Issue 2September 2012

www.WEMAonline.ca

Perfect Storm

he Dirtiest Word inthe Exempt MarketTompliance Pitfalls in a World of

One Rule & Thirteen RefereesC

Why Now is the Right Time for the Exempt Market

he Art of Drafting the OMT

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wemawestern exempt market association

{EDITOR’S LETTER}

Cora PettipasDBA (Candidate) M.Sc, FCSI, CFP

To all our members for their continued

support and participation: Thank-You!{ {

supportive of all legitimate efforts for investor protection and investor rights. When investors are protected, it increases investor confidence which adds to the prosperity of small business, entrepreneurs, investors, and the economy as a whole. WEMA members and regulators alike want the bad apples gone, as they unfairly bring down the reputation and integrity of our industry.

Our President, Craig Skauge, has significantly increased WEMA’s public profile through interviews in national publications including the Globe and Mail, Financial Post, Investment Executive, and Advisor.ca. He has been asked to speak at numerous events for various associations, including the Canadian Securities Administrators, the Canadian Bar Association, and the CFA Institute. He was also appointed to the OSC’s Exempt Market Advisory Committee which is looking at the adoption of the OM exemption in Ontario. He is working tirelessly to play an advocacy role for more efficient regulation.

As part of our mandate, we are holding an Advisor Education Forum to demystify the Exempt Market to those registered in other categories. It is being held on November 7 in the McLeod Hall at the Telus Convention Center in Calgary, Alberta. To make this event as valuable as possible to attendees, we are partnered with the Business Career College. It is a full day of continuing education for Advisors

We have had an exciting quarter at the Western Exempt Market Association! We received a lot of positive feedback on the inaugural issue of this magazine and we are pleased that it is a facilitator of communication and knowledge for our industry. We have a great new graphic designer, Jenelle Miller, who has helped us change the look of the magazine and we will continue to improve this publication with each and every issue.

In this past quarter, we have increased our membership base by 30% and are pleased to welcome all our new members. We encourage your feedback and ideas. The more participation we have from our members, the more we can influence our cause. One area where we would like to grow our membership base is with Advisors that are Dealing Representatives. They are the face and future of our industry and we want them participating in future discussions with regulators, policy makers, and other key parties. Given their importance to our industry, we were pleased to add two Dealing Representatives to our Board of Directors for the upcoming year.

WEMA takes our critics seriously, as that is how we can grow and improve as an organization. One criticism we have received as of late from an investor rights agency is that we are against investor protection, indicated by our public campaign and efforts for the adoption of OM exemption in Ontario. Properly drafted OMs can protect investors, and the OM exemption in Ontario would increase investor rights through creating more options for them. WEMA’s members are fully

outside the exempt market to help gain awareness for WEMA and the exempt market in general.

In addition, I will be presenting this month at the Global Business Research Conference in Mexico, and am looking to seek partnerships internationally with alternative investment experts in markets other than Canada, as globalization is an inevitable trend. WEMA is also seeking out strategic alliances with other ethical organizations that have synergies with us.

Be a part of our success! Please consider publishing an article with us, as submissions are open to all WEMA members. The deadline for the next issue is November 15, 2012. WEMA is your industry, your voice, your future.

Cora is currently the Vice President of Member Services, at WEMA. Prior to this, Cora was a Professor at Mount Royal University and has had tenures with several financial firms in the capacity of wealth management. Cora is also the founder and Co-Owner of Melodic Twilight, a successful business venture which sells internationally. Cora is a doctoral Candidate in Finance, and has had her work published, and has presented, internationally.

Editor’s Letter

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1

Visit www.WEMAonline.ca and join today!

Part of our industry but not yet a WEMA member? What are you waiting for?

If you’re not a part of the solution...

1 EDITOR’S LETTER

Cora Pettipas

4 SELLING STEAK, NOT SIZZLE

Stephanie A. McManus

6 CARNEY, FLAHERTY & MORTAGAGES - OH MY!

Justin G. Charbonneau

8 THE ART OF DRAFTING THE OM

Darren Smit

10 WEMA NEW BOARD MEMBER PROFILES

12 RESOURCEFUL INVESTING: FLOW THROUGH SHARES

Steve Elliot

14 UNMANAGED RISK IS A FOUR LETTER WORD

Cora Pettipas

16 US REAL ESTATE: HAS THE OPPORTUNITY PASSED? Ryan Hittel

18 THE DIRTIEST WORD IN THE EXEMPT MARKET

Craig Skauge

22 A PERFECT STORM

Cora Pettipas & Craig Skauge

26 NOTICEABLE DIFFERENCES

Alexander Changfoot

28 COMPLIANCE PITFALLS IN A WORLD OF ONE RULE & THIRTEEN REFEREES

Phil Du Heaume

30 UNFRIENDING FACEBOOK

Cameron Reid

32 FINANCIAL INSTITUTION BOND

Moe Dahnous

34 INVEST LOCALLY Marcin Drozdz

36BECKSLEY CAPITAL: WELCOME Ryan Lee

38 Q&A: WITH BOB WATT Bob Watt

40 THE LIGHTER SIDE

Marketing Your Exempt Product Business

ELLNG STEAK

By Stephanie A. McManus LL. B.

C)

Know Your Client

The whole regulatory structure around the retail sale of investments is based on one notion: “Know Your Client”, You will notice that is very different from “Sell Products”. In fact, if done properly, the exercise should sometimes end with no product sale at all because in getting to know your client, you learned there is no product you can offer that is suitable for them.

I recognize that this is not an intuitive line of thinking for many professionals who earn their living in this role. But it is what the regulators expect. When they review your work at audit time, it is what they will look for as evidence in your client files. And for you dealers out there, supervision and training processes should be ensuring that this is what’s happening.

It is a client first mentality that requires you to a) know your client, b) know your products, c) if possible, design a match between the two and d) disclose all the downsides, as well as the upsides, of the investment.

Services vs. Products

“We offer safe, simple exempt products with high returns.” We have seen this and many other similar claims made in marketing materials or on websites for Dealing Representatives. The fundamental underlying principle for every marketing piece you ever create has to be “ Do not mislead the public.”

Subsection 100 (2) of the Alberta Securities Act, contains a provision, very similar to provisions contained in every other Securities Act:

“A person or company shall not make

a statement about something that a reasonable investor would consider important in deciding whether to enter into or maintain a trading or advising relationship with the person or company if the statement is untrue or omits information necessary to prevent the statement from being false or misleading in the circumstances in which it is made.”

$It seems to me that one of

the most important things a Dealing Representative selling in the Exempt Market can learn and apply in day-to-day practice, is the notion that he/she is there not to sell a product - but to provide a service.

Too often, we review websites, read client communications, brochures, articles or other marketing material that tout products in the Exempt Market - how wonderful they are and how much better they are than those nasty volatile stocks on the TSX or those mutual funds being battered by stock instability.

The focus always seems to be on product, product, product, and of course on the advantages of the Exempt Market over traditional investing. The dangers with this approach are:

A)

B)

{not sizzle}

Selling Steak Not Sizzle

Can you say with 100% accuracy that every product you offer is “safe”?

Can you say with 100% accuracy that every product you offer is “simple”?

When you promote the Exempt Market as somehow “better” than the traditional markets, you run the risk of glossing over or ignoring the very real risks it entails.

When you advertise on the basis of the products you offer, you could change or misinterpret the information provided by the issuers, which was reviewed and approved in the due diligence process by your dealer;

You’re not focusing on knowing the client; you’re focusing on selling a product;

4

Marketing Your Exempt Product Business

ELLNG STEAK

Second, everything you ever propose to unleash onto the public – bulk communications, newspaper or magazine articles, websites, brochures, cold calling scripts, etc. - must be submitted to your dealer compliance department for review and approval. They have a duty to supervise what you do, whether you like it or not, and you can benefit from their trained eye in reviewing these things to ensure you are not off-side.

Marketing is an important tool in the growth of your business. Just remember to tread carefully and use the compliance expertise you have available to be sure it promotes, rather than harms, your business.

Stephanie A. McManus LL. B. is a member of the Bar in Ontario and Alberta and a Principal of Compliance Support Services, a firm that has been providing compliance help to the financial services industry since 2005. www.compliancesupport.ca.

The preceding is not to be construed as legal advice but is provided for general interest purposes only. Please consult your legal or compliance advisor for matters related to your particular situation.

{not sizzle}

The answer to all three of those questions is of course, “no.” And so, what seemed initially to be a harmless promotional tag line has turned out to be a violation of regulatory marketing rules.

Exempt Market v. Public Markets

You believe in the Exempt Market, otherwise you would not be working in it, right? You genuinely feel that it offers an alternative to investors that the public markets just cannot offer. There is nothing wrong with believing in your work. When you are a Registrant though, there is a problem with promoting the good without disclosing the bad. Yes, the Exempt Market offers less volatility, because its products are not traded daily. All that means is those investors who do not have the stomach for daily jumps and drops can avoid that one aspect of investing when they buy in this less visible market. However, that does NOT mean that the products are less risky. Exempt products are private products with a whole host of risk factors unique to them, which is why they are largely reserved for more sophisticated, “eligible” or “accredited” investors. It is misleading and contrary to regulatory marketing rules to “leave out” the downsides of investing in the Exempt Market when you promote it in your marketing materials.

Avoiding Pitfalls: There are two things you can do to help ensure you are remaining on the right side of the regulators with marketing. First, focus on what you offer as a service.

Pretend you are up against another Dealing Representative in the same Exempt Market with the same products available: what is it that you offer that adds value and would make an investor want to work with you as opposed to that competitor?

Selling Steak Not Sizzle Continued

Can you say with 100% accuracy that every product you offer guarantees “high returns”?

5

Carney, Flaherty & Mortgages - Oh My!

Ever since the global financial crisis, Canada’s policy makers - both on

the monetary and fiscal fronts - have been priming consumers for high interest rates and tighter mortgage regulations, given the economic risks from an overvalued Canadian housing market. Although Canada has so far avoided a disorderly unwinding of our housing market, the risk still remains to our banking system and to our personal balance sheets alike. So what do these policy changes mean for Canadian real estate, fixed income, and equity prices and more importantly, client portfolios?

