PLEASE READ THIS ARTICLE TSX Venture and TSX
Don Mosher, a business consultant with B&D Capital in Vancouver, is
sounding the alarm. The TSX Venture Exchange, a once-thriving exchange
for junior mining companies, is struggling. Its strife is a symptom of the
overregulation that is slowly killing a whole sector of the Canadian economy,
forcing mining companies and their servicers out of business or to move
overseas. But the death knell hasn't sounded yet, Mosher tells The Gold
Report. He believes the Venture Exchange and mining in Canada can be
saved, and he outlines his plan here.
Source: Brian Sylvester of The Gold Report
The Gold Report: Don, you believe that Canada's TSX Venture Exchange, where
most of the world's junior mining equities raise cash, is in crisis. Your concern
stems from overregulation and market inefficiencies. Can you give us an example to
illustrate your point?
Don Mosher: Take a capital pool company or even a junior initial public offering. It
might raise from $200,000 ($200K) to $1 million ($1M), but about 40% of that goes
to regulators, attorneys and accountants before it even gets a listing. The chances
of success are very small when a company has to use that amount of capital right
out of the gate, just to get a listing in place.
TGR: If it's that prohibitive, why are there 1,673 junior mining companies listed on
the TSX Venture?
DM: Over the last 12 years, with the real rise in commodity prices, investors started
to pour money back into a resource sector that had been in maintenance mode. The
money started to come back in and, as a result, we've got 1,600+ listings. I promise
you, it will be a different number in a year, and it certainly won't be going up.
TGR: If the TSX Venture is in crisis, how do we know the patient is ill?
DM: A strong indicator is that the exchange did away with the $0.05 minimum for
financing. It allows companies to do $0.01 financings. What on earth can you raise
at a penny? What's that going to do for the shareholders? The dilution on that is off
the charts.
TGR: We've had downturns in this segment of the market before and it's always
come back. What's different this time?
DM: This time it isn't due to low commodity prices or demand. Instead, there are
regulatory barriers to investors, and escalating costs, that startups simply can't
afford. Also, other regulations are making things more difficult. There's a regulation
coming into effect on March 26 that will force brokers to take a look at becoming
asset gatherers, as opposed to speculating.
With the regulations and liability being
Don Mosher: Strangulation by Regulation—Is the Venture
Exchange on Its Deathbed?
The Gold Report www.TheAUReport.com
companies to do $0.01
financings. What on earth
can you raise at a penny?"
forced upon the brokers, I can foresee the
extinction of the independent brokers
—Haywood Securities, PI Financial, Leede
Financial, Jordan Capital Markets, Toll
Cross Securities, Byron Capital Markets—because they're not built to be asset
gatherers. They're not built to be in competition with the big banks. The investors
who do want to play the Venture market are going to get forced into the discount
houses, where there is no expertise to encourage or help them.
If these brokers can't reach out to retail, which has been killed off due to
commission tampering and the piling on of regulations, they're left with the funds.
Let's face it: There are only so many funds out there. Everybody's feeding out of the
same trough and there's less and less to eat.
TGR: Are you worried about crying wolf?
DM: I hope I'm completely wrong, but I've been doing a lot of research, and in
working with the Venture Financial Crisis Committee, significant problems have
been identified. Regulators still think that most fraud occurs within small-cap
ventures, but society needs to encourage prudent risk-taking and entrepreneurs.
Fraudsters need to be dealt with by regulators and the criminal justice system, not
through regulation.
TGR: Where does the retail investor fit into all of this? Is the retail investor the
forgotten player?
DM: The retail investor is in real trouble. Look at the attendees of any mining
conference. They are mostly people around 60 or 70 years old. New regulations
being implemented by the Investment Industry Regulatory Organization of Canada
(IIROC) are pushing toward an age limit on Venture investing. If you're over 65,
you're asset-gathering broker is going to be very reluctant to allow you to
participate. You're going to have to go to a discount house. And the young people
have a difficult time getting started because they are not yet accredited investors,
and consequently are blocked from participating in private placements (buying a
block of shares at a discount with a warrant).
