Recent Canadian Securities Administrators (“CSA”) and Ontario Securities Commission (“OSC”) Notices indicate that securities regulators in some jurisdictions, including Ontario, are considering expanding the type of prospectus exemptions they will offer while, at the same time, reviewing the accredited investor (“AI”) and minimum amount (“MA”) exemptions. The OSC is considering the offering memorandum exemption, the “friends and family” prospectus exemption and exemptions that have been implemented in other jurisdictions, such as exemptions contained in the United States’ Jumpstart our Business Startups Act (or the JOBS Act).
The JOBS Act provides a “crowdfunding” registration exemption for transactions not exceeding certain thresholds based on an investor’s income and net worth. The JOBS Act also lowers disclosure obligations for emerging growth companies. See investigative journalist Matt Taibbi articles posted on April 9, and April 12 for why the JOBS Act “…actually appears to have been specifically written to encourage fraud in the stock market”.
Meanwhile, securities regulators also recognize that there are real concerns with compliance by issuers and dealers with their obligations to ensure that existing exemptions are being used properly (see OSC Staff Notice 33-735 and Alberta Securities Commission (“ASC”) Staff Notice 33-704).
FAIR Canada urges securities regulators to be cognizant of where the high risk of investor losses is occurring and ensure that regulation focuses on and addresses areas of higher risk. Based on media reports and FAIR Canada’s Frauds Report, we believe that the exempt market is an area of highest risk to investors. The current, largely self-policing system which exists in the exempt market in effect places no control at all upon who is “accredited”. It seems that all one needs is the funds to buy. There is often no suitability inquiries being undertaken, no disclosure of the large commissions that the seller is obtaining when investors purchase the exempt market security or the conflicts of interest which appear to be rife in this part of the market. FAIR Canada’s Fraud Report enumerates several instances of frauds which occurred in the exempt market, and in which there was no scheme of compensation to investors in the event of insolvency since the dealers were not members of a self-regulatory organization. We also note that other attempts to create job growth and finance new companies by giving retail investors more “opportunities” to invest, like labour sponsored investment funds, have resulted in large losses to investors.