Exempt market rules have supporters and detractors

Don’t count Jerome Hass, a portfolio manager at Torontobased Lightwater Partners Ltd., among the supporters of the new exempt market rules that went into effect in Ontario this week.

One of the key changes is an offering memorandum (OM) exemption that will allow investors to participate in private capital investment opportunities previously only available for high net worth investors.

The new rules, including exemptions for capital raisings through crowdfunding and through friends, family and business associates, will also harmonize the rules across the country.

Hass agrees with the decision to open up the exempt market through the offering memorandum exemption, which because of the lower income thresholds will allow more investors to participate. But he doesn’t like the second part of that decision, namely the exclusion of investment funds from the new rules.

That sector is the largest issuer in the exempt market: In 2014, the sector was responsible for two-thirds of the $ 121 billion raised through prospectus-exempt distributions. The overall market is big, with issues ranging from less than $ 250,000 to more than $500 million, with more than half the issues being above $100 million.

In Hass’ view, excluding funds won’t achieve the goals set for the new rules. In other words, they won’t facilitate capital raising for small and medium- sized enterprises (SMEs) to the extent desired; and, they won’t allow the average punter to “invest like the rich.”

The Ontario Securities Commission said to permit investment funds to sell to retail investors under the OM exemption without the benefit of the disclosure and product regulation that applies to retail investment funds “would be inconsistent with the principles underlying these existing rules and with three ongoing investment fund policy initiatives: modernization of investment fund regulation; point of sale disclosure for mutual funds; and the review of the cost of ownership of mutual funds.”

Maybe, but Hass, whose firm manages two hedge funds that focus on mid-cap stocks, argues investment funds are one of the main suppliers of capital to SMEs. “By excluding investment funds from the liberalization of the exempt market, the objective of making capital available to SMEs will be severely impaired.”

Indeed, rather than spending taxpayer dollars “on policy programs to subsidize productivity and innovation, here is a cost-free alternative: remove the barriers that limit the private sector’s ability to provide capital to SMEs,” he said.

While Hass has reservations, another industry participant is having the opposite feelings.

Darrin Hopkins, an investment adviser with Richardson GMP in Calgary, saw his efforts rewarded this week when regulators in five provinces approved a prospectus exemption that will allow listed issuers “to more easily raise money by distributing securities without the need for a prescribed offering document.”

Provided the issuer is up to date with filings, and provided the investor receives advice about the investment’s suitability, the purchase can be made.

The exemption that follows on from a Hopkins-inspired initiative granting existing shareholders those rights now applies to all shareholders.

Hopkins, who spent 3.5 years on the latest endeavour, said you need “patience and persistence.”

“I set out all the arguments to the regulators, the exchanges, the numerous committees and kept stressing the case that this change was needed.

“The capital markets will be better off because the change creates a low cost and efficient way for public companies to raise capital.”