First, it’s not a surprise the Canadian housing market is overvalued by any stretch of historical valuations in Canada and globally. Although Dealing Representatives may have a tendency to

only worry about the assets they specifically manage for their clients, it would be an injustice to not include what risks that the Canadian housing market holds for clients with respect to their overall financial picture and their overall portfolio risk exposure. From a risk management perspective, including client assets tied to Canadian real estate, exposure should be a discussion point for advisors given the close positive correlations between Canadian real estate, and energy & materials – two of the largest S&P/TSX Composite sectors. Especially for Dealing Representatives and clients out West, you may be surprised at how much of your client portfolio exposure is tied to the resource sector bull market which is now 12 years into the making (some might say quite long in the tooth).

A common valuation method used globally based on average price vs. median family income shows that Canada’s residential housing sector is valued between ~4.5-6x. Figures on national average house prices taken from Canada’s Real Estate Board (CREB) and the national median family income taken from the government show that by historical measures, the risk to consumers of becoming house poor is high. This is a clear and present

phenomenon, especially if Canada sees a prolonged slowdown in the resource space, a definitive risk if China cannot navigate a soft landing.

By contrast, and in its fifth year of decline from its own housing bubble, the U.S.

residential housing market now stands at ~3-3.5x. As the May 2012, National Association of Realtors (NAR) housing statistics show, the median

existing home price of ~$160,000 has fallen from a peak of ~$220,000. While median household income of ~$52,000 has stagnated since the global financial crisis, resulting in the US housing market valuation coming back into line with that of the late 1990s.

So how did we get here, and are house prices sustainable given current valuations?

Like the U.S., Canada’s policy makers fuelled access to cheap debt over the last decade, resulting in a credit boom like nothing we’ve ever seen.

Over the past 15 years, China’s insatiable demand for our resources has turned

By Justin G. Charbonneau, CFA, DMS, FCSI

Although Dealing Representatives may have a tendency to only worry about the assets they specifically manage for their clients, it would be an injustice to not include what risks that the Canadian housing market holds for clients with respect to their overall financial picture

6

mainly lies with the underlying manager who needs to be more hands on and build continuity in their business model. Managers need to deploy strategies with conservative loan to value ratios, focus on positive rental cash flow, low carrying financing costs through secure and competitive lending, utilize regular income distributions, and take a reasonable management fee. That way, the likelihood of attractive returns for clients in an exempt product is high given the downside risk to US residential. Real estate appears limited compared to that of Canadian residential real estate.

The traditional asset classes of bonds, balanced portfolios, US blue chips, dividend paying equities, and private equity involving US real estate are back in vogue like mom’s good old home cooking for Canadian investors.

And as Dorothy famously once said, “There’s no place like home.”

By Justin G. Charbonneau, CFA, DMS, FCSI

Justin G. Charbonneau, CFA, DMS, FCSI is vice president and lead portfolio manager of Matco Financial’s Global Asset Allocation committee.

Carney, Flaherty & Mortgages Continued

The traditional asset classes of bonds, balanced portfolios, US blue chips, dividend paying equities, and private equity involving US real estate are back in vogue like mom’s good old home cooking for Canadian investors.

our once manufacturing powerhouse economy into a materials and energy haven. Now, our policy makers are clearly giving us the yellow light given a global economy in deleveraging mode, Europe facing its own debt crisis, and China’s growth rate falling back to earth.

The unfortunate reality is most Canadians haven’t woken up to the fact that our secular commodity bull market is at risk of coming to an end. Coupled with a government focused on implementing tighter monetary policy through unconventional regulation, lower commodity prices at the margin are heightening downside risks in our economy and, moreover, our housing market. That is the bad news.

The good news is a tighter unconventional monetary policy, weaker commodity prices and continued u n c e r t a i n t y over Europe, China, and the U.S. fiscal cliff mean Canadian baseline interest rates should stay lower for longer, thereby fueling the fire of the Canadian bond market. But haven’t we all heard the story that interest rates are historically low and have no where to go but up? Yes, however, the reality is most investors aren’t putting enough weight on the downside risks to our economy because the housing market has left many house poor, not to mention the slow bleed of commodity prices, thereby amplifying the need for lower rates.

The notion of rates normalizing to higher levels has been pushed further into the future, and with the risk of a housing correction in the magnitude of 10% to 15%, it is unlikely Carney will use abrupt interest rate hikes in such an uncertain environment.

For this reason, the corporate sector of the fixed income market remains very attractive, especially considering how tired clients are getting with low equity

market returns. Corporate bonds with a term of 5-10 years continue to offer investors nominal yields in the 3-5% range, even higher for the non-investment grade bond offerings which, unfortunately, have equity-like risk profiles.

Add to this the global deleveraging cycle that is unlikely to bring an economic boom anytime soon, and Advisors may have a real risk to their book of business if there is too much resource and real estate exposure and not enough yield generation in your client portfolios.

Although government bonds are now in negative yield territory, corporate bonds and high yield debt continue to offer investors attractive yields comparatively speaking. Nevertheless, do not discount the shock absorber features of government bonds seeing how a good risk management strategy always incorporates unfavorable outcomes.

Beware of bonds that promise euphoric yields because this might result in disappointment in equity-like downside, or a total loss of return

of capital if the underlying issuer runs into re-financing trouble.

The other asset class that offers clients a lower risk profile along with consistent income generation in the 3% to 5% range is dividend-paying stocks across all market capitalizations around the world. Using our strong and some might say overvalued Canadian dollars to buy cheap US dividend-paying companies has never looked more attractive. Throw on top of that the US stock market which has just endured a lost decade and you have a real opportunity to invest in a slower global growth “two-speed world”. Put another way, for those clients who have a significant weighting to overvalued Canadian real estate and Canada’s resource sectors, you’ve just built in a contingency in case the secular resource bull market is indeed coming to an end.

Finally, exempt market securities involving US real estate should do especially well in a low rate environment given that US residential home prices are back to 1997s levels. Exempt securities, however, involve another risk which

7

4C

Raquel MullenShireen Kok

Investment Executive

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100%1

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We know what it takes to build, support and maintain the relationship you have with your clients. Discover the BMO Bank of Montreal® full service approach to investment lending – a level of service unmatched in the industry.

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filed. In fact, the Securities Regulators found so many common problems with the OMs that the Canadian Securities Administrators published CSA Staff Notice 45-309, on April 26, 2012, which set out many of the common problems that they kept finding and how to reconcile these issues. While this CSA Staff Notice has been very useful for the industry, it should be noted that this Notice only deals with the most common problems encountered and does not address all of the other problems or concerns that the Securities Regulators have encountered with the thousands of OMs they have reviewed. That is why it is crucial that the counsel retained

to prepare the OM be familiar not only with NI 45-106 but also with the expectations of the Securities Regulators.

The art of drafting an OM requires an experienced hand. Inexperienced drafters will look to past OMs or other Issuers’ OMs to act as precedents and attempt to copy them. While precedent OMs do exist, they are too often utilized in a ‘copy-and-paste’ style of drafting. This should never be done for a number of reasons

including, without limitation: they almost always differ from the current offering because the projects and/or the investments differ; they do not include what Securities Regulators now require to be in OMs; and they often contain errors that have been copied from OM to OM. Each OM should be completely drafted from scratch and thoroughly reviewed by experienced counsel. Retaining counsel without experience or drafting one’s own OM in an effort to save money could not only damage the reputation of the Issuer but of the exempt market industry in the long run. Save yourself some heartburn and hire a qualified professional with adequate experience with drafting OMs.

Mr. Smits is a lawyer and partner in the Calgary office of Miller Thomson LLP. Darren practices corporate/commercial law, financial services including commercial lending, and real estate. He is also involved in private placements and exempt market transactions for Miller Thomson’s clients. Mr. Smits obtained his Bachelor of Management from the University of Lethbridge in 2001, his LL.B. from the University of Manitoba in 2001and his Bachelor of Arts from Augusta University College in 1997.

of Drafting the OMArtThe

A ll too often in our office we see Offering Memorandums (“OMs” or an “OM”) that have either been drafted by

lawyers who specialize in legal areas unrelated to securities (such as real estate or corporate-commercial, for example). Even worse, it is not uncommon that we see OMs that have been drafted by the principal(s) of Issuers in an effort to save costs. When we review these OMs, it’s evident to us that the author of the OM had little, or no, expertise with drafting these important disclosure documents.

After the introduction of National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”) in the fall of 2005, it was not uncommon practice for Issuers or inexperienced counsel to draft OMs based solely upon the requirements set out in the Regulations. However, much has changed since the early introduction of NI 45-106. The requirements of the OM have become more and more complex as securities regulators have significantly increased their expectations of what should and should not be included in OMs. In addition, the implementation of National Instrument 31-103 Registration Requirements and Exemptions (“NI 31-103”) on September 28, 2009 has added yet another layer of complexity to drafting and using OMs to raise funds.

Due to the complex nature of the applicable regulations, as well as the need for specificity in the document, it is strongly recommended that Issuers retain legal counsel that is not only familiar with the exempt securities regulations laid out in NI 45-106, but who is also well versed in any other securities regulations that will have an impact on drafting OMs and has experience with dealing with various Securities Commissions. Unlike a Prospectus, an OM is not reviewed by Securities Regulators. However, Securities Regulators will review an OM as a result of their planned compliance-monitoring programs, certain market activity that they observe, or if they receive specific complaints or referrals. Over the last few years we have seen a significant increase in Securities Regulators reviewing OMs and, as a result, they have found considerable issues with many of the OMs that have been

By Darren Smits

The art of drafting an OM requires an experienced hand. Inexperienced drafters will look to past OMs or other Issuers’ OMs to act as precedents and attempt to copy them. While precedent OMs do exist, they are too often utilized in a ‘copy-and-paste’ style of drafting OMs.

8

4C

Raquel MullenShireen Kok

Investment Executive

100% of Final Size7.8125” x 10.625”None7.8125” x 10.625”NoneNoneNone7.8125” x 10.625”None

100%1

BMO-BMO

Cyan Magenta Yellow Black

Cossette BANK OF MONTREALInvestment Lending AdBMO_LEND_IE_E.indd

11-18-2009 4:09 PM

Tina Hassler Kok, Shireen / Kok, Shireen

Daniel Vendramin

Discover BMO’s full-service approach to investment lending.

