economy. We have now gone far beyond that into the realm of regulatory overkill or strangulation, under the mantra that ‘more is better.’
The unintended consequences of unfettered regulators continually elude our law makers. This has gone on undetected by politicians who do not see the complex issue of capital markets as having any political upside. The reasons are simple: First, there are no votes to be gained by dealing with capital market structure. Second, this area is fraught with risks of some ‘blow up’ and no politician wants to be part of that. Third, it plays well to be seen as hard on unscrupulous and greedy characters who prey on Mr. and Mrs. Retail investor, so it is best to insulate through some regulatory body, and let them take the heat.
he ro th in size of the ntario ecurities re ulations and those of their accom an in industr su re ulator has been geometric over the years with, in my opinion, a parallel deterioration in investor protection. The fact that the great scandals have occurred as regulations have become more numerous is partly because of mis-focus and partly because of massive regulatory volume burying what is really important. Bre-X and Sino Forest are great examples of this; with the latter being a replica of the former. Auditors indeed have some responsibility here, but regulators should have spotted Sino, with its identical modus operandi to Bre-X, on day one.
THE STRANGULATION OF CANADA’S FUTURE
CANADA NEEDS TO DO A BETTER JOB REGULATING ITS REGULATORS, AND ENSURING THAT BUREAUCRATIC OBLIGATIONS DO NOT NEEDLESSLY STIFLE OUR PROSPERITY
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Despite large missed scandals and slow follow-up when spotted; regulators, seeking to expand their mandates and staff, insist on focusing on the retail investor and stacking up more and more o li ations on the financial services sector articularl independent brokers and advisors. Small investors are now too risky and too costly to serve by independents, who generally rovide more ersonalized service and roader advice hus
retail investors are shoved into the wholesale products of the industr s lar er an controlled firms
THE THREE LEVERS: FISCAL, MONETARY & REGULATORY POLICY
To put the case simply, there are three main ‘levers’that governments can operate when seeking to grow
the economy. They can exert all the expansionary in uence the ish on the first t o levers fiscal
and monetary policy, but if securities regulation, the third lever, is over-burdensome or locked down, no lasting positive result can occur for the economy as a whole. In regard to the third lever, the impact of overly burdensome securities regulation on jobs, innovation and overall economic growth cannot be overestimated, it is massive!
Sadly, Canada’s third lever is precariously close to being locked down already.
he im ortance of efficient securities re ulation is ignored by politicians, as stated earlier because
it is not well understood by the public at large and thus moves few votes. Securities regulators, who
monitor and re ulate trada le financial assets have with the support of their sponsored lobby groups and the
media, taken on the role of guardians of the public. But they are not themselves accountable. This highly destructive trend is reinforced by the lobby groups they sponsor with our fees and fines li e the fire de artment hirin a screamer e ulators are further cheered on by media who love stories of greed and abuse.
In recent years, they have become self-sustaining empires that also provide considerable revenues to their governments. Fines and fees are now part of a hidden tax structure. And these costs are eclipsed by the resources and time companies must expend keeping up and complying with the massive growth in regulatory requirements. Every securities transgression is portrayed as proof of a widespread problem, demanding even more regulation, despite the fact that tens of thousands of Canadians handle hundreds of thousands of transactions involving billions of dollars each day, in an industry with extremely high overall levels of professionalism and integrity.
Regulatory strangulation in the securities sector has tremendous relevance to Canadian economic growth, innovation, job creation and our future standard of living. Our country’s real generators of economic growth are small businesses. For these enterprises to start up and grow, they require access to capital. Banks have little interest in share ownership of newer or smaller enterprises and borrowing is an ina ro riate means of financin ne com anies s a result new enterprises typically access public capital via smaller investment dealers, not the large bank-controlled companies.
And herein lies the problem: Regulatory burdens for smaller to mid-sized investment firms are devourin cash o s and rofits at an unsustainable rate. This means that the investors we need to drive our economic growth are spending so much money on bureaucratic requirements that they are limited in how much they can invest. If the offending regulations were substantive and relevant to client rotection there ould e some ustification for this economic dra
But they have gone far beyond that into procedural rules largely irrelevant to the goal of investor protection. This has a direct impact on jobs, economic growth and innovation. For example, compliance costs eat up approximately one third to one half of the administration ud ets for most small to midsized investment firms this is unsustainable.
At a time when the majority of independent investment companies are struggling for survival, the recent proposal by the Ontario Securities
ommission to increase fees over three ears sho s the major disconnect between Canadian securities regulators and
WE ARE NOW AT A POINT WHERE A MAJOR IMPEDIMENT TO ECONOMIC GROWTH, JOB CREATION, INNOVATION AND BUSINESS FORMATION IS REGULATORY STRANGULATION WITHIN THE FINANCIAL SERVICES SECTOR.
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Thomas S. Caldwell graduated from McGill University in 1965, and has been actively involved in the investment industry since that time. Mr. Caldwell is Chairman of ald ell ecurities td an or anization founded in ald ell ecurities td is a diversified investment com an ith su sidiar or anizations rovidin
investment management, brokerage and insurance services to a broad spectrum of investors throughout North America and around the world. Mr. Caldwell is also President and a Director of Urbana Corporation and a Member of the Conference of Defence Associations Institute. Mr. Caldwell is a past Governor of the Toronto Stock Exchange and one of the leading experts in capital markets, particularly in tradin environments e is reco nized as one of the orld s foremost investors in securities e chan es ald ell ecurities td and its affiliates ere the secondlar est o ners of the e or toc chan e rior to the s demutualization The company, through various Limited Partnerships, currently has investments in most major securities exchanges around the world.
the investment industry. The 2013 Ontario Securities Act is now approximately 3,500 pages, up from 2,800 pages in 2012. To help hide this growth, the OSC has now switched to thinner paper! he le al re uirement for a realistic cost enefit anal sis of all ne
securities regulations has been ignored by the OSC for years.
But the effect on our economy cannot be so easily hidden. The Act is updated every six months and even securities lawyers are complaining about not being able to keep up with the volume of changes. The costs of producing a corporate prospectus, a disclosure document which describes a security to potential buyers, and which is rarely read, now routinely costs well north of $100,000.
This trend is more dangerous economically than either transitory government gridlocks or the current anemic economic recovery – Regulatory strangulation is structural and without any checks or counters, it builds on itself – It is an unseen economic and standard of living killer.
Canadian entrepreneurs who have developed or wish to build an innovative technology company are now faced with the choice of a com licated and costl effort to ain access to u lic financin or of simply selling their business to a larger, generally American, company. Many choose the latter, to the great detriment of our country’s future.
Canada needs to do a better job regulating its regulators, and ensurin that ureaucratic o li ations do not needlessl sti e our prosperity. A good place to start would be ensuring that Canadian entre reneurs and those ho s ecialize in investin in ro in com anies are iven more of a voice in anada s financial oversi ht community. Only they can be trusted to ensure that the government’s solution to infrequent cases of negligence or abuse won’t be yet further layers of regulations, lawyers and bureaucratic busywork.
WHAT WE CAN DO AS AN INDUSTRY
overall oal is to ensure oliticians reco nize the im ortance of the third lever and stop abrogating their responsibility for it. The costs of that stance are becoming apparent but unfortunately they are no ein mas ed the si nificant revenues enerated securities re ulators in oth fines and fees for rovincial overnments
Regulators must be more accountable on the other side of capital markets, not totally focused a nanny state form of retail investor protection – The average retail investor is long gone – Shoveled into bank packaged products. Regulators must also be better regulated, with industry professionals, not just the usual suspects.
We, as individuals, must make it our business to tell our elected representatives, particularly at the ministerial level that they
are responsible for the economic impact of ignoring r e g u l a t o r y s trangulat ion; the third lever. Our professional a s s o c i a t i o n s have a role, but
remember they are discounted by political types as having vested interests ro d financin is reall ust an effort to avert the regulatory burdens that inhibit new enterprises. Regulators are trying to get a handle on this as well: If it moves, regulate it, preferably to death.
anada has the o ortunit to e the itzerland of the orth I would hate to see us blow it.
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REGULATORY STRANGULATION IS STRUCTURAL AND WITHOUT ANY CHECKS OR COUNTERS, IT BUILDS ON ITSELF – IT IS AN UNSEEN ECONOMIC AND STANDARD OF LIVING KILLER.
DEGREES OF SEPARATION
BY MARCIN DROZDZ
T he word derivative has been well used over the last couple of years. A quick web search reveals countless articles and
documentaries on how modern derivatives have plagued our financial s stem ith ever thin from to ic mort a e ac ed securities to the insurance policies that accompanied them.
e ster s dictionar defines a derivative as a contract or securit that derives its value from that of an underlying asset,” Wikipedia oes further to define a derivative as somethin that has no
intrinsic value in itself” and lesser cited sources have given even more colorful definitions
Arguably then, one can say that the original mass roduced financial instruments that derived value from an underlying asset were stocks and bonds. Fast forward through the paper based, over the counter platforms to the 20th centur to a time hen ca ital e an to o freel and tech friendly stock markets to trade these derivatives of debt and company equity began to emerge. As technology found new ways to su erchar e usiness the financial orld too found ne more progressive ways to sell themselves. Financial products became packaged and marketed in various ways; from mutual funds to funds of funds. Today these products are bought and sold globally at a dizz in ace in ever thin from dollars en and ounds sterlin ntire or anizations e ist to service and s eculate on these modern tools of finance and convenience
At present, Canadians hold over 773 billion dollars in mutual funds source over illion in s anadian ssociation and countless illions in other u licl traded financial instruments Institutional investors and pension plans alike have also traditionally been very heavily invested in public securities.
ut as o lan once said he times the are a chan in
Pension funds, sovereign wealth funds and everyday investors are all votin ith their allets and illions of dollars are o in out of the public markets, searching for refuge and stronger risk adjusted returns investing directly in underlying assets. Topping the
list of reasons why investment capital all over the world is reducing its exposure to public markets include: market complexity, sensitivity and costs.
nvestors and advisors ali e are findin it increasin l difficult to assess here the actual investment ca ital is ein utilized in many retail investment products. Stocks, bonds, mutual funds, segregated funds, ETF’s, forex investment funds, hedge funds, funds of funds etc etc. There are more publically traded/listed/held product types available today than ever before and the vast majority of investors and advisors alike are ill equipped at determining what underlying assets are actually being acquired and how they create a return and mitigate risk. According to Investopedia mutual funds typically hold 100-150 stocks in each fund. Going one step further, many of those funds invest in other ools of funds ma in it e onentiall more difficult to revie
and even determine what the core assets that create value are. In 2004 Michael Norbrega CEO of OMERS pension plan and the man ultimately responsible for over 400,000 individual employee ension lans decided to shift nearl of assets out of the
public markets and invest them into select private offerings. His
“PENSION FUNDS, SOVEREIGN WEALTH FUNDS AND EVERYDAY INVESTORS ARE ALL VOTING WITH THEIR WALLETS AND BILLIONS OF DOLLARS ARE FLOWING OUT OF THE PUBLIC MARKETS, SEARCHING FOR REFUGE AND STRONGER RISK ADJUSTED RETURNS INVESTING DIRECTLY IN UNDERLYING ASSETS.”
