Brokerages that cater to retail investors and junior resource companies are pushing hard for a change that would make it faster and easier for cash-starved companies to raise money from individuals.
A group of provincial securities regulators, led by those in the western provinces, are looking at a rule change that would enable companies listed on the TSX Venture exchange to raise money from their existing retail investors without having to jump through so many regulatory hoops, such as preparing a costly and time-consuming prospectus.
The financing statistics for TSX Venture Exchange companies are grim. The amount of money they raised in 2013 fell 37 per cent as investors fled speculative and commodity stocks. Without more financing, many companies may not make it.
"The current market conditions make it very challenging to raise risk capital particularly for TSXV junior companies focused on precious and base metals," said Robert Quartermain, chief executive of Pretium Resources Inc. and a member of the British Columbia listings advisory committee for the TSX Venture Exchange. "There is also the cost of such financing, so any proposal that enables issuers to access investment through existing shareholders cost effectively is positive for the issuers."
The idea is based on the notion of a rights offering – whereby existing investors are offered a crack at putting more money into a company. The rationale is that the shareholders have already made the investment decision about a company, and have had sufficient opportunity to gather information about the firm. The alternative for many companies is to arrange a private placement, a cheaper method, but one that under securities laws means only wealthy investors and institutions can participate.
"The fairest way to raise money is a rights offering," said Rory Godinho, a Vancouver securities lawyer who is pushing the idea. "The difficulty is, a rights offering is a difficult, complicated, expensive process."
An exemption from prospectus requirements would offer a shortcut. Only companies that have up-to-date disclosure records would qualify. The amount an investor would be able to put up would be capped. The limit under consideration is $15,000 in a year.
The concept makes sense, said Ermanno Pascutto, the executive director of FAIR Canada, an organization that advocates for investors in securities regulation matters. "Generally speaking we are supportive of the efforts being made by regulators to explore ways to help listed issuers to raise capital and for existing shareholders to participate in the financings," he said, suggesting however that the setup be tweaked to enable shareholders to only subscribe for an amount of stock no greater than the amount they already own.
That would help limit risk, and avoid abuses such as someone buying a few shares before the record date to enable themselves to buy many more in a discounted placement.
The change would also aid brokerages whose clients include retail investors. Those firms have been losing out to brokerages that deal only in the so-called "exempt market" of private placements to qualified investors. The group of investment dealers advocating the change includes Canaccord Genuity, Global Securities, Haywood Securities, Jordan Capital Markets, Mackie Research Corp., Leed Financial Markets, Maccquarie Capital Markets Canada, PI Financial, Wolverton Securities and Woodstone Capital.
Even so, there is a divide in the industry about the idea, said Mark Redcliffe, chief executive officer of Jordan Capital. He said that banks, primarily based in Ontario, are wary while western independent firms are more open to it. Concerns revolve around liability and due diligence.
The goal is to get the rule in place as quickly as possible. That may mean starting without the biggest province, Ontario.
All the provincial regulators, except Ontario and Newfoundland, are currently seeking comments on the proposal. However, proponents expect that there is a good chance the outliers will come on board should the plan go forward.
"In a perfect world it should be national," Mr. Redcliffe.