TGR: Who benefits most from more regulation?
DM: More regulation in Canada benefits the banks. Regulation is a growth industry
these days and the banks have taken over the Independent Dealers Association.
They've taken over the TSX. In some regards, they even control the regulators. Our
finance minister, for example, is an ex-banker. Our central banker is an ex-banker.
The people that rule the regulators are the politicians, and the politicians are all exlawyers
and ex-bankers.
If you take a look at a mandate for a bank, it's to continue to consolidate and provide
more money for its shareholders. It has got no interest in job creation. It has no
interest in Venture markets.
If they'd had their way, the Big Six banks in Canada would have consolidated
among themselves, but the government prevented that.
TGR: But you can't have it both ways. You can't say that the banks benefit from
more regulation, which squeezes out the brokers, and then say they don't want
anything to do with junior mining.
DM: They don't want the Venture market. They want to gather the assets that
"There are only so many
funds out there.
Everybody's feeding out of
the same trough and there's
less and less to eat."
people have. If you want into the resource sector, they're going to offer you an
exchange-traded fund or a fund that they own. The last place they want to send you
is to a junior mining company. They don't even want to send you to the senior
mining companies anymore.
The competition is fiercer than ever: the
Australian Small Scale Offering Board
(ASSOB), the Hong Kong Stock Exchange.
How are we going to compete with these if
we're killing off our independent brokers as
a source of funding, regulating the retail
investor out of the market and forcing our
companies offshore?
TGR: You believe that that's the ultimate outcome here?
DM: One of my clients is heading to Asia next week.
If regulators continue to put up all these barriers, Venture money will go somewhere
else. They'll create new avenues to find money. Take crowdfunding—it's a
relatively new creation, but it's taken off like crazy. Why? It's an easier way to raise
money as a startup. Private funding has become much more prevalent in the oil and
gas industry, for example.
TGR: A consortium of banks, insurance companies and other financial players own
the TMX Group, which operates the TSX main board and the TSX Venture. If the
junior mining sector dries up, a lot of their fees also dry up. There has to be some
incentive for its owners to make it easier for companies to operate and raise capital.
DM: Financial institutions are motivated by fees. TD Securities, for example, made
$365M in the second quarter of 2012. After dividing the TSX profit for that quarter
among the 13 owners of TMX, their portion worked out to $846K. The interest is in
selling high-end products—senior products, not high-risk venture products.
The TSX came out in opposition to the latest regulation, which was the revocation
of the Northwest Exemption by the British Columbia Securities Commission
(BCSC). That could prohibit paying non-registered finders to raise capital from all
sources of funding.
The BCSC said that the impact on capital-raising would be about 1%, but the TSX
Venture said it would destroy between $900M to $1.2 billion ($1.2B) of the $6B
raised in 2012. That's more than 1%. The Venture is starting to feel the pinch.
TGR: Some in the junior mining space are calling for an expanded flow-through
share program to help junior miners raise money. You're against it. You don't think
that will fix the problem. That's probably not a popular stance in the mining
business. Can you make your case?
DM: To quote President Ronald Reagan, "If it moves, tax it. If it keeps moving,
regulate it. And when it quits moving, subsidize it." Flow-through is subsidizing a
market that has quit moving.
Flow-through creates an unfair playing field for the shareholders of publicly traded
companies. If I were an American or a European, I'd hate flow-through. It's unfair.
Why does a Canadian get a zero cost base on the same shares with the same
rights as I'm paying for in hard dollars?
"Regulation is a growth
industry these days."
TGR: I think part of the problem is that there's not a concerted voice advocating
specific solutions for these problems. You're one voice. Newsletter writer John
Kaiser is another voice. Sprott Global Resource Investments' Chairman Rick Rule
is another voice. Do all of you agree on the solutions?