One-to-one service for you and your clients.

When it comes to investment lending, you deserve a high level of service. Face-to-face, attentive service not only for you – but for your clients as well.

We know what it takes to build, support and maintain the relationship you have with your clients. Discover the BMO Bank of Montreal® full service approach to investment lending – a level of service unmatched in the industry.

To locate a BMO Investment Lending Specialist in your area today, visit bmo.com/investmentlending

™/®Trade-mark/registered trade-marks of Bank of Montreal.

of Drafting the OM

BOARD MEMBER PROFILES

2012 WEMA {WESTERN EXEMPT MARKET ASSOCIATION}

WEMA’s AGM was a great success! We welcome our new board members: Cora Pettipas, Darris Cameron, Marcin Drozdz, Nadine Wellwood, Riki Roy, Steve Elliott, and Yvonne Martin Morrison. If some of the names are not familiar, please feel free to learn more about them at www.WEMAonline.ca/directors. We thank our departing board members for their service to WEMA: Craig Burrows, David Udy, Dean Koeller, Gordon Bylo, Jim Sand, and William McNarland. We have made an effort to have a representation across firms, as well as representing issuers, dealers, advisors and strategic partners. We look forward to a great year at WEMA and welcome continued feedback and ideas from all our members about our strategic initiatives for the next few years.

Craig Skauge PresidentExempt Experts Inc.

Darren SmitsLawyer/PartnerMiller Thomson LLP

Darvin ZurfluhExecutive Chairman Pinnacle Wealth Brokers

Fabrizio LucchesePresident & CEO The Jaymor Group

Darris CameronVice President Financial Value Inc. (Privest Wealth Managment)

NEW MEMBER

Cora PettipasVice PresidentWEMA

NEW MEMBER

WEMA Board Member Profiles

10

Jay R Modi Chief Executive & DirectorOmniArch Group

Nadine Wellwood President & CEO WealthTerra Capital Management

NEW MEMBER

Steve ElliottSenior Vice President Pathway Asset Management/Energyfields & Mineralfields

NEW MEMBER

Riki Roy President Omnus Investments Ltd.

NEW MEMBER

Marcin Drozdz Managing PartnerBlueprint Group

NEW MEMBER

Yvonne Morrison Principal Advisor Purpose Inspired Solutions(Raintree Financial Solutions)

NEW MEMBER

WEMA Board Member Profiles Continued

11

FOR MORE INFORMATION VISIT WEMAONLINE.CA

“I’m extremely pleased to have such a strong board for our second year. Our revised board is comprised of many of our industry’s movers and shakers and collectively represents the entire industry spectrum from dealing representatives and EMD presidents, to issuers, lawyers, and consultants. Collectively we will ensure our industry continues to move in the right direction“ - Craig Skauge, Chairman

Resourceful Investing: Flow-Through Shares By Steve Elliott Senior Vice President Pathway Asset Management/Energyfields/Mineralfields

M any people think that flow-through shares are

complicated. But with a little explanation I believe the concept is simple. The Government knows that approximately 90% of new businesses fail in the first 5 years, and of the 10% that make it, around 90% of those fail the next five years. In order to keep these resource-based businesses running, and helping the Canadian economy maintain and create lots of jobs, the government allows these corporations to transfer their expenses to individuals, rather than face the more likely scenario of these businesses never getting into production and being able to offset their expenses. In the mining world, most junior companies are generally in exploration for at least 10 years before getting into production and actually starting to see a profit. This makes it very tough for these companies to raise money and stay in business over this time because they have poor cash flow.

Flow-through shares are shares issued in mining, oil & gas, renewable energy and energy conservation sectors (e.g., solar energy) here in Canada, and have been around since the 1950s. These companies do not have to be Canadian

to issue flow-through shares, but they must generate a Canadian Exploration Expense (CEE) or Canadian Development Expense (CDE) on Canadian soil to qualify under CRA guidelines.

A flow-through share is simply a common share of an eligible company. These companies can either be private or public. MineralFields has always bought publically traded companies for its limited partnerships. The name “flow-through” is attached because the resource company enters into an agreement with the shareholder to ‘flow through’ to the shareholder the tax credits the resource company has created from exploration. These are tax deductions that are generated from the company’s capital expenditure programs. Typically, a flow-through share purchase arrangement has the following characteristics:

Up to 100% tax deductible; and addition all federal and provincial tax credits may apply.

Why is the Canadian Government the only government in the world that offers these types of incentives for its taxpayers? Let’s talk first specifically about the mining industry. Canadian taxpayers invest close to $1.0 billion dollars on average in flow through shares every year. So from a tax perspective, the government gave up about $400 million dollars last year alone. But the royalties the government received was approximately $1.1 billion on top of the tax revenue from the 350,000 Canadians that now have jobs in the industry. A recent report showed that for every dollar that the government spent on flow-through shares there was a $2.60 direct economic benefit. Canada has become a world leader in mining, thereby attracting many highly educated and skilled people. Having a solid and vibrant Canadian mining industry also attracts close to 40 billion dollars per year in the mining sector from foreign countries.

Typically, flow-through shares are bought from shares in treasury as a private placement, and these shares are subject to re-sale restrictions typically for a period of four months after;

A detailed subscription agreement (including investor indemnification) that covers the resource company’s obligations to ensure the expenditures are made in accordance with the Canadian Income Tax Act

Resourceful Investing

12

and higher education according to a Global Competiveness Report from 2010-2011 (Source: World Economic Forum).

In 2000, the BRICS nations were at about 16% of the world’s GDP and today these nations are closer to 30%. What do these nations have to do with flow-through shares? Many of the elements and minerals that Canadian companies are mining are being consumed in these fast developing countries. China currently consumes 53% of all the cement in the world and 45% of all steel. That’s a lot of infrastructure going up in the second largest market in the world. Yet, they only rank 50th in the world in infrastructure, so they have a long way to go. The other BRICS nations rank between 47th and 86th in infrastructure. Meaning these nations will be consuming a lot of our minerals and mining production for years to come.

That being said, Canada has become a hotbed for mining operations. We have more publicly traded mining companies than any other country in the world, also continuing to attract some of the best resource-based talent in the world.

I had the privilege to check out the PDAC (Prospectors and Developers Association of Canada) conference this year in Toronto. This annual international convention & trade show is the largest mining investment show in the world. They host domestic and

foreign investors and companies, related top ranked professionals (geologists, economists, portfolio managers, etc.) and mining experts. It

was an eye opener even for me. I would recommend it to anyone who is unclear on the world mining industry or just looking to learn more about mining.

Currently, the government in Canada allows investors to take advantage of an additional 15% federal tax credit when they invest in mining exploration, on top of the 100% CEE tax deduction. This is an individual tax credit and not eligible to corporate investors. But, this credit may not be around forever. It

is currently renewed until March 31st, 2013. And we feel that when the mining industry stabilizes the government may not continue with the 15% federal tax credit, thus eliminating our Super Flow-Through share LP’s.

Other types of tax shelters – outside of mining flow-through -- generally deal with tax loopholes that may or may not get attacked by Canada Revenue Agency (CRA). While mining tax shelters are encouraged by the government, they still contain a bit of risk to the investor. Flow-through investments are very attractive for higher income earners, as well as people that have large registered accounts, whether that be RRSPs, LIRAs or LIFs. Corporations are also able to invest in Flow-Through Limited Partnerships and benefit from the 100 % CEE tax deduction, but they are not eligible for the additional federal or provincial tax credits. Because these investments generate a capital gain on sale, half of the proceeds are a credit to your capital dividend account and could be pulled out of your corporation personally on a tax-free basis. One other strategy we have been seeing is utilizing flow-through investments to offset existing capital losses. There are several other tax minimization strategies that make use of flow-through.

I hope that this brief article has helped make the murky world of flow-through shares a little clearer. Even if you’re feeling like an expert please consult with a tax professional when looking at these strategies.

Steve Elliott is the current Senior Vice President for Pathway Asset Management/Energyfields and Mineralfields. Prior to this, Steve was an advisor with a boutique firm in Southern Alberta called Aurora Capital Partners. Steve was previously licensed with the Alberta Insurance Council and the Mutual Fund Dealers Association. Steve has a Bachelor of Business Management in from Athabasca University.

Sources for this article: Flow-through shares for the innovation sector May 2012 Author Richard S. Sutin http://www.cra-arc.gc.ca/tx/bsnss/tpcs/fts-paa/menu-eng.html Prospectors and Developers of Canada Association www.pdac.ca

Canada offers many competitive advantages when it comes to resource based investing. First, we have two highly recognized, low cost stock exchanges here. Our Canadian markets are also known for their capital market integrity, and investor protection. Canada as a whole also has a highly educated population and favorable immigration policies.

The economic stability that is derived from having a strong exploration program here in Canada is essential when it comes to foreign trade. Many of the BRICS (Brazil, Russia, India, China and South Africa) nations are seeing a rapid increase in consumption, and BRICS nations comprise about 40 percent of the global population. These 5 countries also take up about 30 percent of the world’s land mass. Currently, China ranks second only behind the United States for market size, while, India ranks 4th, Russia is 8th, Brazil is 10th and South Africa is 25th. These nations accounted for 55% global GDP growth from 2000-2008. Where these nations fall behind is in business sophistication, innovation, infrastructure

A recent report showed that for every dollar that the government

spent on flow through shares there was a $2.60 direct economic

benefit.

Resourceful Investing Continued

13

to investors will be amazed at how people’s lives and occupations change so drastically in short periods. Marriage, divorce, illness, job loss, children, and

starting a business, and an unlimited array of other scenarios, can all alter someone’s financial trajectory. The fact that anything is

possible makes life fun, but clients cannot run to cash in illiquid assets to cover the change in life circumstances.

In our society we tend to sometimes indulge in instant gratification. Selling, switching, and changing investments on a whim can be satisfying. It can also be detrimental when an investor’s assets are sold for funding lifestyle expenses that were not part of the financial goals. It

T here have been considerable discussions in the Exempt Market

Industry and with Regulators lately regarding risk. Proper risk assessment and risk taking is as vital in investing, as it is in life. In the Exempt Market, specific attention and care need to be given to liquidity risk.

