Re: More questions for exempt-market regulation, (Investment Executive, September 2014)

[Canadian Foundation for Advancement of Investor Rights, a.k.a. FAIR Canada]’s disingenuous criticisms of the exempt market, and financial services as a whole, have become ubiquitous in our world. Blanket attacks on an industry may seem harmless enough, but FAIR Canada’s continuous linkage of the exempt market with the word “fraud” is akin to yelling “shark” on a crowded beach today because they were known to be in the area in the past — completely irresponsible.

As summarized in your recent editorial, in their latest research report A Canadian Strategy to Combat Investment Fraud, FAIR Canada states that “the exempt market has increasingly become a gateway to fraud by providing easy opportunity for fraudsters.” Yet, as FAIR Canada stated in the very same report, there is no substantive evidence that the exempt market has a higher percentage of fraud than the public markets. To put it in perspective, the recent, high profile “exempt market” fraud committed by David Michaels of Victoria, B.C. involved investor losses totalling $65 million. This is a tragic case, and completely unfortunate. The BreX [gold mining scandal] was as well, in which investors lost $6 billion, or about 91 times more.

FAIR Canada’s report indicates that the majority of fraud cases in the exempt market result from registration exemptions, yet oddly enough, their current efforts are more focused on slowing the adoption of new prospectus exemptions in Ontario, even though they are likely to be used most often by registrants subject to direct oversight by the Ontario Securities Commission. FAIR’s continued focus on the exempt market is difficult to rationalize given a complete regulatory overhaul conducted in 2010 via implementation of National Instrument 31-103. Statements like “the exempt market is loosely regulated” and has a “high level of fraud” are not only inaccurate but lead to unnecessary panic among the very investors FAIR Canada holds themselves out as representing.

No one wants bad apples in their industry. However, until someone discovers a magic bullet to eradicate it, investment fraud will continue to occur in all areas of the capital markets. The National Exempt Market Association suggests that instead of having a highly cantankerous approach, FAIR Canada should work collaboratively with industry, as opposed to criticising it from afar. In the research report, they stated they had spoken with stakeholders, but they only used regulator interviews, data, and reports. Stakeholders must include industry and investors — not just regulators. As a corrections officer may, after some time, lose their faith in humanity, so too may regulators who only see the very worst behaviour in the capital markets.

The exempt market is a new and growing area of the capital markets. It is an exciting space and holds well documented potential for fostering economic prosperity. However, it is far from mainstream and accepted, and will never be so if it continues to be slandered publically by the uninformed groups who should know better.

Craig Skauge, President, National Exempt Market Association
Cora Pettipas, Vice President, National Exempt Market Association