DM: There isn't any one simple solution. Informed, experienced people out of all
parts of the industry—regulators, IIROC, the TSX, public company representatives,
lawyers, accountants—need to put together a new set of regulations that is
exclusively applicable to the Venture Exchange.
We are seeing the demise of the Venture
Board in Canada. Companies are exploring
opportunities in other jurisdictions—just the
way manufacturing left the U.S. and went to
Asia because there was less regulation, fewer costs and the ability to build in more
efficiencies. I think the risk is real and we are running out of time.
TGR: What about this ASSOB model in Australia? Could that work here?
DM: It works there because it's private. It doesn't have the regulators, IIROC and the
rest of it. It goes out privately and raises money. It's allowed to advertise. That's
what we're competing against.
TGR: People are creatures of habit. Maybe some of the younger players will
venture off to Asia, but I think the majority will just keep trying to raise money the
way they always have.
DM: I got off the phone with someone earlier today with a stock that is trading at half
a penny. He's going private with it.
He's gotten to the point where he doesn't want to deal with the Venture Exchange
anymore, because if he does a $0.01 issue, the insiders who have the largest
vested interest are only allowed to take down 25% of it.
His other option is to sell it off to what he considers potentially parasitic investors
that will take down the funding at a penny and sell it for a nickel.
He said, "The hell with it. I'm just going to delist."
There's also an interesting case study in Kirrin Resources Inc. (KYM:TSX.V). Kirrin
essentially gave up. It discontinued operations and all of its directors and officers
resigned, which caused it to no longer meet the exchange's requirements and to
have its shares suspended.
TGR: How do we reinvigorate the retail space?
DM: Here's a question for you. A non-accredited investor owns 30K shares of a
company, knows the management and likes the company. The company
announces it is going to do a private placement—brokered or non-brokered, he's
not allowed to participate because he's not accredited. Does that make sense? He
can buy free-trading stock, but he's not allowed to participate in the financing and
get a warrant with a company that he's completely comfortable and familiar with.
On the other hand, my receptionist, who has never traded a share of stock in her
life, can borrow $150K and participate in a financing with somebody that she
doesn't know, because that $150K allows her an exemption to the sophisticated
investor rule. If she's got $150K, she must be sophisticated, right?
"If regulators continue to
put up all these barriers,
Venture money will go
somewhere else."
Why not allow a non-accredited shareholder of a publicly traded company to
participate in a financing and have the benefit of the warrant?
TGR: What's another solution?
DM: If a broker can get a client to sign off on a release that acknowledges the risks
involved in participating in a Venture stock, they have no recourse to go back and
sue the broker. The front of a prospectus says, "high-risk investment, you may lose
some or all of your investment."
We actually advertise the risk involved. Yet
nobody minds when Apple stock is sold to
retail investors at $700/share and is now
trading at $450/share. Nobody seems to
mind that somebody's carved $25B off the
market cap of Apple. There is always a
winner and a loser; that is the way the market works.
When it comes to the Venture market, nobody's allowed to play. Even though
they've got regulations, the toughest penalties in the world, oversight on the brokers
who are registered and being reviewed and supervised by IIROC, audited
financials and security lawyers pushing all the paper through.
TGR: Why do you think this story is not getting more traction?
DM: This story will get a lot of traction in the coming months because we're going to
lose thousands of jobs. Just in my building, two companies just laid off two of their
five employees because the principals know how difficult it is to raise money.
TGR: One of the counterarguments to all of it is that the good projects will always
get the money somewhere.
DM: Right now, there are 12 heap-leach gold projects in the world with preliminary
economic assessments or better. Twelve. That's it. You think you're going to get any
more to come onstream with the lack of funding out there? How many of those 12
will go to production in the next 10 years if these markets don't turn dramatically?
Maybe the top four?
