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.
"The TSX allows companies to do $0.01 financings. What on earth can you raise at a penny?"
With the regulations and liability being 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 ex-lawyers 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 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.
"There are only so many funds out there. Everybody's feeding out of the same trough and there's less and less to eat."
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?
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.
"Regulation is a growth industry these days."
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?
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."
"If regulators continue to put up all these barriers, Venture money will go somewhere else."
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?
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.
"There will be no new discoveries if Venture markets can't get funded. The senior companies do not even have exploration teams."
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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