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primary mot i ve
was to r e d u c e t h e i r
exposure to the volatility of
the public markets and create more
consistent income. With over 11 Billion raised in
private offerings (Exempt ar et in l erta alone in
2012, groups like OMERS are not alone in their search for less
degrees of separation between them and their investment holdings.
Integrated communication technology has changed the game. Most retail investment
products available today are reactive as much to systematic mar et ris as as itnessed in the mar et crash as the are to speculative news. For those social network experts out there you will recall the April hacking of The Associated Press twitter account where Obama was apparently injured during a bombing of the White House. The markets did not take this news lightly as it instantly triggered a burst of selloffs and in a matter of minutes temporarily wiped out over 136.5 Billion of
ealth on as eo le ed to cash for safet ource ail ail
The costs of taking a company public and maintaining it have skyrocketed, eroding returns by passing these costs onto investors. The title of the September 2012 PriceWaterhouseCoopers article ets ri ht to the oint onsiderin an he cost of going and being public may surprise you.” The 32 page document also includes uotes such as of s indicated that their firms s ent more than million on one time costs associated ith their and n avera e com anies incur $1.5 million of recurring costs as a result of being public.” Going public has become an increasingly more expensive proposition and with the steady declines in IPOs since 2007 the evidence is becoming clear that vast numbers of investors of
all participation levels are looking for less layers of fees and more direct access to investment opportunities. The vast majority of these opportunities are private investments in direct, underlying assets.
a ne er as once uoted sa in f ou chan e the a ou look at things, the things you look at change.” Depending on where you are in the investment capital markets you would be wise to consider a change in perspective also. For investors and advisors, it means setting yourself up for success by being aware of the trends in the capital markets as the landscape is shifting faster than ever efore o not et left ehind ith illions of dollars o in into
private offerings it’s time to become informed. There are courses you can sign up for, people you can interview and most recently a website was launched with some of the brightest minds in the space ExemptEducation.ca. If you happen to be an entrepreneur, you do not need to go public to raise millions to expand your business. ave mone and invest some time n a e a firm that s ecializes
in offering memorandum and market consulting services to learn if taking your enterprise private is the way to go.
his article offers readers a different ers ective on our financial landscape and hopefully helps make more sense of things. We currentl live in a financial orld here most investa le roducts derive their value not from the direct output of a business but rather a
ac a ed financial instrument that to var in de rees ta es the actual business and value generation out of direct sight. The smart money is already in the know and cutting through the layers, removing degrees of separation and investing much more directl t is time for financial rofessionals to take a look at private investment options.
arcin rozdz is the hief trate ic fficer ith lue rint lo al artners lue rint offers value-add wholesaling and promotional services to businesses looking to raise capital through private placements.
“THE SMART MONEY IS ALREADY IN THE KNOW AND CUTTING THROUGH THE LAYERS, REMOVING DEGREES OF SEPARATION AND INVESTING MUCH MORE DIRECTLY.”
BEING A NEMA (DR) MEMBERBEING A NEMA (DR) MEMBERBEING A NEMA (DR) MEMBERYOU WILL RECEIVE YOU WILL RECEIVE YOU WILL RECEIVE
THE WAIVING OF THE ANNUAL TRUSTEE FEE THE WAIVING OF THE ANNUAL TRUSTEE FEE THE WAIVING OF THE ANNUAL TRUSTEE FEE ON PERSONAL SELF DIRECTED ACCOUNTS ON PERSONAL SELF DIRECTED ACCOUNTS ON PERSONAL SELF DIRECTED ACCOUNTS
HELD ATHELD ATHELD AT
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VISIT NEMAONLINE.CA TO FIND OUT MOREVISIT NEMAONLINE.CA TO FIND OUT MOREVISIT NEMAONLINE.CA TO FIND OUT MORE
EXEMPT EXPERTS ASSISTS COMPANIES IN STRUCTURING THEIR EXEMPT MARKET OFFERINGS TO BE ELIGIBLE FOR INCLUSION IN TAX DEFERRED ACCOUNTS, SUCH AS RRSP, RRIF AND TFSA.
WE HAVE CONSULTED ON OVER 350 EXEMPT MARKET OFFERINGS, WHICH COMBINED HAVE RAISED MORE THAN $1 BILLION DOLLARS.
PARTNERING WITH SENIOR LEGAL, ACCOUNTING AND TAX ADVISORS, WE OFFER TURN-KEY SOLUTIONS THAT ARE READY FOR PRESENTATION TO EXEMPT MARKET DEALERS, WHOLESALERS, AND THE INVESTING PUBLIC.
CONTACT US TODAY TO SEE THE DIFFERENCE AN EXPERT CAN MAKE
SUITE 1020 - 140, 10 AVENUE SE CALGARY | 403.476.0280 | [email protected]
NEMA ASKS DARVIN ZURFLUH
TO “Fill in the Blanks”
1. The Exempt Market is a place where small businesses with capital needs can go to individuals wishing to invest.
2. The Exempt Market is not the Wild West of investing that it once was.
3. The thing I like the most about the Exempt
Market is the unlimited potential to seek unique opportunities to increase wealth.
4. The one rule I would change in the Exempt
Market is to increase penalties for misrepresentation.5. The stock market is a good compliment to a well
diversified portfolio.6. In regards to the Exempt Market, regulators are ensuring better disclosures are made and
investors have more protection than in the past.7. The biggest misconception people have about the Exempt Market is that it is all high risk
and not liquid.8. The most important thing investors should know about the Exempt Market is that it
is very important to read the offering memorandum.9. Dealing Reps need to do their own due diligence on products they sell.10. In the Exempt Market, there is not enough dealing representatives.11. In the Exempt Market, there is too much negativity about the past when the market wasn’t regulated.12. The Exempt Market is no place for nervous Nellie’s.13. In the next 5 years the Exempt Market will be well known for finding superior alternatives.14. The biggest change in the Exempt Market has been increased accountability to the regulators.15. The biggest challenge for the Exempt Market is finding alignment between the parties (issuers,
dealers, reps, and regulators).16. The key to longevity for the Exempt Market is the people.17. NEMA is integrity for all the parties participating in the Exempt Market.integrity for all the parties participating in the Exempt Market.integrity for all the parties participating in the Exempt Market.
WANT TO “Fill in the Blanks” IN OUR NEXT ISSUE?
E-MAIL: [email protected]
Darvin Zurfluh, Executive ChairmanPinnacle Wealth Brokers
17
POWER TO THE PROVINCESALBERTA AND THE NATIONAL SECURITIES REGULATOR
BY BRYCE C. TINGLE
Federal Finance Minister Jim Flaherty recently reported that si nificant ro ress has een made to ard creatin a national
securities regulator. Almost the only explanation for this assessment as that l erta is a arentl no tal in to the feds a out the
project.
ast ear the u reme ourt ruled tta a could not unilaterall create such an institution s l erta re resents a ro imatel
of anada s ca ital mar ets an lausi le national scheme is usually thought to require its participation.
he ne s re orts provided little detail a out the discussions et een the arties ut e can safel uess e aminin
the concerns that animated l erta s fierce o osition to a national regulator a year ago. The governance structure of the proposed national securities commission is the i issue and resolvin this uestion ill e so difficult that it is ro a le the ro ect ill fail
t its ase securities re ulation is a out ho mone o s to create su ort and ro a rovince s usinesses n l erta s case oil com anies re uire vast amounts of ca ital to find and develo resources n addition the erennial ho e the rovince can diversif its econom de ends on the financin of thousands of ne usinesses every year.
l erta s ar uments in last ear s liti ation su est t o com ellin rovincial interests that ould have to e rotected in an national
scheme he first is that the national re ulator ould have to e
made almost totally independent of the politicians in Ottawa and Toronto.
Leading politicians in Central Canada have historically felt comfortable running against Alberta and its principal industry. Last month alone provided us with the examples of Justin Trudeau and David McGuinty. Earlier this year, Thomas Mulcair blamed much of the nation’s problems on the province.
Alberta’s concerns might be dismissed as paranoia except that Mulcair leads the second largest party in parliament, occasionally
topping the Conservatives in national polls, and the painful National Energy Program is still within the living memory of Alberta’s politicians.
The obvious problem is that neither Ontario nor the feds are likely to agree to
a governance scheme that completely ties its hands. Questions of innovation, job creation, economic development, fairness, liberty, and environmental protection, among others, are all im licated in securities re ulation and it is difficult to ima ine governments voluntarily giving up their power in these areas. In fact, it probably wouldn’t be right for them to do so.
The second governance issue is actually less likely to be resolved. Almost certainly, the national regulator would be located in Toronto and largely staffed by the Ontario Securities Commission. his is onl reasona le he vast ma orit of anada s financial
institutions and investment capital are located in Ontario. he difficult is that the dominance of ntario ased financial
institutions means that a province like Alberta has very few of
QUESTIONS OF INNOVATION, JOB CREATION, ECONOMIC DEVELOPMENT, FAIRNESS, LIBERTY, AND ENVIRONMENTAL PROTECTION, AMONG OTHERS, ARE ALL IMPLICATED IN SECURITIES REGULATION AND IT IS DIFFICULT TO IMAGINE GOVERNMENTS VOLUNTARILY GIVING UP THEIR POWER IN THESE AREAS.
18
these institutions itself l ertan com anies ma e orth of the total value of Canada’s public businesses, but last year the rovince received less than of the institutional venture capital in the country. Even oil companies must raise most of their money in Ontario.
The scale of business in the two provinces is quite different as well. Alberta is at the top of the league tables for businesses per 1,000 residents; Ontario is at the bottom. In other words, businesses in Ontario are bigger, while, possibly out of necessity, Albertans are more entrepreneurial.