One of the things that happened in 1998 to 2003, when the real commodity prices
turned around, was that people went out and dusted off old projects where the
economics started to make sense, then spun around and sold them to companies
like Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX).
There are no old projects out there to dust off. There will be no new discoveries if
Venture markets can't get funded. The senior companies do not even have
exploration teams.
There are some companies running around looking for good assets on the cheap
right now. We will see merger and acquisition action start to happen. But when
that's gone, then what?
TGR: Do you think we'll soon start to see a round of capitulation selling?
DM: We're already seeing it in the funds. Outflows are forcing redemptions, and the
stocks with large institutional holdings are hitting new lows daily. Their stock charts
all make nice ski slopes that are flattening out at the bottom.
TGR: We've had some form of a Venture Exchange for 100 years. You're really
saying that's all going to come to an end?
"There will be no new
discoveries if Venture
markets can't get funded.
The senior companies do
not even have exploration
teams."
DM: Yes. For 75 years, it was very efficient. It was a system that flowed and
functioned properly. Then in the 1980s, the system went from non-negotiable
commissions to negotiable commissions, which created the discount houses where
the brokers were taken out of the picture.
Since then, the banks in Canada and the U.S. have managed to overthrow
regulations that did not allow them to get involved in the broker, insurance or trust
businesses. They've put their fingers into everything.
What got the U.S. in so much trouble in
2008 were the investment banks. They
were involved in arbitrage trading and
mortgage-backed securities. You name it,
they had their fingers in it, and that created
the problems. If we'd kept banks as banks I
don't think we'd see these issues.
TGR: It seems as if there will need to be some political weight put behind this for
changes to be made. Where is that political will going to come from?
DM: That's why Joe Martin, the founder of the resource investment conference
company Cambridge House, and I built the venturecrisis.org website. We knew we
needed to get a groundswell movement from within all facets of the industry.
Joe is part of the service sector. How would you like to be selling booths to Venture
companies right now? His people are dealing with a lot of rejection.
The whole service sector is feeling the bite. There's going to be a lot less drilling
this year, so there are going to be drillers out of work. Caterers, first-aid suppliers,
helicopter and airplane providers, line cutters and indigenous populations in the
north, too. Accountants and lawyers are working on fewer filings and financings,
and are getting fewer fees.
At our meetings, we've actually got independent brokers because they're feeling the
pinch.
It could have a massive impact on Canada. There is potential risk to our entire
economy. I believe we'll start to see the impact this summer. I believe we'll see it in
our gross domestic product.
TGR: How do people get involved?
DM: To start, register on our website, venturecrisis.org. We'll be coming forward
with some ideas on there. We're also looking for people to vote in favor of the TSX
letter. If we can start with one small thing and have a positive impact, we can go to
the BCSC and say, "Here's several thousand people voting against this
revocation." Maybe we can rally the troops to generate ideas that will start to bring
efficiencies back into this market.
TGR: If you could say one thing to Canadian security regulators, what would it be?
DM: Let me say two things.
The first point is mine. The regulators need to focus on market efficiencies, as
opposed to retail investor protection. They don't have one mandate. Their website
states two mandates, which are to facilitate:
A securities market that is fair and warrants public confidence
A dynamic and competitive securities industry that provides investment
opportunities and access to capital
The second point is made in this description of the situation by a person with a
prodigious knowledge of the junior capital markets. He said, "The BCSC's proposal
to revoke the Northwest Exemption seems to be the product of muddled minds. By
throwing private placements in public companies in with the completely
unregulated exempt market, the BCSC implies that these already overregulated
companies are loosey-goosey and in need of new rules [like] the unregulated
others.
In other words, the BCSC's many years of rules, regulations, policies,
proclamations, police work and colossal salaries have been for naught.
TGR: Thanks, Don.
Don Mosher is one of the founders of B&D Capital Partners and has over 25
years of experience in the public market with strong connections to several
financial institutions and sophisticated individual investors.
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