Introduction
The issue of the role of government can itself be a thesis. But if one believes in limited government, then one should see its role to protect its citizens from violence and theft, protect the environment, and develop and maintain a civil society and rule of law, allowing commerce to flourish.
Those societies that have flourished economically are those with an enlightened government that had little corruption, and entrenched property rights. Why bother putting all your energies to build a business if the government could take it away because some apparatchik wants a business for his family? One can only look at the collapse that occurred in Zimbabwe’s agricultural sector after the government started seizing land from white farmers.
Vancouver, BC is a mining town. Some estimates put upwards of 2,000 mining and mining-related companies with a presence in this city. Also, there are numerous green-tech companies trying to sprout and grow.
What each one of these emerging companies requires is capital. Money is to a company like food to a person, something that is necessary for survival.
This will be the first of many blogs talking about issues of capital raising and regulation for companies.
Let Brokerage Firms Help Emerging Companies Raise Money
Bob Gander (this is a true story, but his identity is protected) lied. Actually, Bob filled out a document, and wrote something that was false. Bob even put his signature on that document in multiple places affirming the falsehood. And that lie made him a lot of money. The first time Bob did it was in the office of his broker in downtown Vancouver. His palms were sweaty, and he was nervous. After that first time, it was easier. He lied many times after that. He was worried that they might audit him, and find out that he had lied. No one ever did.
If you are like Bob you are brought up by your parents to tell the truth.
But Bob wanted to buy that private placement. However, securities regulations say that only accredited investors or close friends and business associates of an issuer (public company) can buy securities in a private placement. At the time Bob was making less than $30,000 a year, but had an MBA.
For many years there was a nudge-nudge-wink-wink approach at brokerage firms in Vancouver. Brokers let their clients, many of whom clearly were not accredited, participate in private placements.
Some of the riskiest investments are those private placements reserved for the Howe Street/Bay Street crowd, friends of CEOs and Directors, or for the wealthy. To be an accredited investor according to the BC Securities Commission, one needs to have at least $1 Million in financial assets (cash and securities), or $200,000 in net income before taxes (or $300,000 for combined income with a spouse). Considering that the BC Median income in 2009 is $66,700[1], this leaves out a lot of investors.
Why is this important? Sometimes the best (but also riskiest) investments are undertaken via private placement for the well heeled and well connected. The first time I heard about the term “private placement” was in Robert T. Kiyosaki’s Rich Dad, Poor Dad. Coming back from Vietnam, Mr. Kiyosaki was told he couldn’t invest in a good deal because “it would be against the law”. Mr. Kiyosaki was not yet an accredited investor.
Bob’s $5,000 investment turned into about $40,000. It was an amazing opportunity. Unfortunately, opportunities like that are no longer available for Bob, and many other people.
In the past, brokerage firms accepted their client’s word that they were accredited. Now, after the financial collapse in 2008, the compliance departments in brokerage firms are requesting clients validate their net worth. In many cases, firms are asking for bank statements and income tax statements.
One of the mantras relayed by the 99% is that the ‘rich get richer’. Well, one way they get richer is by access to opportunities that ‘poor’ people are not able to access.
These accredited investor regulations were put in place to prevent unsophisticated people from being taken advantage of by shady finance people. And, yes, Vancouver has had its share of them. Thankfully, the BCSC, US SEC, and other provincial regulators have helped clean up the industry to make it safer for investors.
However, regulation should not entrench wealth, but should provide an equal playing field for all investors and to protect investors from crooks.
If an average individual wants to have access to these private placements, let him or her make that personal decision. Plain language is the antithesis of these private placement documents, some of which are in excess of 30 pages.
My Dad’s new lawn mower has a single sentence warning that says putting one’s hand into the moving blade can cause serious harm or death. Let us provide that same type of clear, concise warning to investors wanting to risk their capital.
If a person certifies he is an accredited investor, but refuses to provide proof, he is limited to investing at most 20% of his portfolio’s value at that brokerage firm into a private placement. As well, there should be a notarized document which he signs that states in 42 point bold font: “I certify that I am an accredited investor, but will not provide documentation to that effect. IT IS ALMOST CERTAIN I WILL LOSE ALL OF MY MONEY I INVESTED IN THIS PRIVATE PLACEMENT. FURTHERMORE, I AM FOOLISH AND STUPID IF I PUT MORE THAN 2% OF MY NET WORTH IN THIS EXTREMELY RISKY AND DANGEROUS INVESTMENT. “
Government cannot protect us from all harm. By trying to do so, a new layer of bureaucracy is created at brokerage firms, hindering companies from raising the capital they need to grow.
As citizens we need to take responsibility for our actions and be careful of the moving blades.
[1] Accessed on the Internet April 6, 2012: http://www.statcan.gc.ca/tables-tableaux/sum-som/l01/cst01/famil108a-eng.htm