When having conversations with clients, risk is the four letter word that should be discussed simultaneously with investment return. How should risk, more specifically liquidity risk, be approached with clients? Here are five suggestions for better risk discussions with investors in the Exempt Market.

The first step to an effective investment risk management process is identifying the risks, and communicating them with clients. Some of the most common investment risks are: business risk, market risk, interest rate risk, inflation risk, marketability risk, liquidity risk, political risk, exchange rate risk and credit risk. As every advisor knows well through experience, specific risks differ for different investments. Even though Exempt Market products are by no means homogenous; liquidity, marketability, and business risk are arguably the biggest threats to exempt market products. Luckily, business risk can be significantly reduced through diversification. Liquidity and marketability risk can be managed, but not eliminated, in the exempt market. Illiquidity can be an advantage if investors are looking to hold assets longer term and do not want to be influenced by public stock market mood swings.

Exempt market offerings in Canada tend to be localized and tangible. Whether investing in mining or real estate, it is important for an advisor (and investor) to have a basic sense of the m i c r o e c o n o m i c forces and macroeconomic cycle that can affect market conditions. Especially in an age with increased tampering of fiscal economic policies, seemingly innocuous factors like mortgage legislation, tax policy, trade flows and austerity measures can highly impact companies. This is not to say the future can be predicted, as it cannot be consistently. It just means that the advisor can give background information as to why they are recommending certain strategies.

Before investing in exempt market securities, or any securities for that matter, a client should have a solid financial base in place, with positive cash flow, liquid assets and an emergency fund of at least six months expenses. A lot of investors will consider their home equity line of credit an adequate emergency fund. It is not. Anyone working in financial planning or an advisory capacity

Unmanaged Risk Is A4 Letter

Word By Cora Pettipas

2 Know how theBusiness Model May Interact with the Market

3 Make Sure the Investor has aSolid FinancialBase

1Identify theRisks

4 Lengthen theTime Horizon

Most Canadian investors understand illiquid products intuitively, as they have been

investing in GICs for years

Unmanaged Risk

14

comes at a long term cost of their financial goals, future, and legacies. The timelines of these investments need to match the client’s timelines for use, plus a buffer of time for illiquid assets, while still having flexibility in the plan for life changes. Most Canadian investors understand illiquid products intuitively, as they have been investing in GICs for years. Up until a few years ago, the most popular GIC was the 5 year fixed. Therefore, having investments that are illiquid instead of marketable can be advantageous, if the proper diversification is in place.

Diversification gets a lot of attention, but it is not always enacted in investors’ portfolios. Some of the factors that push investors into specialization, as opposed to diversification, are: a concentration of knowledge in one area, employer stock option plans, unbounded exuberance about a certain sector or company, and policy legislation. A popular rule of thumb is an absolute maximum of ten percent of your portfolio in one security. Like gardening, after setting up the perfect diversified portfolio, the portfolio will need maintenance. Rebalancing is hard for investors, as it takes a contrarian edge to sell the best performing ones and reinvest in underperforming asset classes, but it is empirically proven to help returns.

In short, risk cannot be avoided in investments, or in life. Unlike other areas of life, risk in a financial portfolio can be successfully managed. Most of all, advisors not only need to discuss risk with exempt market investors, but have the clients understand it enough that they can explain it back to the advisor. Even though risk is a four letter word, risk should be mentioned in every client conversation. Properly managed, the illiquid risk of exempt products can actually solidify a portfolio.

Cora is currently the Vice President of Member Services, at WEMA. Prior to this, Cora was a Professor at Mount Royal University and has had tenures with several financial firms in the capacity of wealth management. Cora is also the founder and Co-Owner of Melodic Twilight, a successful business venture which sells internationally. Cora is a doctoral Candidate in Finance, and has had her work published, and has presented, internationally.

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“Properly managed, the illiquid risk of exempt products can

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Unmanaged Risk Continued

15

US Real Estate: Has the Opportunity Passed? By Ryan Hittel

F or the past 24 to 30 months, certain regions of the battered US housing market have been terrific places to invest.

Phoenix, in particular, has offered investors a welcome escape from the squeeze between brutally low-interest bond issues and increasingly volatile and underperforming equities. Phoenix has been a standout because housing prices were hammered down 40 to 50% in a region with a very strong long-term economic outlook.

As expected, the Phoenix area is now leading the turnaround in the US housing market, with an average 25% price appreciation in the past 12 months. So the question that confronts us now is whether the big opportunity for US real estate investment is a thing of the past.

Real estate markets, whether in Canada or the US, are driven by regional dynamics. Smart investment dollars analyze and pursue opportunities on a regional basis. We must be careful not to get caught up in the “simplistic” media hype relating to the “US Housing Market.” Every region has its own unique challenges and opportunities. To be sure, certain advantages may be common across the entire market — but the crucial drivers of opportunity are regional. The US subprime mortgage crisis hurt the entire country and drove the global economy into recession in 2009. But housing prices in some areas of the United States were far less affected than those in the Sunbelt, where millions of home buyers overextended themselves with the active encouragement of lenders offering

“Easy Money” with subprime, adjustable-rate mortgages. But, not all real estate markets are created equal. Or, put another way, the three keys of real estate investment are location, location, location.

While the causes of the US housing market implosion were national in scope, impacts were very unevenly distributed. In an expanding US economy, subprime, adjustable-rate mortgages

took over 20% of the US market between 2004 and 2006. As those loans rolled over, or reset, into higher interest rates and ballooning monthly payments, one in every seven mortgages in the US went into default. Foreclosures reached 2.8 million by 2009 and, as housing prices plummeted, more than half of all homes in Phoenix and some other parts of the

Sunbelt sank to values that were far less than mortgages owing. This compared with 23% of all US homes that were said to be similarly “underwater.” Banks that suddenly found themselves owning thousands of repossessed homes invariably worth less than their mortgages, rapidly pulled back from further mortgage financing, virtually killing the housing market. In the broader economy investment banks teetered, Lehman Brothers failed and US stock markets lost 40% of their value — or some $8 trillion dollars.

With US Sunbelt home prices suddenly cut in half, Canadians rushed in to take advantage of this situation, this trend was strengthened by the Loonie trading above parity with theasset whose value, unlike stocks and bonds, never goes to zero and because, during downturns, it generates rental income that essentially pays you to wait until there’s a recovery. Furthermore, because shelter is a basic human need, rental rates are more resistant to downward pressure.

That said — all real estate does not provide the same opportunity at the same time.

In 2009, our firm Capstone Real Estate selected Phoenix as the home to the first of two successive US real estate investment funds for a number of reasons. Housing prices were cut in half yet the rental market remained healthy. From a monthly payment standpoint, it was cheaper to buy a home than to rent one. It was

The key to successful real estate investing is to identify these cycles and

adjust your strategy accordingly. No one investment strategy is perfectly

suited to every market cycle.

US Real Estate

16

Greenback. From Miami to San Diego, it seemed, the only buyers were Canadians. Real estate as an investment class provides a real tangible asset whose value, unlike stocks and bonds, never goes to zero and because, during downturns, it generates rental income that essentially pays you to wait until there’s a recovery. Furthermore, because shelter is a basic human need, rental rates are more resistant to downward pressure.

That said — all real estate does not provide the same opportunity at the same time.

In 2009, our firm Capstone Real Estate selected Phoenix as the home to the first of two successive US real estate investment funds for a number of reasons. Housing prices were cut in half yet the rental market remained healthy. From a monthly payment standpoint, it was cheaper to buy a home than to rent one. It was an investment paradox that we believed would be short-lived in an area that had undergone several years of population growth at three times the national average and that we believed was likely to return to strong growth in the years ahead. We believed Phoenix would retain its Sunbelt appeal and continue to be a magnet — not just for retirees but for a wide range of industries that are not location dependent and that prefer settings that make it easy to attract top talent.

Since early 2010, we’ve acquired over 190 single family revenue homes directly from the banks with cash for an average all in price below $105,000. The average monthly rent of our homes is $1,050, or 1% of the purchase price. It is this type of price/rent ratio that has made Phoenix so appealing to investors.

Today, Phoenix is growing again and leading the nation in the real estate recovery. More than 28,000 jobs have been created in the past 12 months and the jobless rate is 7.5%, versus a national rate of 8.2%. Phoenix now ranks 4th in large city job growth, compared to a dismal 49th only two years ago. Median housing prices have risen 33% to stand at $155,000. And the inventory of homes for sale has declined 44% over 12 months, creating an environment in which many listings attract competing offers and bidding wars. Since November 2007, inventory has declined 70%, from 48,340 homes to 14,547 units in July, 2012, which is less than three months’ supply at the current pace of sales.

The Phoenix single family market housing market is expected to continue to improve based on sound economic drivers. And Canadian investors who are already in the market are likely to see solid returns as Phoenix continues to outperform other regional housing markets. For the last 2 years, purchasing single family revenue homes in the Phoenix area was the opportunity of a lifetime. Other markets may still offer opportunities similar to what Phoenix provided in 2010-12. After all, median prices across the entire US are up by only 2.93% in the past 12 months, compared with 33% in the greater Phoenix area. But other regional opportunities will need to be carefully assessed on their merits, with careful analysis of regional economic drivers and real estate supply/demand balances.

It is important to be opportunistic, not only when identifying a specific region, but opportunistic when identifying different types of real estate opportunities within the real estate cycle. A buy, renovate, rent model is a sound investment strategy when housing prices have reached a bottom in the real estate cycle and rental demand is strong. This is our experience in Phoenix over the past 3 years. But now market conditions are changing. A drastic downturn in prices is normally followed by an increase in prices when combined with historically low supply. The key to successful real estate investing is to identify these cycles and adjust your strategy accordingly. No one investment strategy is perfectly suited to every market cycle.

We believe that very favorably priced properties with significant upside still exist, but the “buy, renovate, rent” model may not be best suited to take full advantage of this evolving market cycle. The “buy, renovate, sell” or better yet the “buy, renovate, finance” model may provide the best opportunities. There is significant demand from quality buyers who are still unable to obtain traditional financing due to tightened lending criteria. Many families made a business decision to return their home to the banks via foreclosure rather than continue to pay an underwater mortgage. With the low housing supply and new demand pushing up home prices, previous home owners don’t want to miss out. And they are willing to pay a premium to ensure they are able to re-enter the market at these rock bottom prices.

