Jack Mintz to regulators: curb your caution on private markets

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Jack Mintz is begging provincial securities regulators to take deep breaths.

Worried that the watchdogs are overreacting to fears about fraud in private markets, the man who runs the University of Calgary's School of Public Policy wants them to study the issue before jumping to conclusions.

Currently, only "accredited investors," or those with $1-million in net financial assets or net income above $200,000, can invest in securities sold solely in private markets. These "exempt securities" do not trade on public exchanges, and their companies' financial disclosures are often limited or do not exist.

The main ideas underlying these rules: wealthy investors are either more sophisticated when it comes to markets than the average investor, or they have enough financial leeway to absorb any losses from riskier bets.

However, exempt securities are becoming more popular. TMX Group Ltd., which operates the Toronto Stock Exchange, recently launched a private exchange to help investors swap these illiquid securities. Baby boomers are also inheriting wealth at a fast clip, and many do not know what to do with their new-found money. If a 50-something Canadian inherits a house in Vancouver from her parents, there's a decent chance she becomes a millionaire overnight.

To update its governance, the Canadian Securities Administrators proposed new rules this year, such as requiring exempt investors to sign a "risk acknowledgment form." The Ontario Securities Commission went even farther, allowing more people to buy private securities – but restricting how much they can purchase at the same time.

To make it acceptable for more Canadians to invest in private securities, the OSC proposed adding a new class of investors who have a net income of at least $75,000 or have $250,000 in net assets, excluding their primary residence. If the new rules are accepted, these individuals will be able to buy up to $30,000 worth of private securities a year.

Mr. Mintz isn't so sure such a cap is necessary, nor is he convinced the current rules must be changed. After thorough research, he's concluded there is almost no data on the private markets. "The first question we should be asking is: what is the problem?" he said during a panel discussion to discuss his new paper in Toronto Monday.

"I think we should wait a year before we put in regulations that could do a lot of harm," he said. "Let's slow down. The world won't fall apart."

"I'm not the kind of person who likes to study something forever," he added, but he stressed that it is shocking how little data there is on this area of the market. For starters, no one knows how big it is.

Mr. Mintz was backed up by Vijay Jog, a professor at Carleton University's Sprott School of Business, who argued for a data repository for the exempt market. He even found sympathy from Ed Waitzer, former chair of the Ontario Securities Commission.

When it comes to regulation, Mr. Waitzer said, "we don't know what works in protecting investors from fraudsters. We don't know what works in protecting investors from themselves." That doesn't meant the OSC's proposals are bad, but he believes the rules may not be necessary or the best means of protection. Instead of targeting caps on private investments, maybe regulators should simply ensure investment advisers follow their fiduciary duties, he argued.

By no means did Mr. Mintz deny that fraud exists in private markets, or that some investors get in over their heads because they don't really know what they're buying. But he argues the same is true for public markets, and that the minimal data on exempt securities makes it hard to know if things are all that worse for private investors. For that key reason, he wants regulators to take it slow.