An investor advocacy group is calling on regulators to resist the urge to grow the exempt market through measures such as a new crowdfunding exemption, citing the lack of compliance, and the high incidence of outright fraud, in this part of the market.
The Canadian Foundation for Advancement of Investor Rights (FAIR Canada) said Monday that, “Widespread non-compliance with the laws and regulations governing the loosely-regulated exempt market coupled with a high level of fraud and weak oversight harms investors and weakens confidence in the Canadian capital markets.”
FAIR argues that regulators should focus on fixing the existing regulatory framework in the exempt market before increasing the number of available exemptions.
“There will be a greater risk of harm to retail investors if exemptions are broadened without first better understanding the extent of fraud and investor losses in the exempt market and improving compliance with the rules,” it says.
In particular, it points to recent reports from securities regulators that reveal compliance problems in this part of the market, such as improper use of the existing exemptions, and assorted disclosure failures; along with anecdotal evidence of serious fraud issues. In terms of investor protection, “The evidence simply does not justify expansion of the exempt market,” it maintains.
Instead, FAIR says that regulators should focus on reforming the existing $150,000 and accredited investor exemptions; which, it says, are “fundamentally flawed” and should be replaced with a different set of criteria. It also calls for regulators to improve compliance in the exempt market; bring stronger sanctions for compliance violations; consider reforming the existing oversight regime; study the issue of fraud in this market; and, to scrap the so-called “Northwest exemption” which exempts dealers from registration requirements in certain provinces.
FAIR also criticizes the Ontario Securities Commission’s (OSC) recent exemption for MaRS VX to operate a crowdfunding portal for impact investments, saying, “This exemption was granted in the absence of public consultation, despite its direct relevance to the current debate about the appropriateness of current exemptions (especially the accredited investor exemption), crowdfunding and investor protection.”
And, it notes that the Saskatchewan Financial and Consumer Affairs Authority (FCAA) recently held a consultation into equity crowdfunding too. ” In FAIR Canada’s view, an equity crowdfunding exemption would be completely inconsistent with modern principles of securities regulation in Canada, and, at a minimum, warrants a fulsome, transparent public consultation in order to ensure that the issue is fully canvassed and potential risks are identified and mitigated in the drafting of any unprecedented exemptions,” it says.