Today the Dow Jones Industrial Average has almost fully recovered the losses it experienced, providing an 85% increase from its market lows of February 2009. The Phoenix housing market has seen a significant increase in the average price per square foot, from a low of $79 to a current price of $99. This though is a far cry from the market high of $192 per square foot seen in June 2006, so a great deal of upside still exists.

The US housing market, specifically the Sunbelt region, has, and will continue, to provide significant opportunities to the astute investor.

Ryan Hittel is the Business Development Manager for Capstone Real Estate Corporation. Ryan provides sales education and support to investors, dealing representatives and financial advisors. Prior to his two year tenure at Capstone, Ryan worked in the financial services sector for the previous 12 years specializing in the areas of investment, insurance, and lending.

US Real Estate Continued

17

The Dirtiest Word in the Exempt Market

By Craig Skauge

Not much in our world is black and white, and in no place is that truer than in the world of securities legislation. It is

well known that the majority of securities rules and terminology are subject to significant interpretation. It is not rare to hear two lawyers argue over something like referral fees as if they were climatologists debating global warming. Over the past few years, a preposterous interpretation of one particular phrase in the securities world has hurt not just the credibility and reputation of certain individuals, but of our industry as a whole.

Within an offering memorandum it is mandatory to state that “[The Issuer] intends to spend the net proceeds as stated [and] will reallocate funds only for sound business reasons.” While providing some flexibility for issuers to adapt to changes is good common sense, the questions of what is “sound,” and more importantly what is allowed, need asking. For example, is it acceptable for an issuer to reallocate unutilized funds to a secured deposit at the bank? How about into a short term stock play? How about to finance another real estate project that the issuer’s promoters are involved with?

According to Constable Travis Dann of the RCMP Calgary Commercial Crime Section, “If capital is raised for a purpose, which has been communicated to an investor and that capital is reallocated, or diverted to, a different purpose, then a fraud may have been committed. Even if reallocated capital is used wisely and the investor receives a return, a fraud may still have been committed.” It is important for issuers to note this, and to utilize investor funds as they indicated they would and not get creative.

The heavy penalties handed down by regulators to past partakers of this type of behaviour have hopefully sent a message about what is permissible. We can also hope that the RCMP will be successful in prosecuting a number of past offenders to

provide justice to investors and further send the right message to prospective fraudsters. Unfortunately, punishing past offenders alone will not be enough to curb future behaviour such as this. Exempt market dealers and their dealing representatives should ensure that they have substantial comfort and faith not only with the business deal itself, but also with the track record and ethics of whomever they are placing their clients’ money with. No matter how hard we as an industry and securities regulators try, there will always be a fox or two trying to get into the henhouse.

Our industry has done a near 180 since most of these disasters and is now under much tighter regulation, but the dirty deeds and blatant abuse of this simple wording in the past has unfortunately painted an entire industry with the same brush in the eyes of some. It is a day-to-day task for many of us to dispel the misconception that all exempt issuers just take the investor’s money and run and it is a battle that

we will have to continue to fight for the foreseeable future.

While the wrongdoings of the past can’t generally be undone, our industry can and should take these hard learned lessons to heart and work towards trying to curb this type of behaviour as much as possible on a go forward.

Craig Skauge is the President and founder of WEMA. Mr. Skauge has nearly ten years of experience as the Business Development Manager for the Registered Plans Division of Olympia Trust Company, where he helped grow the division over tenfold. Craig is currently a Director with Olympia Trust Company and Olympia Financial Group Inc. (TSX-V:OLY). Mr. Skauge is the President of Exempt Experts Inc. and Target Capital Inc. (TSX-V:TCI). Mr. Skauge is recognized as a leader and national subject expert on the Canadian Exempt Market. He has been asked to speak nationally, or be an advisor to: the OSC, the CSA, the Canadian Bar Association, and the CFA. Mr. Skauge has been featured in the National Post, the Globe and Mail, and the Investment Executive.

REALLOCATION

If capital is raised for a purpose, which has been communicated to an investor and that capital is reallocated, or diverted to, a different purpose, then a fraud may have been committed. Even if reallocated capital is used wisely and the investor receives a return, a fraud may still have been committed. - Constable Travis Dann of the RCMP Calgary,

Commercial Crime Section

18

Perfect Storm

By Cora Pettipas and Craig Skauge

W ith any challenge comes opportunity and the economic challenges of the last four years are no exception. While

Canada has done relatively well during recent economic turmoil, our economies at both provincial and federal levels have not been unscathed. Many people have looked at the combination of low interest rates, tightened credit, and overly volatile markets as a recipe for disaster but for the exempt market we have been presented with an opportunity unlike anything we have ever seen.

While the exempt market’s exposure to retail investors has grown significantly in the past five to ten years, its importance to business and the economy as a whole have come to the forefront since the financial crisis. Many small businesses that were once able to rely on our record profit-mak-ing big banks for small business loans are now turned away due to tightened loan policies and a greater risk perception by loan officers.

What is an entrepreneur to do? A smorgasbord of entrepreneurs, from real estate developers, to oil and gas service providers, to restaurateurs, and anything in between have since turned to the exempt market to raise the capital they need to operate their business and investors flocking to the exempt market with the desire for alternative low volatile places to park their cash have created a perfect storm for our industry. “The exempt market plays an important role for many smaller Canadian companies trying to grow” says Dave Baker, President of Newstart Canada. Curtis Potyondi, President of Prestige Capital agrees. “Entrepreneurs have always relied on private equity (such as the Exempt Market) for their capital. Given the current uncertainty in financial markets and lending institutions parameters, the Exempt Market will play an even greater role in project capitalization.”

Poor performing traditional asset classes combined with in-creasing public market volatility and more aggressive monetary p o l i c y have left investors thirst ing for some-t h i n g different, especially where the t y p i c a l asset allocation for a moderate investor has been a 60/40 equity/bond split. “The aftermath of the 2008 financial crisis has created a new era in investing where the old rules no longer apply,” writes Tamsin McMahon in a recent article entitled The Fear Bubble, in Maclean’s Magazine. “The markets themselves seem hopelessly manipulated: by central bankers who print money like it’s going out of style and then use it to buy back their own debt; by auto-mated trading systems whose software glitches have created and

destroyed millions of artificial wealth; by Facebook and its disas-trous IPO.” McMahon writes that investor fear may not be the most obvious danger to capital markets, but it may be the biggest threat the economy currently faces.

This fear is not surprising, as we are in the midst of the global financial storm. With interest rates at historical lows; bond yields are giving investors minimal returns. Bonds have not been meeting previous means or investor expectations, as we are in a period of historically low interest rates that are facilitating consumer debt accumulation and penalizing savers. The historically high bond yields of the eighties are long behind us. With interest rates set to inevitably rise by the Bank of Canada, holding bonds long is a

dangerous strategy as rates are certain to go up, but it is anything but a definite as to when or how fast.

Investors have been just as gun shy of equities as of late. During the 2008 global financial crisis, the drop in equity portfolio values was a shock to investors, with the TSX/S&P composite index dropping by half, leading to

emotional selling that peaked in March of 2009. Major stock markets have become increasingly volatile over the periods from June 2008, at about 15,000 points to a trough in March 2009; the TSX/S&P composite index lost half its value. The index peaked again in April at around 14,200 points and has been on an overall bearish trend, as of issue date being at approximately 12,100 points. Global markets have been trending the same way, and are heavily reliant in the past few years on government quantitative easing measures. Experts do not agree on why (technology, globalization and policy have been named) but almost everyone agrees the volatility is here to stay.

In a 2012 Quantitative Analysis of Investor Behavior published by Dalbar Inc., actual historical investment returns for investors using mutual funds have been even less than the benchmarks we measure them by in most reports. The tables from this report shows equity and income returns for the past 20 years.

Based on this experience, investors are shying away from traditional exposures in equities and bond funds, and are tempted to retreat and hold all their money in cash and cash equivalents. While parking money in savings is a good short term strategy if the investor’s timeline for the money is uncertain, it can be more detrimental long term than investing. A modest return of 1 to 2 % may be better than nothing, but it is a negative return when factoring in inflation (and taxes if the money is not in a tax preferred plan such as an RRSP or TFSA).

If bonds have depressed yields and the stock market is volatile and heavily dependent on policy, cash value loses money. Where can investors seek a sustainable portfolio return while hedging the risk? A 2011 survey by Jefferson National of 500 American fee based advisors revealed that half of them have increased their >

“Explore alternatives in the Exempt Market. Arming yourself

with information, a trusted advisor and a tactical asset allocation can help investors survive, thrive and

utilize the storm.

”

A Perfect Storm

23

Traditional Portfolio

BondsEquities

use of alternative investments. In another survey, Morningstar Inc. found that 79% of Advisors stated that “addressing portfolio diversification with a low correlating asset” is their greatest concern. In addition, 44% of advisors polled are addressing this issue with investments in the alternative asset class.

What is the alternative asset class? There is more consensus about what it does than what it actually is. Alternative investments are used to compliment core asset holdings, to increase diversification and decrease asset correlation which increases alpha and helps manage risk. It is widely debated what is in the alternative asset class; hedge funds, private equity, and hybrid securities featuring commodity exposure, venture capital, as well as derivative based products are all included by most experts. Real estate, tangible assets and collectables are sometimes grouped into the alternative investment category, but may be better left to other investment categories.

Classified as alternative investments, the Exempt Market is pri-vate equity, or private placements which are privately negotiated equity contracts between investors and entrepreneurs. This form of financing has a more extensive market in the US and Europe, but is

in a growth stage in Canada. In fact, in re-cent years both Har-vard and Princeton U n i v e r -sity’s en-

dowment funds have increased their exposure to ‘alternative in-vestments’ from zero to 16% in alternative investments and 23% in ‘private equity’ respectively, according to their recent annual reports.