These differences between the provinces lead to si nificant differences in their respective securities regimes. Alberta relies on individual investors to a much reater de ree to finance its many small companies. With more abundant sources of sophisticated institutional capital, Ontario restricts the ability of the avera e citizen to invest
Alberta advocates rules that facilitate relatively small companies going public (often necessary if money is to be raised from individual investors ntario advocates rules that protect institutional investors, occasionally without regard to the costs those rules would impose on smaller companies. It is telling that the roots of the TSX Venture Exchange are in Alberta. Many of Alberta’s biggest companies got their start as small companies on that exchange or its predecessors, raising money from personal networks of friends and business acquaintances.
Over the past decade, the difference in regulatory philosophy between Alberta and Ontario has been repeatedly visible in debates about the introduction of Sarbanes-Oxley style regulation into the countr or the harmonization of the rivate lacement or exempt-market registration regimes.
The OSC is a great regulator. It advocates rules that seem best in light of the experiences of its staff and Ontario’s circumstances. It is perfectly natural that the regulations it recommends for the country don t re ect the circumstances and culture in sa l erta
That brings us to the last governance challenge for a national regulator: restrictin the in uence its own staff can have on securities regulation in l erta t is difficult to see how this could be accommodated in any plausible institutional arrangement.
The governance challenges faced in the discussions between the feds and their provincial counterparts are not without precedent. How to manage the very different local economic and cultural circumstances of the provinces was the central issue for the Fathers of Confederation as well.
They solved the problem by giving the power to the provinces.
Bryce C. Tingle holds the N. Murray Edwards chair in business law at the University of Calgary and sits on the exempt markets committee of the Ontario Securities Commission and the securities advisory committee of the Alberta Securities Commission.
THESE DIFFERENCES BETWEEN THE PROVINCES LEAD TO SIGNIFICANT DIFFERENCES IN THEIR RESPECTIVE SECURITIES REGIMES. ALBERTA RELIES ON INDIVIDUAL INVESTORS TO A MUCH GREATER DEGREE TO FINANCE ITS MANY SMALL COMPANIES. WITH ITS MORE ABUNDANT SOURCES OF SOPHISTICATED INSTITUTIONAL CAPITAL, ONTARIO RESTRICTS THE ABILITY OF THE AVERAGE CITIZEN TO INVEST.
REPRINTED WITH THE PERMISSION OF BRYCE TINGLE. ARTICLE ORIGINALLY PUBLISHED JUNE 12, 2012 IN THE FP COMMENT SECTION OF THE FINANCIAL POST. [ HTTP://OPINION.FINANCIALPOST.COM/2012/12/06/POWER-TO-THE-PROVINCES ]
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BUSINESS RESOLUTIONS FOR THE NEW YEAR
I t s that time of the ear a ain here e re ect on thin s that have happened this year and prepare for New Year’s resolutions. I
often receive requests from clients to help them with their business’s New Year’s resolutions. Whether it’s generating more revenues or motivating employees to be more productive, putting together a set of ‘Business Resolutions’ is a great exercise for any business owner/executive to go through. I have compiled a sample list of Business Resolutions that I believe can be useful.
1. DITCH THE BUSINESS PLAN.Business owners often spend the bulk of their time perfecting a business plan that may ultimately fail in execution. Flexibility is critical in today’s business world and a business plan can often restrict an owner’s ability to adapt. Focus more on monthly/quarterly goals and financial tar ets that can e easil modified to etter fit mar et circumstances.
2. LEARN SOMETHING NEW.The age-old mantra that educators often preach is ‘life long learning.’ For business owners, knowledge is power. Learning something new can add a new dimension to a business, and may help it stand out from the competition. In addition, depending on the method of learnin an o ner ma find net or in o ortunities to uild ne business relationships.
3. SUPPORT COMMUNITY INITIATIVES.oo to su ort non rofit communit initiatives throu h various
methods such as serving as a committee member, becoming a mentor financial donations or volunteer for s ecial events ot onl will this give a business additional public relations exposure, but sometimes it just feels good to give back to the community that a business operates in.
4. STOP WHAT’S NOT WORKING AND MOVE ON.erha s one of the most difficult thin s for usiness o ners to do
is dro a failin strate and move on to a ne one ealizin a strategy has failed and is unworkable will help an owner craft new strategies, which can ultimately rejuvenate a business. Lean on others in the or anization for ne ideas ou never no ho ma have that one idea that propels the business to a new level.
5. WORK-LIFE BALANCE.For business owners, work-life balance can be hard to achieve as most owners wear multiple hats and take on extraordinary
responsibilities. That being said, having work-life balance is like maintaining a good personal relationship; you have to keep working on it. Make it a priority in the New Year to put the cell phone or computer away a couple days per week to enjoy life. A healthy personal life will help strengthen the productivity of any business.
BY CHRISTOPHER YEUNG
Christopher Yeung is President of i9 Capital Consulting, an independent consultancy group for exempt market issuers. Prior to that, Christopher Yeung was VP of Marketing for Prestige Capital where he was involved in raising capital for the Calgary Airport Hotels & Conference Centre development.
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IN A NUTSHELLBY CRAIG SKAUGEBY CRAIG SKAUGE
I n its rawest form, the Exempt Market is back to basics investing. Investing in a product because one
believes in the underlying idea and people behind the idea, not because they anticipate that a tweet from a TV personality or announcement from the federal government will move the market and make them a few bucks. While many look at this as a new way of investing, it is really the oldest form of it there is. It’s hard to imagine today but there was a period of time before the stock mar ets e isted o did eo le invest efore the could find and chec stoc erformances in the ne s a er uite sim l eo le invested in their community, with people they knew and in brick and mortar ideas they could see come to fruition, or not. That’s very much
here e find ourselves toda in the e em t mar et eo le raisin money locally for local deals.
The word private has many connotations. When it comes to access to a good or service, it’s generally coupled with an assumption of being reserved for the select few, the wealthy, the powerful; when it comes to investments that has very much been the case in Canada over the course of history. Private investments, or
em t ar et securities as those in the industr call them have generally been reserved for those with sky high incomes or net worth, leaving the 99 percent to fend for themselves in our current world of underperforming mutual funds, hi h fre uenc tradin in ated IPO’s and historically low interest rates. Having said that, thanks to the dedication of a relatively small group intent on challenging the status quo, a movement is underway that is seeing these private opportunities become available to the masses.
Craig Skauge is the President and founder of NEMA. Craig is currently a Director with
l m ia inancial rou nc Mr. Skauge is the President of Exempt Experts Inc. and Target Capital Inc. (TSX-
r au e is reco nized as a leader and national subject expert on the Canadian Exempt Market. He has
been asked to speak nationally, or be an advisor to: the OSC, the CSA, the Canadian
Bar association, and the CFA. Mr. Skauge has been featured in the National Post, the Globe and
Mail, Alberta Venture, Business in Calgary, and the Investment Executive.
FROM THE BOOK:“THE CANADIAN GOLD RUSH IS BACK!! HOW TO ACCELERATE YOUR WEALTH OUTSIDE THE STOCK MARKET”BY CARRIE MULLIGAN, PRIVATE MARKET SPECIALIST
Truth be told, regulations have allowed everyday Canadians to access to private investments for decades but it was a portion of the regulatory rulebook that was hardly used. The tools allowing entrepreneurs to raise capital without going public and allowing investors to get in at the ground level are a well-kept secret that is just starting to get out.
What is often seen as the Achilles’ heel of private investments is hat no sees eo le oc in to them a lac of li uidit or better put…shelter from market risk. While it is not for everyone, many investors are starting to consider trading in the liquidity provided in the public markets in exchange for the possibility of higher yields and shelter from the market risk tied to the liquidity they once craved. Prior to the great meltdown of 2008, investors were led to believe that the liquidity provided by the markets was their safety net. If they needed out, they could get out on a moments notice. Not unlike any other evacuation though, the
mass exodus of the markets saw many people get hurt. The safety net had
holes and people fell through.
hether the democratized world of private
investments is the highly sought after solution
to the ongoing ailments of the capital markets remains to be seen, but
one a or another e re soon to find out es ite an uphill battle due to past shortcomings, misinformation,
and the noise of naysayers, the exempt market should continue to grow so long as those who earn a living in
this space remember what most on Wall and Bay Street seem to have long since forgotten, whose opinion matters
most, that of the investor.
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FROM THE AUTHOR:CARRIE MULLIGAN, PRIVATE MARKET SPECIALIST
THE CANADIAN GOLD RUSH IS BACK!! HOW TO ACCELERATE YOUR WEALTH OUTSIDE THE STOCK MARKET is the first book written, dedicated exclusively to educating investors on the Exempt Market today. As a private market specialist with Pinnacle Wealth ro ers found that most ualified investors
were unaware of what the Exempt Market has available to accelerate their wealth; or even of its existence.
For the most part, the largest percentage of potential investors are uninformed on the alternatives they have to traditional investing vehicles and the an s or their usual financial sources are not about to tell them. Those that do know that the private market is out there may not be educated about the changes in the industry to protect the investor. They want proof that this is real and not too good to be true.
Investors need to be informed that there are now EMDs who do the stringent due diligence on the issuers he assess the financials and a ilities of the principals to be able to bring the investment to a ositive financial outcome hich rovides them the highest quality investments to choose from.
The process needs to be broken down into simple terms that make sense for those who think anything over a return is not le itimatel attaina le Investors need to be provided knowledge on the multiple options of terms, payouts, high returns, and asset classes in Cash or registered accounts that the can orchestrate to fit their individual needs.
Trust, credibility and visibility must be built on a massive and efficient scale not on a touch touch basis. It is time for the Exempt Market to walk out into the light!
2014 QUARTERLY AD RATES
MEMBERS NON-MEMBERS
*HALF PAGE AD CHOICE VERTICAL OR HORIZONTAL.*ALL ADS ARE SUBJECT TO APPROVAL BY NEMA.*PLUS APPLICABLE TAXES.
PLEASE CONTACT [email protected] FOR YOUR 2014 SPOT WITHIN THE EXEMPT EDGE.