In a recent Financial Post article by David Pett, “The new Portfolio Pie” he challenges that risk adjusted returns are for the traditional portfolio. “Fortunately, retail investors can now buy into a range of alternative strategies and exchange-traded funds that allow them to access many of the same investments that institutional and high net worth clients have long been privy to, including hedge funds and real assets such as agricultural land. Perhaps the only exception is private equity, an asset class that continues to grow in importance institutionally, but is still largely unavailable to the average person.” David Pett compared the traditional and modern weightings for asset classes, as seen in the chart below. However, private equity is available to average investors in most provinces under certain regulatory rules, known as prospectus exemptions. (Private equity is available from Exempt Market Dealers who sell the product, from Issuers through Dealing Representatives).

Although the alternative investment category and the Canadian Exempt Market offer great opportunities, an investor always needs

to be cautious. An investor needs a trusted advisor. A trusted advisor is someone who is competent, puts the client’s needs before their own, offers full disclosure, and works with an exempt market dealership that has a solid business model for selecting products they offer clients. “I think our industry is misunderstood in that there have been some big names go down and as such all offerings get painted with the same brush. There are numerous offerings that are brilliant, have significant alignment, and an excellent track record of delivering returns.” states Kyle Jacober, Vice President of sales at Raintree Financial Solutions, an Alberta based Exempt Market Dealer with offices in four Western provinces.

Investors are braving a changing world, and the global economic storm is not going away for some time; but with change always comes opportunity. This is the perfect time to explore other investment opportunities. Diversify. Explore alternatives in the Exempt Market. Arming yourself with information, a trusted advisor and a tactical asset allocation can help investors survive, thrive and utilize the storm.

Cora Pettipas is currently the Vice President of Member Services, at WEMA. Prior to this, Cora was a Professor at Mount Royal University and has had tenures with several financial firms in the capacity of wealth management. Cora is also the founder and Co-Owner of Melodic Twilight, a successful business venture which sells internation-ally. Cora is a doctoral Candidate in Finance, and has had her work published, and has presented, internationally.

Craig Skauge is the President and founder of WEMA. Mr. Skauge has nearly ten years of experience as the Business Development Manager for the Registered Plans Division of Olympia Trust Company, where he helped grow the division over tenfold. Craig is currently a Director with Olympia Trust Company and Olympia Financial Group Inc. (TSX-V:OLY). Mr. Skauge is the President of Exempt Experts Inc. and Target Capital Inc. (TSX-V:TCI). Mr. Skauge is recognized as a leader and national subject expert on the Canadian Exempt Market. He has been asked to speak nationally, or be an advisor to: the OSC, the CSA, the Canadian Bar association, and the CFA. Mr. Skauge has been featured in the National Post, the Globe and Mail, and the Investment Executive.

A Perfect Storm Continued

Modern Portfolio

BondsEquities

Real EstateAlternativesReal AssetsCash

24

FOSTERING A CULTURE OF

TRANSPARENCY IN THE EXEMPT MARKET.

www.exemptanalyst.com

Noticeable Differences

When Analyzing Exempt Market vs. Public SecuritiesBy Alexander Changfoot, BSc, MM – Fundamental Research Corp

R ecently, there has been increasing media coverage on

Exempt Market deals. According to the Ontario Securities Commission (OSC), transactions in the Exempt Market almost doubled from $83 billion in 2010, to $142.9 billion in 2011. As an analyst initially trained at analyzing public companies, I would like to give some insight into the differences I have noticed when analyzing Exempt Market offerings in comparison to public offerings.

For public companies, information about the company is available on Sedar or other public sources – all this information is transparent so that investors can easily access any related documents. It is a completely different story for Exempt Market companies as documentation is not readily available. As detailed in recent regulatory press releases, there has been a major crackdown on misleading information contained in offering memorandums (OM). One of the imperative things that I demand to review for every project is documentation to support the claims made. For example, if a claim is made by management that they were directly involved in the sale of a similar type of project for $40 million, I request documentation pertaining to the transaction. If management is unable

to provide this information, not only is it extremely troubling, but you can be certain that there will definitely be further analysis into their background, experience, and work history.

One of the main sources of information for investors in Exempt Market offerings is the OM. The OM contains a variety of information from share structure, management experience, project scope, and of course, distributions. In the public sector, an issuer goes to an investment bank, and a prospectus is drafted with only a preliminary and final prospectus going out to end users. From my experience dealing with OMs (they are drafted by the issuer themselves) they may be shown to us prior to being finalized, and prior to them actually being released to end users (dealers and investors) and they can be changed frequently. This is quite different from a prospectus offering where third party analysts will only get to analyze the final version. Minor changes are a given, but oftentimes, substantial changes to the OM will be made during the due diligence process. It is quite frustrating trying to analyze a company that has substantially changed their OM more than a couple times. It is also a red flag when management decides to change their OM significantly, as this indicates that they do not really know what they are doing, or they did

not have investor’s best interest in mind the first time. A lot of this also has to do with the fact that the industry is still new and evolving and everyone is still learning.

In general, the track record of public companies is more transparent and easily available. Most public companies have an established performance record (as investment banks want to find a viable company to attract investors). On the other hand, the track record of Exempt Market companies and their management are not as clear cut. For example, I have come across many directors that have been a part of multiple private companies but it is difficult to find any performance records for these companies. Also, if the management claims to have sold a previous private company for a profit, it is difficult to actually obtain any documentation to support the sale (unless it was bought by a public company). In my experience, I have come across managers or directors in the exempt market that have had some sort of disciplinary action imposed on them from their past experience being involved in different offerings and previous companies they worked with. One of the things that I find worrisome is when the company decides not to disclose such matters in the OM. It leads to a loss of confidence in the management team when it is not appropriately disclosed

Transparency

Offering MemorandumChanges

Track Record

Noticeable Differences

26

Our goal is to reach a point where we can provide investors with a professional third party opinion on any investment they will potentially make whether in the exempt markets or public markets.

Alexander Changefoot, BSc, MM - Fundamental Research Corp, Analyst, FRC

that one of the directors was previously disciplined by a securities commission.

The most obvious difference between public and private offerings is liquidity. For the majority of publicly traded companies, there is little liquidity risk involved. For Exempt Market offerings you are usually in it for the whole nine yards. In my experience, most exempt market offerings have a ‘no redemption clause’, or ‘redemption but with fees involved” meaning that investors can only redeem their shares on the specified redemption date or in the event of a company dissolution. One thing to note is that private companies generally carry more risk but also have higher expected returns.

All in all, my experience in having the integral role in the exempt market of research analysis has certainly been an eye opener. There are many differences in the way business is done and in the

structures of the public and exempt markets. As the exempt market matures, the regulatory environment will improve, and with that, more sophisticated due diligence will be required by EMD’s, overall improving the investment grade in the Exempt Market. We can already see a trend in the leading EMDs requiring third party due diligence as an initial step. Because of the above factors previously mentioned, third party due diligence is crucial in the exempt market. In the public markets, we saw past cases where the investment banks raising money for companies also issue research. Of course this leads to potential conflicts of interest. We are pleased to see that most of the exempt market dealers out there learned from this, and have chosen not to set up internal research departments, but instead, outsource the function to third parties like Fundamental Research Corp.

Our firm has been covering public companies since 2003, and we now cover almost 10% of the companies listed on the TSX/V. In 2009, we started covering exempt market securities, leveraging our expertise from the public markets to the point we have covered over 40 exempt market offerings.

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Noticeable Differences Continued

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27

F or many dealing and advising firms in Canada, the coming

into force of National Instrument 31-103: Registration Requirements and Exemptions on September 28, 2009 was a regulatory wake-up call; a notice to the industry at large that provincial regulators were joining in concert to standardize the registration and proficiency requirements for dealers, advisors and fund managers from British Columbia to Newfoundland and everywhere in between.

From the perspective of investors, exempt market dealer registration was long overdue. Prior to National Instrument 31-103, dealers in some jurisdictions were subject to almost no regulation if the investments they sold qualified as prospectus exempt under National Instrument 45-106. These dealers weren’t required to disclose financial interests in the companies whose securities they peddled, and too often a subscription agreement wound up being the last piece of paper an investor saw until it came time to (hopefully) realize on their investment. It was an industry that longed for legitimacy.

According to the CBC, in 2008, Alberta companies alone raised more than $10 billion in the exempt market - more than double what was raised by Alberta companies on both the TSX and TSX-Venture combined. In 2010 this figure had risen to $12.0 billion and in 2011 the annual amount had climbed yet again to $12.8 billion, of which only $3.1 billion was contributed by Alberta residents. With so much money in the exempt market changing hands across provincial borders, securities regulators were in dire need of a way to peek into their neighbor’s backyard and work together to protect investors. The new exempt market dealer registration regime was born and the industry took its first steps inward from the fringes of Canada’s financial marketplace towards the mainstream.

Contrasting the move towards uniformity that was represented by the introduction of National Instrument 31-103, the provincial governments of Alberta and Quebec were busy posing reference questions to their respective appeal courts to determine the constitutionality of a federal securities regulator. It was a matter that came to a head on December 22, 2011 when the Supreme Court of Canada ruled in Reference

Re: Securities Act that the federal government’s proposal to appoint a national regulator overseeing all securities matters across Canada had overstepped its constitutional bounds.

Although the introduction of National Instrument 31-103 and the opposition to appointment of a national regulator are independent of one another, viewed together they help illustrate the complex regulatory landscape that awaits exempt market dealers after registration. Although the provincial regulators have conceptually agreed to work together, at the end of the day there’s a functional dichotomy created by a world of one rule and thirteen referees. If the compliance team of an exempt market dealership fails to recognize this key aspect of the new regime, they haven’t been doing their job.

To be successful, a registrant firm has to perform its activities effectively, profitably and (most importantly) compliantly in all jurisdictions where trading and advising activities are being undertaken. Chief Compliance Officers need to ensure that they’ve empowered their firms with the information and professional guidance required to safely navigate the pitfalls of an industry where national instruments are jurisdictionally enforced. One of the most readily identifiable examples of this need is in the private mortgage industry.

The Canadian Securities Administrators have created the definition “Mortgage Investment Entity” to refer to a person or company whose purpose is to invest substantially all of its assets in mortgages and whose other assets are limited to bank deposits, cash, debt securities, (limited) real property and certain risk-

Compliance Pitfalls in a World of One Rule

Referees13&Compliance Pitfalls

28

By Phil Du Heaume

hedging instruments. To most industry participants, this calls to mind Mortgage Investment Corporations (MICs) as defined under the Income Tax Act (Canada), which in the years leading up to National Instrument 31-103 often considered themselves to be in the business of lending rather than the business of buying and selling mortgage securities. These entities were the subject of a great deal of consternation during the introduction of the new regulatory framework, not least because of the impact of pre-existing provincial oversight bodies in the mortgage industry. While nearly all members of the Canadian Securities Administrators (the British Columbia Securities Commission being the exception) quickly agreed that dealer registration was a necessity, all thirteen recognized that investment fund manager and adviser registration requirements needed to be further assessed.

On February 25, 2011, the Canadian Securities Administrators published CSA Staff Notice 31-323 “Guidance Relating to the Registration Obligations of Mortgage Investment Entities”, which stands as a cogent example of the “one rule, thirteen referee” regime. The notice contains two headings under the “Investment Fund Manager Registration” topic on pooled Mortgage Investment Entities: “In jurisdictions other than Alberta” and “In Alberta”.

Without delving into gritty details, the regulators other than Alberta essentially determined that so long as a pooled Mortgage Investment Entity is operating a business that creates and manages mortgages, it isn’t an investment fund and does not require the services of a registered Investment Fund Manager. In Alberta, however, if a pooled Mortgage Investment Entity has the primary purpose of investing money provided by its security holders into other securities (such as mortgages), then it qualifies as an investment fund and does require the services of a registered Investment Fund Manager. The result is that a MIC in Alberta is likely an investment fund, and cannot operate without the proper registrations, however the same MIC in Saskatchewan, is not an investment fund and can get by with exempt market dealer registration only.

Why is this a concern? Market participants need to be aware that a national instrument is only as uniform as the jurisdictional legislation and regulatory policies used to interpret and enforce that instrument. The passport registration mechanisms afforded under the new regime have helped streamline the ability for regional issuers to raise national capital, but they haven’t changed the fact that organizations still need to comply with the specific laws of the jurisdictions where they carry on business. As specialized exempt market dealer brokerages begin growing based on their ability to raise large capital sums for securities issuers, this problem is only going to become compounded unless Chief

Compliance Officers become informed of the jurisdictional differences and are able to ensure that dealers and issuers alike are aware of the secondary impacts of cross-jurisdictional trading.

There’s no denying that the new regulatory framework has helped facilitate the ability for registrants to conduct cross-border transactions under a single set of registration guidelines. However, even though the national instruments provide for a uniform set of rules on the proficiency requirements and responsibilities of the people and companies conducting these registerable activities, it doesn’t mean that those activities are going to be viewed the same in each province. In a world with one rule and thirteen referees, registrant compliance teams need to be sure at all times that they know which referee is calling the game so that they can respond accordingly and compliantly.

Phil practices general corporate/commercial law and has experience in a wide range of corporate matters as a member of several Business Law teams within his firm, including the Corporate Finance and Security Group. He has been significantly involved in advising on and creating compliance frameworks for securities law registrants and has facilitated the registration of some of Alberta’s first Exempt Market dealer firms locally and across Canada.

Compliance Pitfalls Continued

29

O n May 18th, 2012 Facebook had its Initial Public Offering (IPO) and the

company seems to have been making headlines ever since. This IPO, troubled by technical problems and tangible losses for recent investors, continues to draw the scrutiny of the investment

community. I believe that the challenges encountered in the IPO represent those of

two varieties. The first being those that we can expect will

lead to better future outcomes, and the second being those that highlight the f u n d a m e n t a l

conflicts of interests embedded in Wall Street and the brokerage

community more broadly.

Nasdaq continues to be troubled by its poorly executed Facebook IPO. UBS and Citigroup are requesting

that the Securities Exchange Commission to reject an offer

by the exchange to cover losses incurred, saying the $62

million proposal would only cover a small portion of their total losses. For many of the parties involved, this IPO is not only deeply embarrassing, it will most likely lead to meaningful legal expenses as well.

It has been reported that on the day of Facebook’s IPO, the Nasdaq’s computers were overwhelmed by a huge number of cancellations and changes to standing orders. The result being that for several hours millions of dollars of trades went unconfirmed. Without trade

confirmations, trade desks could only guess at their positions and some found their net positions meaningfully out of balance when confirmations finally came in.

As a consequence to the botched IPO, UBS has said it lost $356 million. Citi has only said that its losses are in the millions. In addition, Citadel Securities and Knight

Capital Group have said they have incurred losses of $35 million or more because of

what happened. “We strongly urge the commission to reconsider the level of the proposed cap in light of the actual damages caused by Nasdaq in its mismanagement of the Facebook IPO,” UBS officials wrote. Citi’s comments were much sharper: “Nasdaq was grossly negligent in its handling of the Facebook IPO, and as such, Citi should be entitled to recover all of its losses attributable to Nasdaq’s gross negligence, not just a very small fraction as is currently the case.”

Will anything change in the future? That is always hard to know, but I suspect that Nasdaq will take its technical failures very seriously. I believe they will make very significant investments to bolster and up-grade the software and hardware systems that allow them to facilitate the trading of hundreds of millions of shares every day. And, I expect that other exchanges will critically analyze Nasdaq’s failure and their resulting changes to ensure that Nasdaq’s failures are never replicated elsewhere. In summary, I expect these technical faults to generate meaningful improvements in public capital markets.

Unfriending Facebook

Investment Banks, and indeed nearly all organizations that stand between their

issuing clients and institutional and public investors, will be troubled by their inherent

conflicts of interest.

By Cameron Reid MBA, CFA

Unfriending Facebook

30

Despite the obvious technical difficulties with the offering, we must also keep in mind that Facebook’s IPO was a success on a number of metrics. The company and its advisors successfully raised $16 billion. This represents the largest technology IPO in history and the third largest IPO ever completed. The management team was able to raise more than $10 billion in funds to support the continued growth and development of Facebook and deliver billions of dollars to Facebook’s early Venture Capital investors – thereby securing, in part, the availability of future financing for the next generation of technology companies.

However, in other ways, their IPO was deeply disappointing. Determining the price of an IPO is not a precise science. Typically, at the conclusion of a company’s roadshow presentations, potential investors are invited to indicate the number of shares they wish to buy. Expecting their orders to be cut back, investors have learned to ask for more shares than they expect to receive for high demand offerings, sometimes twice as many. Anticipating outsized demand for Facebook shares, it is believed that investors submitted orders for triple or quadruple the size of the allotments they expected to get.

Here, I’ll suggest that it was greed on the part of institutional and private investors that blinded their ability to fairly value Facebook’s shares. Having seen the early investors earn fortunes by investing in Facebook, their desire not to miss out on future gains became palpable. Forgetting that IPO was priced at nearly 100 times earnings they stampeded in with oversized orders hoping not to be left behind.

Balancing out the greed of investors was the management team at Facebook, and perhaps most importantly, Mr. Ebersman. He is Facebook’s CFO who played a key role the offering. It would appear, at least from our vantage point that the bankers who were advising him and Mr. Ebersman himself did not appear to have a firm grasp of what was happening. Perhaps they believed their own hype and thought all those orders as real, giving them the unfounded confidence to lift the IPO to the highest possible price and issue an even greater number shares.

The example offered by LinkedIn’s IPO would complicate matters further for Mr. Ebersman and the bank underwriters. Its shares rose 110 percent on its first day of trading. That might sound like a positive outcome; however it meant that early investors sold mispriced shares so badly undervalued that they effectively gave new investors a gift of nearly $350 million. According to a number of people close to him, Mr. Ebersman was committed to making sure Facebook didn’t “leave money on the table.” Consequently, he may have created even more pressure on the stock by leaving investors with little upside.

The fallout from the offering suggests that Mr. Ebersman had seriously misjudged the real investor appetite for Facebook’s IPO. However, Mr. Ebersman did not act alone; his actions were supported by imprudent advice from a core group of Wall Street’s top investment banking advisers, each of whom had a strong incentive to offer the maximum number of shares at the highest possible price. Goldman Sachs suggested that they aught to be sold for a slightly lower price, JPMorgan Chase believed that the shares could be offered for a higher price, while Morgan Stanley expressed comfort with $38 a share. Reportedly, when Mr. Ebersman decided on $38 dollars per share all of the underwriters moved quickly to

support the valuation.

Some things will stay the same. Investment Banks, and indeed nearly all organizations that stand between their issuing clients and institutional and public investors, will be troubled by their inherent conflicts of interest. Companies and their existing investors want to sell at the highest prices they can. New investors want to invest at the lowest values they can. This, I suspect, will never change. And the organizations that bring these two groups of investors together will always try to balance these respective interests. And, they will from time to time continue to get this balance wrong; sometimes egregiously so.

The lesson for all of us is that Investor enthusiasm has the potential move asset valuations to unsustainable levels in any market. Our role as professionals is to steer our clients away from these investments where we can or at least moderate their exposure were we cannot.

Cameron has over ten years of industry experience, including six years of investment and portfolio management experience. Prior to joining BCV Asset Management Inc. in 2011, he was employed as an Associate Portfolio Manager at a competing investment management firm. Previously, he was an Analyst with Bank of America Securities LLC and a Private Client Investment Advisor at BMO Nesbitt Burns Inc.

“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.” - Mark Twain

Unfriending Facebook

Unfriending Facebook Continued

31

R ecent Ipsos-Reid surveys indicate that approximately one in five

employees stole or witnessed other employees stealing from their employer. A recent KPMG study indicated that 59% of frauds discovered by companies were perpetrated by employees.

No organization is immune from the risks of employee fraud and theft. Over the past three years, there have been a number of high-profile claims involving long-time trusted employees stealing millions of dollars from their employers. In one well-publicized case, an Edmonton banker defrauded his branch of $16.3 million over five years. In the US, it has been estimated that employees steal approximately $400 million a week from their employers.

It is unfortunate that even with a reasonable employee fraud prevention program in effect, many employers still will suffer significant losses due to worker-related embezzlement and theft. In order to protect against these potential losses, many clients in the financial institutions sector purchase financial institution bonds (clients in other sectors purchase crime insurance), which provides coverage for losses caused by the dishonest and fraudulent acts of employees that are under supervision and on the companies’ payroll.