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25
I t has no een sli htl more than five ears since the e tem er an ru tc of ehman rothers the lar est an ru tc
in histor and one of the most definin moments of the lo al financial crisis hi hl res ected lue chi financial
services firm ith illion in assets had colla sed a reviousl unthinkable scenario. Public equity markets experienced turbulence throu h the financial crisis that as unfathoma le to man investors prompting an exodus from the asset class (often referred to as a form of i ht to safet a si nificant ortion of retail investors
Five years from the depths of the trough of market lows in March 2009, public equity indices are hitting new all-time highs. Unfortunately, there is no way to tell how high markets may go, or whether we have already begun to crest the peak. However, a patient investor investing his or her capital in an index perfectly tracking the S&P 500 on October 1, 2008 would have experienced a total return of in the su se uent five ear eriod he o and S&P 500 indices have surpassed the previous highs set in 2007, and continue to reach new records on an almost weekly basis. A sense of euphoria, or at least satisfaction, is permeating through the various forms of financial media nvestors are feelin a it idd the ee of e tem er sa the hi hest ee l in o into equity market mutual funds and ETFs ever, surpassing yet another record set durin the final sta es of the merican housin u le
With public market equities indices hitting new highs, it is the point in a mar et c cle hen confidence e ets e cessive and cons icuous consum tion art and collecti les a reciate at a dizz in ace
high-end restaurants are fully booked-up weeks in advance, and a ercedes enz a ears in our nei h our s drive a Economists call this the wealth effect; as a population’s perception of the value of their assets in this case e uities oes u their consumption also rises. On November 12th, it was announced that a 1969 Francis Bacon painting, Three Studies in Lucian Freud, had been sold by Christie’s in a contemporary and postwar art sale for a record $142 million dollars.
This is the point in the cycle where investors favouring alternative investment, particularly absolute return investments, which have return strategies designed to perform without correlation to public markets, including investments focused on the apartment rental and receivable factoring businesses, as well as select hedge-fund style strategies, begin to become envious of their peers with heavier equities exposure in their portfolios. Despite doing well over the past several years, receiving what have often been strong and consistent returns, it is hard to ignore that from market trough to peak, that your neighbours may have done slightly better.
THE MERCEDES NEXT DOOR: CYCLICAL MARKETS AND THE ABSOLUTE RETURN INVESTORBY MATT MCKELLAR, ALEX KAUMEYER, AND MAX WANG
This is also
the point in the cycle where it would be unwise to begin decreasing allocation to absolute return-styled investment strategies in favour of public e uities ven if e i nore the lost diversification enefits that uncorrelated, absolute return strategies add to a portfolio, we should be acutely aware that the capture of any marginal continued multiple expansion and earnings growth in public equities over the near term will almost certainly be less attractive on a risk-adjusted basis when compared to the steady, all-weather characteristics of the absolute return strategies available in the exempt market. Current public equity valuations, which now sit at a stretched Shiller P/E multiple of 25 despite weak sales and earnings growth, hardly seem compelling.
It should be noted that having a bullish view on equities is not necessarily inconsistent with the decision to begin increasing
26
att c ellar esearch nal st oined the financial services industr after or in in trade romotion and mar et anal sis ith as atche an rade and ort artnershi e holds
a de ree from the niversit of e ina and lans to sit for the hartered inancial nal st evel am in une att is res onsi le for rovidin thorou h due
dili ence anal sis and financial modelin for a diverse ran e of alternative investment o ortunities availa le to innacle ealth ro ers retail and institutional clients
le aume er esearch ssociate oined innacle ealth ro ers in ul of after raduatin ith his achelors of cience de ree in ana ement from a son olle e of oston assachusetts e s ent a considera le art of his education ursuin financial
research related e eriences and is no enrolled in the ro ram
a an esearch ssociat is a raduate from estern niversit and holds a achelor de ree in inance and conomics reviousl he has een involved in anal tical roles ithin the financial services industr and the ener industr a is currentl stud in for the
evel am
IT SHOULD BE NOTED THAT HAVING A BULLISH VIEW ON EQUITIES IS NOT NECESSARILY INCONSISTENT WITH THE DECISION TO BEGIN INCREASING ALLOCATIONS TO ABSOLUTE RETURN INVESTMENT PRODUCTS AT PRESENT, ESPECIALLY FOR DISCIPLINED INVESTORS.
allocations to absolute return investment products at present, especially for disciplined investors. An investment strategy that calls for static relative investment sizes amon asset classes in the ortfolio for e am le domestic and e uities
a solute return fi ed income should naturall dictate a portfolio rebalancing at this point in the cycle, as equities have undoubtedly appreciated beyond the relative size the investment strate calls for he ealth created a reciation of u lic e uities over the last five ears should be put to work in assets with better forward-looking risk-return rofiles
Despite the outperformance by public equities over the past five ears investors should remain disci lined in their a roach When the next market correction presents itself, absolute-return investors will preserve capital and continue to prosper, and you will likely be able to pick up your neighbour’s Mercedes second-hand on the cheap.
27
CENTRAL BANKERS BEGIN TO SEE THEPAINT AND THE OUTLINE OF THE CORNER
BY STEPHEN JOHNSTON
Will Rogers once quipped, “If stupidity got us into this mess, then why can’t it get us out?” This seems like an apt
description of the zero interest rate policies (ZIRP) being pursued by the world’s monetary authorities.
On the topic of ZIRP, needless to say we continue to live in historic financial times and in articular in the first s nchronized lo al fiat mone in ation effort e have and ne ative real interest rates in virtually every major market and with the recent US Fed decision to continue its quantitative easing (QE) policy the monetary base of the world’s reserve currency appears set to continue its rapid growth. This is an unsustainable trend if history is a guide. It has been written many times before in one form or another but it bears repeating - there is no way to create capital and the ros erit that o s from it other than throu h rivate savin s and
private production - simply printing money does not create capital.
Sadly this is a message to which our governments, under the sway of Keynesian ideology, are unwilling to listen. It is axiomatic that state s endin re uires that ca ital is first ta en out of the hands of the rofit ma in rivate sector activities via ta es orro in or in ation and then de lo ed in t icall loss ma in u lic sector activities. Having said this, the current bout of excess money printing is simply a stealthy redistribution scheme that allows capital to be harvested from savers ension funds and e tracted the financial sector.
Obviously, while I believe that eliminating ZIRP/QE is the right thing to do for the long-term health of the economy, the recent equity and bond market declines are but modest harbingers of the unintended short-term consequences that the US Fed’s prolonged ZIRP/QE program and its termination will wreak - rollover and convexity risk. These risks will loom large if and when the US Federal Reserve and its global proxies, in the form of the Bank of Japan, European Central Bank, and the Bank of England, stop their massive bond-buying sprees as rates normalize. I believe it is these issues that are making central bankers nervous as they start to see the outline of the corner into which they are painting themselves.
Sovereign borrowers have had virtually unfettered access to the credit markets over the last two decades. Those privileges are gradually being revoked as the ability to repay is being called into
question. Without the ability to roll over obligations at current historically depressed interest rates, the truly precarious nature of soverei n finances ill e revealed onsider that hile interest rates for many developed nations are at generational lo s soverei n de t loads as a ercenta e of are at alltime highs.
hat ha ens to estern overnments hen their orro in costs rise from to somethin a roachin the lon term
historical average of 5%? In countries like Japan and the US, the ans er is that the majority of the
ud et ould e dedicated sim l to a in interest erha s this sounds alarmist and unlikely, but consider that, as of 2012,
federal overnment de t e ceeds trillion n the overnment aid illion in interest an im lied rate of he on ressional ud et ffice notes that federal overnment de t ill rise to trillion f e assume that it carried a rate of instead of interest a ments ould total trillion or of current ta
revenues.
learl state de t service as a ercent of ta revenues is already at high levels for most developed nations, yet interest rates are at historic lo s s state finances enter distress the are forced to finance themselves at shorter durations creatin roll over ris he com ination of interest servicin issues and duration compression, leaves them heavily exposed to even modest increases in interest rates. When rates rise, state revenues
ill e ra idl consumed ust the interest on servicin their de t let alone fundin da to da commitments
nd therein lies the issue ur commitments are enterin a hi h ro th hase in the face of deterioratin demo ra hics and ro in de endenc ratios he ma nitude of our im endin
entitlement costs are largely being ignored despite some lip service coverage in the mainstream media. Layer on an absence of political support for a reduction in government spending and can some form of rintin ress in ationar default e far ehind t s certainl difficult to see ho an com ination of ta increases economic ro th or mar inal ad ustments to entitlements is oin to close estern fundin a s
SIMPLY PRINTING MONEY DOES NOT CREATE CAPITAL
32
To quote Jens Parssons from the book Dying of Money: Lessons of the Great German & American Inflations – of the Great German & American Inflations – of the Great German & American Inflations “Everyone loves an earl inflation. he effects at the e innin of in ation are all good. There is steepened money expansion, rising overnment s endin increased overnment ud et deficits
booming stock markets, and spectacular general prosperity, all in the midst of temporarily stable prices. ver one enefits and no one pa s.
hat is the earl art of the c cle n the later in ation on the other hand, the effects are all bad. The government may steadil increase the mone in ation in order to stave off the latter effects, but the latter effects patiently wait. In the terminal in ation there is falterin ros erit ti htness of mone fallin stoc mar ets risin ta es still lar er overnment deficits and still roaring money expansion, now accompanied by soaring prices and an ineffectiveness of all traditional remedies. ver one pa s and no one enefits. That is the full cycle of
ever in ation em hasis mine
The Austrian School of Economics has many useful insights on the economic consequences of state intervention in the economy and unbridled monetary expansion. Friedrich Hayek, a prominent Austrian economist, wrote The Road to Serfdom and The Fatal
Stephen is a co-founder of a Calgary based family of hard asset investment funds focusing on farmland, energy and private equity. Prior to returning to Calgary in 2003, Stephen was the head of the London based emerging markets private equity team of a large French bank. Stephen is a regular contributor to various print and television media outlets including Fortune, Macleans, WSJ, FT, Canadian Business, Business Week, Business News Network, Bloomberg and the Globe and Mail. He is the author of Cantillon’s Curse a oo discussin the macro economic issues facin investors in the ost financial
crisis orld te hen has a c and a from the niversit of l erta and a from the ondon usiness chool
Conceit as a warning against the prevention of the free operation of Conceit as a warning against the prevention of the free operation of Conceitthe markets - privatizing gains and socializing losses is not capitalism and not good for the economy despite what politically connected ‘too big to fail’ banks would like us to believe. It has been central bank control over the cost of money (i.e. interest rates) and the moral hazard created with ‘too big to fail’ that led directly to the problems we now face. More of the same will not solve our problems - let interest rates normalize and insolvent financial institutions suffer the consequences.
The unvarnished truth is that we are living beyond our means and dishonestly passing the cost onto future generations - Herbert Hoover once prophetically said, “Blessed are the young for they shall inherit the national debt.”
THANK-YOU TO ALL ATTENDEES FOR CONTRIBUTING TO THE SUCCESS OF WAISC VANCOUVER 2013
KYLE JACOBER FROM RAINTREE FINANCIAL SOLUTIONS & SCOTT MORRISON OF I9 CAPITAL
KATHLEEN BLACK OF PINNACLE WEALTH BROKERS & MARCIN DROZDZ OF BLUEPRINT GLOBAL PARTNERS
MATTHEW SKERRY OF A2A CAPITAL WITH PHOEBE CHAN FROM
SLOANE CAPITAL
NIMA FARD & ERICA FREEMAN FROM OLYMPIA TRUST COMPANY
DAVID TODD OF 982 MEDIA SHARING A LAUGH WITH PRIVEST WEALTH MANAGEMENT DEALING REP ZELJKO (JOCKO) TOIC
MEHRAN ESHAN, TERRY DEMPSEY, AND BARRY WHELAN OF ENERGY RESOURCES CORP.
34
NEMA PRESIDENT CRAIG SKAUGE OPENS THE SOLD OUT EVENT BY GIVING ATTENDEES AN ‘EXEMPT EDUCATION’
VANCOUVER, BRITISH COLUMBIA | PHOTOS BY: JENELLE MILLER
KEYNOTE SPEAKER THOMAS CALDWELL IN CONVERSATION WITH MC PAT BOLLAND MARLA LIGUORI AND MARK IWANAKA OF GRANT THORNTON LLP
STEPHANIE THOMPSON FROM MILLER THOMSON LLP
LESLIE TOTH OF THE JAYMOR GROUP PRESENTS TO A STANDING ROOM ONLY CROWD
SHARON WONG FROM EXEMPT EXPERTS IN CONVERSATION WITH SLOANE CAPITAL PRESIDENT STEPHEN FREEDMAN
35
JOIN TODAY|VISIT NEMAONLINE.CA
YOUR INDUSTRY, YOUR VOICE, YOUR FUTURE
WE’RE DEDICATED TO THE GROWTH AND IMPROVEMENT OF THE EXEMPT MARKET
ARE YOU?
BY MICHAEL EDWARDS
DIFFERENT PAINT SAME BRUSH
Based upon my personal experience, and input from numerous experienced Exempt Market Representatives, what is needed
in this fast-paced, maturing Exempt Market space is a uniform risk ranking system. This would better permit investors (and their advisors to assess the relative ris rofile of each investment o tion to more fairly gauge the risk/return consideration of investing in the Exempt Market when building their portfolio.
Although there is no formal secondary market for most investments in the em t ar et s ace li uidit can e realized as soon as si months for at least one fi ed return investment currentl availa le to investors. In addition, many Exempt Market investments mature in one year, two years, three years, four years, and /or five ear fi ed time eriods depending on the investment period selected; some of which have had private credit assessment ratings of AA (bear in mind the government of Canada is
There is a vast array of investment options in the traditional investment market, from Canada Savings Bonds to derivative based options, in which Canadian investors can, and do invest. There are often major differences in these various investment choices vis-à-vis risk, volatility, return, income distributions, taxation impact, and complexity/structure of the investment. Many of these investments la a si nificant role in a ro erl diversified investment ortfolio
(Whether they are appropriate for any particular investor, or not, de ends on the investor s investment time horizon o ectives and ris tolerance
If investors were to read solely the risk acknowledgement form, 45-106F4 (which ignores an investor’s prudence to read the Offering
emorandum and the arnin rescri ed it it is hi hl unli el that many investors would make any investment in this market.
It would appear that regulators are so concerned about the liquidity risk of the Exempt Market investments that in their opinion this special warning is warranted. By comparison, many investors in Nortel, re lac err e erience si nificant ris s an illustration if
an investor in RBC common shares in February 2008 (at about $50
er share needed to li uidate in e ruar at a out er share the ould have lost half of their mone on anada s
largest blue chip bank, but no such warning would be required for the market risk public markets entail.
It is disconcerting that almost any investor can open up a brokerage account to buy stocks or bonds via an IIROC dealer, buy Mutual Funds from an MFDA member, or buy segregated funds from an insurance agent, without having to sign any such warning to make any such investment.
To be fair, there is a vast array of investments in the Exempt Market space with varying degrees of market ris li uidit ris in ation risk, etc., just as there are in the Public Markets. Certainly the Exempt
Market, as well as the regulatory oversight, of today are light years ahead of the Limited Market Dealership regime and ‘wild-west’ that existed prior to September 2010 but to paint all em t ar et investments ith the same ris rofile rush is no more fair than to say a start-up junior mining company is the same investment risk as say one of the major Canadian banks.
The Exempt market is growing in popularity with investors. Even Ontario has stated that they plan to add an Offering
emorandum e em tion investment ualification in addition to their existing available exemptions. As this important component of the capital market grows and matures, it is critical that a more balanced investment risk ranking and assessment criteria be developed and applied to the Exempt Market.
SAME BRUSH
er share needed to li uidate in e ruar at a out er share needed to li uidate in e ruar at a out er share the ould have lost half of their mone on anada s
largest blue chip bank, but no such warning would be required
Michael Edwards, BBA, CA, CFP, CLU, TEP is the Atlantic Branch manager of Pinnacle Wealth Brokers, having practiced as a tax specialist and Public Accountant for most of
e has een involved in financial lannin and ealth creation since when he obtained his CFP designation and become life licensed in 2001 and an Exempt Market Representative in 2010.
IT WOULD APPEAR THAT REGULATORS ARE SO CONCERNED ABOUT THE LIQUIDITY RISK OF THE EXEMPT MARKET INVESTMENTS THAT THIS SPECIAL WARNING IS WARRANTED.
38
Form 45-106F4
Risk Acknowledgement
· I acknowledge that this is a risky investment.· I am investing entirely at my own risk.· No securities regulatory authority or regulator has evaluated or endorsed the merits of
these securities or the disclosure in the offering memorandum.· I will not be able to sell these securities except in very limited circumstances. I may
never be able to sell these securities. · I could lose all the money I invest.
I am investing $____________ in total; this includes any amount I am obliged to pay in future. The Issuer will pay $_____________ of this to __________________ as a fee or commission.
I acknowledge that this is a risky investment and that I could lose all the money I invest.
Date Signature of Purchaser
Print name of Purchaser
Sign 2 copies of this document. Keep one copy for your records.
You have 2 business days to cancel your purchase
To do so, send a notice to [name of issuer] stating that you want to cancel your purchase. You must send the notice before midnight on the 2nd business day after you sign the agreement to purchase the securities. You can send the notice by fax or email or deliver it in person to [name of issuer] at its business address. Keep a copy of the notice for your records.
W A
R N
I N G
TO PAINT ALL EXEMPT MARKET INVESTMENTS WITH THE SAME RISK PROFILE BRUSH IS NO MORE FAIR THAN TO SAY A START-UP JUNIOR MINING COMPANY IS THE SAME INVESTMENT RISK AS SAY ONE OF THE MAJOR CANADIAN BANKS.
To do so, send a notice to [name of issuer] stating that you want to cancel your purchase. You must send tpurchase the securities. You can send the notice by fax or email or deliver it in person to [name of issuer] at its business address. Keep a copy of the notice for your rec
THE CHANCE TO DO IT RIGHT IN ONTARIO: LEARNING FROM PAST LESSONS
C hanges in the offering memorandum e em tion in ntario a ear
to be imminent. Although the procedure cannot be seen as a ‘slam dunk’ as some observers have suggested, at least the changes, and their direction (following the l erta model are clearl in si ht
do tion of the e em tion ill definitel rovide si nificant o ortunities for the ntario
economy, as more and more investors will be able to allocate parts of their portfolios to assets that traditionally were available only to accredited investors, who because of the very high threshold (income level and investible assets re resent onl a ro imatel of the population.
The upcoming solution (regardless of the le al ramifications of the ne re ulations in ntario ill definitel increase in o of funds
into the private equities sector, and although the new regulations may not necessarily open the
ood ates as seen some mar et o servers the ro osed chan es ill definitel increase cash in o to roducts
ith the difficult mar et conditions over ast few years, private equity products faced si nificant challen es in raisin ca ital The very limited population of accredited investors realizin the value of the investments as well as some liquidity related issues made the ca ital raisin rocess e tremel difficult
The proposed, or perhaps at this stage predicted, changes will not only create an opportunity for economic growth in Ontario, but
also for some si nificant ro th in securities offerin s throu h various market participants.
This however can create some challenges. The unregulated and relatively unknown OM exemption market can create problems for dealerships, issuers, and ultimately – the investors. These problems can be created when an issuer enters this market without si nificant mar et research dili ent a roval rocess clearl determined distribution network, and reporting. Any failure, or even a hint of an unclearl defined environment can in the lon run create a feeling of uncertainly in this type of investment, and ultimately lower the level of interest among investors.
The Exempt Market has an enormous opportunity to use the time between now and the implementation of the new rules, to develop the necessary processes that would make the new regulations more easily absorbed by all market participants.
Following the Alberta model creates an enormous opportunity to implement the OM Exemption in Ontario the right way. Not only from the le al ramifications of the rocess ut in articular from
the implementation angle. Rarely in the investment world have we had an opportunity to use 20/20 hindsight. This time, the Alberta experience with the OM exemption should, in my opinion, be studied very
carefull and dili entl to si nificantl reduce the ossi ilities of market failures by either both issuers and dealers.
ust ecause there is oin to e a si nificant cash in o into private equities sector market participants cannot act blindly, and assume that no regulatory work is necessary because investors are knowledgeable and are comfortable with all the aspects of the securities industry and its regulations.
It is hard to draw any parallels because there is probably no such situation in the past where the regulatory environments are being adjusted so all provinces have almost identical regulations, but I can think of the situation from the mid 90’s of the past century
hen the a our onsored nvestment unds s rules ere implemented in Ontario.
ADOPTION OF THE OM EXEMPTION WILL DEFINITELY PROVIDE SIGNIFICANT OPPORTUNITIES FOR THE ONTARIO ECONOMY, MORE INVESTORS WILL BE ABLE TO ALLOCATE PARTS OF THEIR PORTFOLIOS TO ASSETS THAT TRADITIONALLY WERE AVAILABLE ONLY TO ACCREDITED INVESTORS
BY PETER FIGURA
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The relatively low LSIF investment amount (in most cases lo er than attractive ta treatments additional ta credits oth rovinciall and federall and an o ortunit to participate in the ‘exciting’ part of the market created a si nificant in o of funds n man cases the in o as so si nificant that funds could not e de lo ed in a manner that would even create a chance of decent returns. In other situations the volatilit of the sector created first ro ust returns and conse uentl more si nificant cash o into the funds and then nearly collapse situations.
Based on those experiences, careful study of the OM market in Alberta, and introduction (with clear vision of implementation rocess of the rules that ould revent most of the itfalls
can create a healthy environment for the OM products to play more si nificant role in the securities mar et in ntario and a broader sense in Ontario economy.
Peter has over 18 years of Financial Services industry experience. His management focus is the development and implementation of comprehensive wholesaling programs with an emphasis on their alignment with company business goals. Working with executive management groups, Peter has helped in the design, im lementation and a roval of several financial roducts that ere rou ht to the mar et eter s investment career include roles of financial advisor ith major Canadian full service investment dealers, senior manager of investment department with one of the major Ontario Credit Unions, Director of Investment
ar etin ith one of the inde endent financial advisor or anizations and usiness evelo ment ith an inde endent investment services or anization eter
has an MBA from the University of Toronto, and completed many of the industry required professional courses. Peter is a regular business commentator on the news channel CP24, and a contributor to Exempt Market Watch, and The Exempt Edge, a publication of the National Exempt Market Association.
EAU CLAIRE MARKET203, 200 BARCLAY PARADE SW, CALGARY, AB T2P 4R5
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BY CHRISTOPHE VOEGELI, BSC, CFP, CFA
R isk. A scary word to people, no matter the context. Whether hiking a mountain, leaving an employer, or investing a dollar, risk
is something we are evolutionarily predisposed to avoid. But in the orld of mone hen ris is mentioned hat e actl is ein said
n an earlier article on financial mathematics fall issue of the em t d e there as a focus on the various sorts of rates of
returns hen returns are considered so is ris ut hat is ris uch like rates of returns, there are several variations. These include loss of rinci al time frame ris li uidit ris mar et ris firm ris and regulatory risk, and how these impact the investments clients hold.
LOSS OF PRINCIPALOne of the simplest concepts clients and Dealing Representatives
s understand is ris to ca ital it means the client has lost mone Commonly, investments are discussed in relation to the security, or safety, that is being offered. In other cases, it is very clear there is risk to the invested capital. Security could be a function of government regulation, like some bank and insurance products that have potential guarantees. Alternatively, security could be a matter of underlying assets, with no guarantee, with the security only contingent on the value extracted from those assets and their management. Principal security is usually a function of the nature of the investment, its mana ement st le and most si nificantl the asset class and the re ulator channel in hich it finds itself in
ith e uities and real estate ein the most common and si nificant assets carrying risk to most investors, how can one protect themselves from loss of rinci al or real estate it is often said that ou do not make your money when you sell, but rather when you buy. The notion here is that buying an asset ‘on the cheap’ will help to protect your principal. With equities, the same theme applies. When buying stocks, it is prudent to purchase them with a margin of safety, a term coined by the famous Benjamin Graham. With both these asset classes, trying to compute what is ‘cheap’ is a far from perfect game of assessing valuation metrics, reviewing historical data, and making projections. While individual securities can always lose, buying an asset for the long term may help avoid a loss to principal, as long as the asset recovers over time.
TIME FRAME RISK: “IN THE LONG RUN, WE ARE ALL DEAD”conomists includin e nes ho is uoted a ove have a ro ensit
to observe trends in both the short and long term. The theme of such a tagline is suited for the exempt world, as often assets are illiquid
and medium to long term in nature. Exempt investments loosely refer to alternative assets, which are different from most retail investments such as mutual funds and stocks. While the above paragraph noted holding onto assets for the long term can be a good approach, time frames are always a consideration, and there may be risk. This is called time frame risk; the risk that someone cannot ‘wait’ for the investment to exit or redeem. Land and real estate developments are the best examples of this.
LIQUIDITY RISK: “FUNDAMENTALS HURT, WEAK BALANCE SHEETS MAIM, BUT LIQUIDITY KILLS”Time frame risk is also tied to liquidity risk; the notion that an investment cannot be sold, even if an investor needs the cash. At the peak of the banking crisis, the above quote by analyst Chris Taggert was popular. Cash is king and when cash is needed investors do not care about upside or exciting projections; they just want to sell. An emergency fund is a good text book example where most investors need safe, liquid, and low tax consequence mone hree to si months of fi ed asic livin e enses is suggested, and liquidity is critical; in this case, any exempt investment is ill advised.
EXCESS RETURNS: ALWAYS A GOOD THING, IF YOU DON’T COUNT RISK
hile a lot of financial models and academic research su est investors are rewarded with excess returns when using long term and illi uid assets a stron ar ument for usin e em t assets investors and s should e a are of s ecific li uidit needs and time frames in the investor’s life cycle. This is core to the planning process and should never be undermined. This being said, there is often a misconception that long term assets with risk are not suitable for a retiree. While having ample liquidity and some guaranteed income with security are paramount (often called an income oor in retirement lannin in ation and e haustion of ca ital called lon evit ris are serious ris s too or a cou le at 65 years old, who will very likely see at least one of them live to their mid 80s, there is still a place for long term assets, as their portfolio still has a long term element. As long as the retired investor can absorb the investment, time frame, and liquidity risk, there can be a place for risky assets, with allocation and exposure remaining major considerations. If the investor cannot absorb a
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loss, stick to guaranteed tools mostly or entirely. This distinction is most critical for retirees. A very common allocation rule of thumb is to make the investor’s age the percentage of their portfolio which should be in safe or guaranteed investments. This is a guideline, but a prudent and sound one indeed.
MARKET RISK OR FIRM RISKFinanciers often seek out the composition of risk. Total risk of an individual stoc is made u of mar et ased s stematic ris and firm s ecific idios ncratic ris or e am le a stoc investor that diversifies their holdin s across stoc s across the whole market will have a portfolio that mainly consists of market-based risk, with the investor’s portfolio sensitive mainly to road mar et movements lternativel ith firm s ecific risk, an investor that buys just one stock has all risk concentrated into the performance of that single company.
Interestingly, research shows that if one large company stock is urchased in each sector of the econom financials ener healthcare etc total ris stems mainl from mar et ased ris that is firm s ecific ris is virtuall eliminated investin in ust 10 to 14 stocks. In other words, an equal investment in each of a dozen stoc s is all it ta es to achieve a ell diversified portfolio.
ver the last decade e uities have nearl een at on man nations stoc mar ets et all the hile ith si nificant s in s in value; a cork in the ocean, some might say. While the last 10 years have been a rough economic bout, the loss of principal, in the case of a at ut volatile stoc mar et is urel a matter of hen and hat the investor ou ht and sold n the orld of u lic finance and related academia it is often said that ic in stoc s or timin the mar et is near im ossi le and
picking currencies is even harder.
The challenge, and opportunity, of the exempt space is that an investor is picking a management team, in contrast to a broad asset class or currency, for example. Returns are less about selecting assets based on valuation methods and public data li e the stoc mar et and more a out selectin a s ecific asset a business model, and a team leading the use of funds. That is, in the exempt world risk and return are often more about firm s ecific ris than mar et ased ris s a result the ris s and return outcomes of the exempt space can be very different than that of a public security. The hopeful side effect of this of
course is that a return can be had on your money, which is tied to both management skill and asset performance, and less so on the public news and factors that can affect the stock market. However, there are always factors that can affect both public and private markets, never mind a s ecific investment
KEY MAN RISKIn the exempt world, reporting, monitoring and regulation are very different from the public space. Key man risks become far more severe. This can include management risk, misappropriation of funds, and simply put, ‘people not doing what they said they were going to do.’ These risks do exist in the public space, but with the public eye and robust reporting required, these risks are managed in a very different way.
Efforts are being made by the regulators, dealers, or the industry as a whole through NEMA, to strengthen the exempt space. However, this regulation also has a cost, which is why the people behind issuing companies do seek out the often cheaper and more limber exempt space, which may allow returns to be had for the exempt investor. Yes, the exempt space carries opportunity, but risks still present themselves, and clients must always be made aware.
hile and client meetin s can e filled ith lannin conce ts ta tal and discussion of eneficiaries the ord ris comes u more than anything. This is due to the regulatory environment indeed, but at a higher level it is for the client’s best interest. Explaining risk to a client in a language they can understand is key, as it protects the DR, the dealership, and most of all, the client.
A VERY COMMON ALLOCATION RULE OF THUMB IS TO MAKE THE INVESTOR’S AGE THE PERCENTAGE OF THEIR PORTFOLIO WHICH SHOULD BE IN SAFE OR GUARANTEED INVESTMENTS.
hristo he oe eli is a financial lanner and the founder of lear ocus inancial e has been building his practice since 2001 with his practical focus on professionals and business o ners in the dmonton and al ar area hristo he focuses on holistic financial lannin including estate and insurance planning, coupled with wealth management. Christophe com leted his de ree in mathematical finance at the of in hile doin research in applied mathematics, completed his CFP in 2009, and obtained his CFA charter in 2012.
e ma e reached at info clearfocusfinancial ca or via clearfocusfinancial ca
Special thanks to Kurston Doonanco, MSc, Scott Reed, CFA, MBA, and Daren Miller, CFA for their thoughts and help with this article.
45
THE DEAL THAT WASN’T DONE: PUTTING INVESTORS FIRSTHOW DUE DILIGENCE ENSURED THE SAFETY OF INVESTOR FUNDS BY JOSH WILL
Earlier this year, a $27,000,000 equity raise was commenced through Fortress Real Capital (a syndicate mortgage product
offered entro ort a e nc hese funds ere ein raised to finance the servicin and develo ment hase for a su division of hi h end custom residential homes the final hase in a mature neighborhood. This picturesque site provided homes with sprawling views, including some waterfront lots.
Investors were excited about the project’s potential and attractive term, in addition to the return they would make by participating in the funding. There was a strong com letion onus deferred lender fee aitin for them u on e it his enthusiasm as shared future homeo ners ith of the
lots already pre-sold and strong demand for these highly sought after lots.
In a short period, $13,000,000 was raised and ready to close in the first tranche ut the e ecutive team made the difficult decision not to close the investor funds, forfeit all fees and incur the costs of repatriation for both clients and advisors. It was the right market
ith the ri ht roduct and the ri ht term so hat ha ened
Fortress had completed full due diligence and the closing of investor funds as conditional on the refinancin of the st mort a e held
the rimar mort a e lender his ould allo our fundin to be in line with the senior land loan in front of us and ensure the two loans worked in tandem.
BEING DILIGENT ABOUT DUE DILIGENCE
ne of the ris oints e identified as that the maturit date on the developer’s current mortgage was prior to Fortress’ exit. In the event
that the developer was not able to extend or secure additional financin the rimar lender ho is entitled efore investors could decide to force the sale of the property.
In that scenario, the developer would lose control of the project, and it could e sold to a ne o ner his ould cause a si nificant
disruption to the investors and was an unacceptable risk.
RESIGNING OPPORTUNITIES, RECONCILING INVESTORS
fter more than one deadline for the orro er the develo er to secure a new 1st mortgage had passed, we went to the current mortgage holder and asked them to work with us by extending their financin to e con ruent ith our term
We were hopeful for their cooperation as part of the funding we would be providing would be giving them some much needed liquidity and be positive for their balance sheet.
The wheels were in motion for the new funding to close; a well-known lender was providing a loan facility. It would have clearly een advanta eous to the first mort a ee for us to close and rotect their investment ut hat if the ne financin didn t
close hat if this tri art a reement as dela ed or hit a sna
We tried several different approaches and tactics to have the current mortgage holder give us the comfort we were looking for. Let me be very clear: we wanted this closing. Up until this oint the deal had satisfied ever thin e loo for here as a
great return for investors, a great location, and strong demand
IT WAS THE RIGHT MARKET WITH THE RIGHT PRODUCT AND THE RIGHT TERM... SO WHAT HAPPENED?
48
for the consumer product. It was a good deal. We had gone to market and had front funded huge expenses for legal and offering documents, marketing materials, multiple due diligence trips including bringing over 50 agents in from out of province and even a $10,000 donation to
a local charity. Cancelling this deal would mean forfeiting recovery of tens of thousands in costs and even more in fees; additionally, advisors
and clients waiting to get paid for positioning their funds and making them available would also feel put out.
We wanted this closing as badly as the sales force but we knew the right thing to do was not to close and withdraw our commitment. We committed the full resources of our 30+ staff and worked with agents and investors to redeploy their capital to a different project.
Shortly after we pulled out of the project, the would-be borrower failed to secure and close on the new funding or e tend refinance the st mort a e
Consequently, the mortgage lender started pursuing enforcement options. Had we closed and funds been advanced to the borrower, we could have potentially been embroiled in a distressed asset situation. This would be a strategically advantageous outcome for the current mortgage lender, as they would have received some liquidity from us and now also have us as an exposed party to the enforcement action - the more eo le on the hoo the etter ri ht
This would have resulted in the project being locked up for an indefinite eriod of time in le al challen es and nothin ut headaches and heartaches for both advisor and investor.
MAKING THINGS RIGHT With approval from investors, funds raised were transferred to other ortress ro ects his came at a si nificant cost to us hundreds of thousands of dollars ut e ne lon term e will only be as successful as our investors and agents. We were under no contractual obligation to compensate investors; all of their contracts clearly stated that they were not entitled to any interest until funds closed into the project they subscribed to.
We voluntarily compensated clients for monies that sat safely in trust accounts and paid them a premium return for taking no
risk and no deployment. Additionally, we worked with all dealing representatives and compensated them, at our own cost, for the extra work needed to rewrite all the cancelled business. It was a frustrating time for everyone involved, but a disciplined approach to due diligence means making the hard decisions.
o h did e do this irit dedication rinci al es for all those reasons. As important as those factors are, the fundamental factor
that underpins our process is people. People whose education and training is sound. People whose judgment is calm and perceptive. People whose actions
are deli erate and definitive hen difficult times came e ere not swept up by these series of events. Our people were ready. At the end of the day, people are who we do business with and that’s what we rely on.
WE KNEW LONG TERM, WE WILL ONLY BE AS SUCCESSFUL AS OUR INVESTORS AND AGENTS
As the Senior Vice President of Marketing and Communications with Fortress Real Developments Josh is spearheading growth and new investment product design. Both mortgage and securities licensed, Josh handles many of the public speaking engagements on behalf of the Fortress executive team. He communicates regularly with the media, clients, development partners and advisors and was most recently quoted heavily in Mortgage Broker news in a feature about syndicate mortgages.
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REFERRAL ARRANGEMENTS WITH A PORTFOLIO MANAGER
referral arran ement ith a ortfolio ana er can ta e the client relationship to a whole new level. A PM is able to offer a full range of complementary investment opportunities to its clients, so referrin clients to a ill allo the ealin e resentative to offer the services of the PM to their clients. This provides the DR with a competitive edge over other limited licensed individuals. In return, the PM will pay an ongoing referral fee to the EMD and, ultimatel to the he arran ement rovides enefits to all of the parties involved.
THE BENEFITS TO THE EXEMPT MARKET DEALERA referral arrangement between the EMD and the PM provides an innovative way for the EMD to add value to their business model and strengthen the relationship with their DRs and clients. The ability to facilitate a role in a larger portion of clients’ investments than other EMDs is a great way to recruit new DRs. It also creates a more sta le on oin revenue stream for the firm that ould other ise not have existed.
THE BENEFITS TO THE DEALING REPRESENTATIVEOnly being able to offer exempt securities to clients can be very limiting to your business and very frustrating knowing that clients’ remaining assets are being managed by another individual. A referral arrangement with a PM will enable you to refer clients to a
friendl art ho ill com ensate our firm for the referral his creates an opportunity for the DR to become more instrumental in the client relationship by, perhaps, acting as a key liaison on financial matters or underta in more financial lannin functions he o tions are varied ut si nificant o ortunities e ist to raise the rofile of our usiness utilizin this ind of referral arrangement.
THE BENEFITS TO THE CLIENThe client also enefits from this relationshi s usuall have
access to a much wider range of investment opportunities than traditional ro ers hich ma lead to etter diversification over multiple assets classes and provide the opportunity for better risk ad usted returns n additional enefit to the client is that there are no sales commissions or DSC fees on their individual accounts. PMs are often able to negotiate institutional pricing on products, which may be passed down to clients through reduced costs.
s ell if the underta es more financial lannin functions the a ilit to see a roader vie of a client s financial situation usually leads clients to make more informed investment decisions.
HERE’S HOW IT WORKSSetting up a referral arrangement can take a little time and there are certain basic steps that must be followed as outlined in National Instrument 31-103 and its Companion Policy. Once the
and the are satisfied that a relationshi is a ro riate they enter into a formal referral arrangement. On an ongoing basis the referral relationship would operate as follows:
1 Referral: The DR refers a client to the PM, after providing the client with a disclosure document outlining the key
aspects of the referral arrangement;
2 Initial Account Setup: The PM contacts the client, collects all the relevant information required to open and manage
accounts and fills out all the necessar a er or
3 Investment Management: Once all the required documents are signed, the PM will make the appropriate
security selection.
4 Reporting: The PM will create statements and reports which are sent directly to the client. Copies may be sent
to the DR if agreed to by the client.
MEMBER MEMBER MEMBER PROFILEPROFILEPROFILE
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5 Referral Fee: The PM pays a monthly referral fee to the EMD which may be split with the DR according to the
EMD’s compensation system.
The key concept of a referral arrangement is that the PM assumes all the compliance oversight & risk and as such, under no circumstances can the DR be in any way involved in the investment decision-making process. However, the PM may use the DR to assist with non-securities related activities, such as identit verification or hel in the client ith the si nin of the paperwork.
A FINAL WORDA referral arrangement with a Portfolio Manager can help you take your business to the next level by providing your clients with access to additional quality investments and service. It will also allow you to focus more time building upon your established relationship with your existing clients and, in the process, create a value for your business – a winning solution for everyone!
Terry Gwilliam, FMA FCSI is the Vice President and a Director of Alitis Investment Terry Gwilliam, FMA FCSI is the Vice President and a Director of Alitis Investment Terry Gwilliam, FMA FCSI is the Vice President and a Director of Alitis Investment Terry Gwilliam, FMA FCSI is the Vice President and a Director of Alitis Investment ounsel and has over ears e erience in the financial services industr as ounsel and has over ears e erience in the financial services industr as ounsel and has over ears e erience in the financial services industr as
an investment advisor in ritish olum ia err s ualifications include inancial an investment advisor in ritish olum ia err s ualifications include inancial an investment advisor in ritish olum ia err s ualifications include inancial ana ement dvisor and ello of the anadian ecurities nstitute ana ement dvisor and ello of the anadian ecurities nstitute ana ement dvisor and ello of the anadian ecurities nstitute
His main focus is corporate oversight, business development, and client relations His main focus is corporate oversight, business development, and client relations His main focus is corporate oversight, business development, and client relations management. management. management.
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NOT ALL REAL ESTATE INVESTMENTS ARE CREATED EQUAL
BY ZACK SIEZMAGRAFF
W e all know real estate can be a great investment. There is no shortage of real estate investment opportunities available
including; direct investment, rental properties, and those in the Exempt Market - MICs, REITs, Limited Partnerships.
As I watched the heartbreaking story of a recent exempt market real estate investment go sideways, I was struck by the realization that ith a fe simple questions, investors could have unravelled the spin and hype around the product in question and found out that the investment’s promised success was questionable from the beginning.
o can ou tell if a real estate investment is ood o can an investor se arate the heat from the chaff ere are e questions any real estate investor should ask before signing on the dotted line.
(1) WHERE IS THE PROPERTY?This is the most obvious and basic of questions - where is the investment ro ert or ro erties located hat are the econometrics of the
region and does the business plan of the investment issuer align with medium ran e forecasts
One key indicator of the economic health of a region is to look at what other types of investments are being made in the area. For example, if the property is in an industrial area heavily dependent on the oil and gas sector, what kinds of investments are the big O&G la ers ma in ou can et that
the big O&G companies have armies of economists and data miners that the average investor does not have access to.
Another angle is to look at the behaviour
of big retailers in the area. Is there a new Wal-Mart opening up in to n id the local ona recentl close its doors i retailers and chain restaurants have economists on staff who help guide
investment decisions. Learn from them.
(2) WHAT IS THE VALUE OF THE PROPERTY?The value of the property is a basic metric that investors can use to assess the health of a real estate investment. The
Issuer should have this. Ask to see a valuation and its comparables to ac u their fi ures
In the aforementioned failed investment, the Issuer raised more than 5 times the value of the property from investors. That is an alarming ratio, and it wipes out any notion of security that the investors may have had. It is common practice to raise a total offering larger than the current property value, with the provision the raise is going to complete value-added work to the property but the capital raise-to-value ratio should be in line with the nature of the work being done.
(3) HAS THERE BEEN A LIFT? IF SO, IS IT REASONABLE?Often in real estate deals that are structured as Limited artnershi s s or ndivided nterests s the ssuer has already purchased the land, and is now selling it to investors.
The difference between what the Issuer paid for the land, and the price the Issuer is selling it at, is called the lift.
It is not uncommon for there to be a lift, as often the Issuer injects capital and does value-added
work, in addition to basic land appreciation. However, if the lift is overblown, this
should be a warning sign to investors, as it means the Issuer is making money right off the top. Ask the Issuer what they paid for the land, and how they justify the lift. Ask to see a raisals and verification of value-added work to justify the lift.
IT IS COMMON PRACTICE TO RAISE A TOTAL OFFERING LARGER THAN THE CURRENT PROPERTY VALUE, WITH THE PROVISION THE RAISE IS GOING TO COMPLETE VALUE-ADDED WORK TO THE PROPERTY BUT THE CAPITAL RAISE-TO-VALUE RATIO SHOULD BE IN LINE WITH THE NATURE OF THE WORK BEING DONE.
52
(4) WHAT IS THE INTENDED USE OF INVESTMENT PROCEEDS?Peel back one further layer and ask what the purpose of the investment proceeds are. This will determine at what stage the overall development is at.
Many real estate investments are designed with the investment proceeds going to purchase the land (and then the issuer roceeds to develo it n this model the investor carries a lot of
the ris as the first re construction hase of land develo ment is one of the ris iest tainin ro er zonin su division approvals, development permits, engineering assessments, etc all require the cooperation of the municipality. Failure to execute this phase of the development properly can add months or even years to the development, which in turn costs the investors.
f the investment is turn e all a rovals ermits zonin etc are in lace and the ur ose of the raise is to commence the construction phase of the development, the investor’s assets are more secure, as there is very minimal risk of a delay from the municipality.
(5) WHAT IS THE BUSINESS PLAN?o is the ssuer lannin to ma e ou mone hat are the
input factors, and what contingency does the management of the ssuer have if the assum tions don t or out
Take a deeper look at the assumptions in the business plan. If a development plans to generate revenue through sales of serviced lots, for example, ask what price point the model assumes for the lot revenue and how management arrived at that fi ure re there com ara les hat assum tions are ehind that in ut rice hat ha ens if the mar et softens
(6) CAN THEY EXECUTE THE PLAN?Take a good hard look at the Issuer’s business plan. Does the management team have the experience and skills to execute the ro ect ho are their strate ic artners en ineers architects
construction ro ers etc o our research all or email the management of the Issuer and ask questions.
Some development-type investments underperform as a result of poor planning and execution. For example, if the development calls for a subdivision plan - has the management team e ecuted a su division lan reviousl
If not, ask how they are confident in their ability to execute one at this point in time.
(7) WHAT’S IN IT FOR THEM?he first uestion on most investor s minds
is hat s in it for me he uestion that should e first on investor s minds is hat s in it for the ssuer he reater the ali nment et een the investor’s goals and those of the issuer, the more
stake the issuer has in the investment’s success.
Does the issuer make money when you make
mone f orst case scenario the investor loses mone does the ssuer lose mone as ell o the ma e all their mone u front Do they make additional revenue through management fees and commissions f so as hat value does that add to our investment
This list was by no means exhaustive, but was meant as a checklist of key points with which to assess the strength of potential real estate investments.
THE FIRST QUESTION ON MOST INVESTOR’S MINDS IS: ‘WHAT’S IN IT FOR ME?’ THE QUESTION THAT SHOULD BE FIRST ON INVESTOR’S MINDS IS: ‘WHAT’S IN IT FOR THE ISSUER?
ac iezma raff is the irector of ales and ar etin for verest eal state nvestments a division of Everest Development Group. You can follow him on twitter @ZackEDG.
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BY PHIL DU HEAUME
MOTIVATION DRIVES PEOPLE TO ACTION.
I t’s a simple yet critical concept, commonly discussed in articles that champion techniques in leadership and sales strategy. Whether an
individual s motivation ta es the form of financial incentives ethical beliefs or pursuit of the simple satisfaction that comes along with doing a good job, there is almost always an underlying reason for why people do things. Finding ways to identify and harness these motivating factors can be an effective way to promote success – particularly in exempt market dealerships. These dealerships also need to be wary of motivation’s evil t in con ict of interest In behavioral psychology, incentive theory describes how people are naturally inclined to make decisions that offer positive reinforcement and to avoid decisions that lead to punishment. Unfortunately, the pursuit of positive reinforcement is also subject to a natural human tendency to choose smaller immediate ratification at the cost of su stantial but delayed success. Perhaps even more dangerous is the fact that
e often do not reco nize that e are fallin re to an incentive bias until we get the chance to look back on our decisions with the enefit of hindsi ht
his is a commonl identified ro lem ith u lic mar et investin
here rash u sell decisions ased on mar et uctuations can cost investors longer-term market gains that are traditionally available through a model of diversify and hold. The short-term incentive to escape what is perceived as a potentially catastrophic loss wins out over the longer-term incentive to stay the course and allow for a market rebound.
nvestors are not the onl ones ho are vulnera le to con ictin incentives and decision-making biases. Investment dealers and their representatives are presented with a similar dilemma when
the encounter con ictin incentives of their own; particularly if one option is immediately gratifying while the other feels less certain and longer-term.
or the most art industr artici ants reco nize that investor success begets dealer success, because the act of growing investor wealth creates a larger capital pool for the dealership to draw from. But this can be perceived as ‘hard’ because its a long-term objective that requires the dealership to create a consistent track record of effective due-diligence and responsible advising, all while maintaining strong relationships with clients, advisors and issuers.
Conversely, the immediate, positive reinforcement that is available to dealers and representatives who pursue sales commissions
CONFLICT DISCLOSURE:
WITHOUT PROPER CONTROLS IN PLACE, CONFLICTS OF INTEREST ARE A SIGNIFICANT RISK TO MARKET INTEGRITY.
DEALERSHIPS ALSO NEED TO BE WARY OF MOTIVATION’S EVIL TWIN: THE CONFLICT OF INTEREST.
from unsuitable transactions and related-party investments is more gratifying and, according to these psychological theories, more attractive. Short term incentives form the basis of man con icts of interest that threaten industr inte rit t is imperative that Exempt Market Dealers do everything in their o er to rotect their clients from these con icts efore the
have to look back on their decisions through the hindsight that comes with a regulatory investigation.
n incentive ias is considered to e a con ict of interest by provincial securities regulators if it could reasonably result in circumstances where the interests of the client and the interests of the registrant are inconsistent or divergent. A case of a dealer being incentivized in the short term to advance unsuitable deals or sell related-party roducts is a erfect e am le of a con ict of interest hoosin
the uic dollar over the mutual enefit of actions that lead to client success means that the investor’s goal of building wealth is no longer the primary focus.
he conce t of rotectin a ainst con icts of interest runs deep throughout National Instrument 31-103: Registration Requirements, Exemptions and Ongoing Registrant Obligations and its related Companion Policy (for the sake of brevity, we will refer to both the instrument and the companion policy collectivel as the nstrument he dual re uirements of a dealershi to a rovide clients ith relationshi disclosure information outlinin ho the firm ma es mone and perform suitability assessments prior to recommending or accepting instructions on the purchase or sale of a security, are le islated solutions to the natural con ict of interest that e ists between seller and buyer.
ome con icts ho ever are circumstantial rather than industrwide and are not directly accounted for in the Instrument. This is why a key obligation of dealerships is to implement effective olicies and rocedures that miti ate con icts of interest and
ensure that they act fairly, honestly and in good faith when dealing with their clients. The dealer must be able to identify otential con icts of interest determine the level of ris that
they raise, and then respond appropriately by disclosing, controllin and or avoidin the con ict
erha s the most im ortant of these con ict miti ation strate ies is the requirement to provide disclosure to clients, because it forces the dealership to see the world through the eyes of an investor isclosure is s ecificall codified in the nstrument at section here it states that f a reasona le investor
ould e ect to e informed of a con ict of interest the re istered firm must disclose in a timel manner the nature and e tent of the con ict of interest to the client hose interest con icts ith the interest identified
The wording is nuanced, and it is important for registrants to reco nize that the disclosure re uirement is orn out of hether or not a reasona le investor ould e ect to e informed of the con ict rather than whether or not the client will actually be harmed. This creates a very low threshold test for necessitating disclosure and forces the dealershi to o ectivel vie the con ict of interest efore runnin it throu h a ut ould never do that filter
To illustrate how the test for disclosure must be conducted, we can use the example of an Exempt Market Dealer that distributes
the securities of an indirectly related issuer, such as an issuer controlled by a family member or financial ac er of the firm It’s worth noting that section 13.6 of the Instrument also requires that the client be provided with disclosure anytime a dealership recommends that the client buy, sell or hold a security issued by a related issuer of the dealership,
as defined under ue to the re uirement that the firm performs a suitability analysis before allowing an investor to acquire securities of that issuer, the dealership may feel that client risk is minimal. Nonetheless, the dealerships perceived risk does not matter if a reasonable client would still want to be afforded the opportunity to independently evaluate the risk, based on full disclosure. Disclosure of the relationship would, in this case, be required under the Instrument.
With complete information relating to the relationship between the dealer and the issuer the client is a le to conte tualize the dealershi s recommendation to buy or sell the security and decide whether or not their interests are sufficientl ali ned further roduct of this disclosure is that it forces the re istrant to articulate the con ict and through that process, consider whether or not additional controls or avoidance measures should be put in place.
isclosure is onl art of the con ict revention rocess ho ever it is an important tool for registrants to use in protecting their clients.
ithout ro er controls in lace con icts of interest are a si nificant ris to mar et inte rit he re uirement to disclose con icts of interest based on whether or not a reasonable investor would expect to be informed ensures that re istrant firms ive due consideration to the interests of their clients t is a fundamental first ste to ensurin that clients are always dealt with fairly, honestly and in good faith.
The above is not to be construed as legal advice but is provided for general
interest purposes only. Please consult your legal or compliance advisor for
matters related to your particular situation and to determine whether or not you
have implemented sufficient policies to protect clients against conflicts of interest.
INDUSTRY PARTICIPANTS RECOGNIZE THAT INVESTOR SUCCESS BEGETS DEALER SUCCESS, BECAUSE THE ACT OF GROWING INVESTOR WEALTH CREATES A LARGER CAPITAL POOL FOR THE DEALERSHIP TO DRAW FROM.
Phil is the newly appointed Vice President of Legal and Compliance at Raintree Financial Solutions, one of Canada’s leading Exempt Market Dealers. Prior to joining Raintree, Phil practiced general corporate/commercial law with a recent focus on advising on and creating compliance frameworks for securities law registrants and helping facilitate the re istration of some of l erta s first em t ar et ealershi s
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