Apart from risk management considerations, Exempt Market Dealers (EMDs) are required under National Instrument 31-103 to carry Financial Institution Bonds.

National Instrument 31-103 came into force on September 28, 2009. Much of the Instrument is related to the new regulatory framework that replaced a myriad of requirements that had

3 The FIB must provide for a double aggregate limit or full reinstatement of coverage. In other

words, the amount of coverage available during the policy period is twice the individual occurrence limit. For example, if there is a $1 million per occurrence limit, the policy will pay a maximum of $1 million per any one occurrence, and a maximum of $2 million during the policy period. There can be any combination of claims less than $1 million each, as long as they are less than $2 million in the aggregate.

4 The Instrument does not stipulate how much the FIB’s deductible need be. However, it is important

to note that despite the fact a higher deductible may result in a lower premium, it will impact on the amount recoverable, should there be a claim, and could negatively influence the registrant’s available working capital.

For EMDs, Financial Institution Bonds are a valuable loss control mechanism to transfer the employee fraud risk exposure to the Insurance companies, as well as to comply with the requirements of the regulators.

In partnership with the Western Exempt Market Association (WEMA) and the Guarantee Company of North America, Aon designed a robust and competitive FIB program for the WEMA members.

For more details regarding the program, please contact Moe Dahnous at moe.dahnous@aon.ca or 403-267-7766. Or visit WEMA website at www.WEMAonline.ca

Moe Dahnous, MBA, CPCU. Aon Reed Stenhouse Inc. Financial Services Group

been developed under various Canadian regulatory and self-regulatory regimes. Under the Instrument, there are three revised registration categories: Advisors, Dealers (including Exempt Market Dealers - EMDs) and Investment Fund Managers (IFM).

Financial Institution Bond (FIB) Insurance requirements for EMDs under the Instrument are summarized as follows:

1 The FIB that is purchased must include insuring agreements for:

Fidelity On premises In transit Forgery or alteration Securities

2 In respect of the minimum limits required by the Instrument, a registered dealer must maintain bonding or insurance

as set out in Appendix A. Please refer to the categories as listed in item 1 above.

a) $50,000 per employee, agent and dealing representative or $200,000,

whichever is less;

b) one per cent of the total client assets that the dealer holds or has access to,

as calculated using the dealer’s most recent financial records, or $25,000,000, whichever is less;

c) one per cent of the dealer’s total assets, as calculated using the dealer’s most

recent financial records, or $25,000,000, whichever is less;

d) the amount determined to be appropriate by a resolution of the

dealer’s board of directors, or individuals acting in a similar capacity for the firm. For more details, please refer to section 12.3 of the Instrument.

Financial Institution Bond{a valuable risk management & compliance tool}

By Moe Dahnous, MBA, CPCU

Financial Institution Bond

32

Education and support for financial advisors

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Think that this Boot Camp would be a great idea for your team? We would be happy to arrange a Boot Camp in your office, contact us today!

We provide the training that will help you make the right decisions for your clients and your business.

Invest LocallyBy Marcin Drozdz

Before Mergers & Acquisitions, prior to

stock market IPO’s and even before the modern day printing presses, we were investors. Nothing like we are today, with instant updates streaming to us live through BNN or a plethora of media outlets. No, today we can own a company at 9:35am and decide to sell it just before heading out for lunch. We can make “millions” and lose “millions” faster in 2012 than in any other period in time. The world is increasingly becoming a smaller place, more connected than ever with billions of facts and figures firing off at lightning speed from investment brokerage’s trading desks to people’s laptops (likely connected to free Wi-Fi at Starbucks).

The paradox here however is that with the abundance of videos, reports, and information available regarding just about anything, many people today find themselves more overwhelmed than ever before. We live in a world where we have to contend with information overload. Very few things are simple today; even grocery shopping.

Gone are the days when chicken was just “chicken” or eggs were just “eggs”. Today, between GMO (Genetically Modified Organism) and/or artificially grown “real” food, it is nearly impossible to know where our food comes from. I remember when I was a small boy in Poland, my Grandma used to send me to the corner of our block every Tuesday to meet the

milkman. He would arrive in a truck with several gallons of milk for the neighborhood. It was fresh, tasted great and we knew exactly where it came from (and may even have unknowingly played amongst the cows that provided it). Other groceries were bought at the local farmers markets where we knew the people we bought our food from. Fast forward twenty plus years and we live in a world where our nutrition depends on a handful of large companies that, through profitable consolidation and other efficiencies, have indirectly disconnected us from our food suppliers. If you look around the country a grassroots movement has started. It has various names/groups/associations but most have a common theme of eating locally produced organic/natural food and supporting local farmers. Many of these groups have a common core belief and it includes getting “you” the consumer, reacquainted or closer to your local food supplier. I have been a big supporter of this movement myself for several years seeking out local grocers and only in the last few months I’ve realized that there is a striking similarity between the “Eat Local” movement and what I have been advocating to investors, “Invest Locally”.

In my opinion, as with the origination of our food, the

34

“Eat Local” movements springing up across Canada and lay the groundwork for an “Investing Locally” movement supporting viable local businesses and in turn helping support the communities we live in.

A consistent top performer in the exempt market space, Mr. Drozdz is a respected advocate for investor and advisor education regarding Alternative Investments. Mr. Drozdz’s public awareness campaigns through educational talks to thousands of people across Canada, and he has been featured in various publications including Canadian Real Estate Wealth Magazine, The Calgary Herald, Edmonton Journal, The Winnipeg Free Press, and the Exempt Edge.

majority of people are oblivious as to where their money is actually invested.

Don’t get me wrong, they may know that they have “X” amount of dollars as of the last statement that they received and some may even understand that they own mutual funds or stocks, but the vast majority of people I have come across know very little on this subject.

Now, there are those people that are informed about their finances and investments. They spend time studying markets and reading up on world events that may affect their portfolio. This would be similar to someone who is aware of the dangers of genetically modified foods and reads the labels on everything they buy at the mainstream grocery store. In the world of finance the individual researching mutual funds or stocks will come across terms such as P/E Ratio’s or the Sharpe Index when deciding to make an investment in the public markets. In similar fashion, someone looking to make more health conscious purchases at the mainstream grocery store will read up on common ingredients they may want to be aware of such as sodium nitrate or monosodium glutamate (MSG). In the world of finance we call this kind of research due diligence, and I applaud anyone taking the time and interest in understanding the playing field.

The issue/dilemma I believe investors inevitably end up with is the realization that they are just too far/disconnected from the actual investments themselves. A mutual fund in the average person’s portfolio can hold other mutual funds or hundreds of stocks and bonds making proper due diligence very difficult, especially for a time strapped investor. Also, transparency comes at a premium with many companies today pushing to make their enterprise look as promising as possible. The other alternative of course is buying stocks directly which requires incredible focus/attention and reliance on mountains of due diligence by numerous parties with various personal interests.

Consider also the volumes of unrelated industry reports/gossip that seem to regularly send stock prices plummeting as speculators push their interests . At the end of the day, the only real control an investor can have over his/her stock holdings is their ability to buy or sell in this knee jerk reaction environment. On the other end of the spectrum, today’s choppy stock market can also prove quite lucrative for the few that have the nerves/bank accounts to tolerate the uncertainty. In my opinion, the majority of Canadians have two main options:

1 They can continue to invest “blindly on faith” in funds they know nothing about, with people they have never even met

(those currently managing their money) and with their money flowing to who knows what part of the world.

2 Take some time to learn about alterna-tive investment opportunities that the masses are not yet exposed to. There is

an entire regulated industry out there (called the Exempt Market) that supports investing in private opportunities, many of which are local and in your hometown.

The Exempt Market is a place where every day Canadians (subject to provincial qualification rules) are able to assess individual opportunities for their own merit and appeal. If it is a local RRSP eligible real estate opportunity; you as the investor can drive out to the site and “kick the dirt,” review the financials and business plan, ask questions and dialogue with the actual people that will be utilizing your investment dollars to finance the development. Overtime, as the project moves forward you can drive by the site on your way home from work and see things taking shape, take pride in the jobs and increased property values that your investment dollars have helped catalyze. The Exempt Market is an industry that by nature removes the “normal” degrees of separation and encourages transparency between investors and those entrusted to best utilize the funds. This direct approach also helps set expectations for everyone involved.

With the global markets becoming increasingly interconnected and volatile, I believe we need to take a page from the

Invest Locally Continued

35

Added experience. Added clarity. Added value.

Darren M. SmitsPartnerCalgary403.298.2409dsmits@millerthomson.com

VANCOUVER CALGARY EDMONTON SASKATOON REGINA LONDON KITCHENER-WATERLOO GUELPH TORONTO MARKHAM MONTRÉAL

EXEMPT MARKET INDUSTRY EXPERTISE

Miller Thomson LLPmillerthomson.com

private equity

A s I sit to write this, famed investor and Oracle of

Omaha, Warren Buffett, turns 82. While many of us are, as suggested by the handle of this very publication,

students of the Exempt Market, allow me to use just a bit of this space to share two of my favorite quotes from Mr. Buffett that I feel lend themselves tremendously well in advocating the Exempt

Market and Alternative Investing. The first “When we invest in outstanding businesses with outstanding managements, our favorite holding period is forever” AND “For investors as a whole, returns decrease as motion increases.” This speaks volumes to what I feel to be one of the most significant misnomers in the Exempt Market. That being, the commonly heard objection; “the lack of liquidity, and often unknown time of exit, represents too big a risk for me!” One truly cannot succeed within the Exempt Market without first honing a solid, confident rebuttal to such objection. What I suggest to you is liquidity breeds volatility. “Alternative,” “Private,” “Exempt,” should not

be synonyms with high-risk due to lack of liquidity. They should foster thoughts of low volatility, calculated returns, and low-correlation and true diversification. With that, I introduce to you, Becksley Capital. WELCOME!

Established in 1994, Becksley Capital is an Exempt Market Dealer registered in British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, Nova Scotia and Newfoundland. Becksley Capital was established 18 years ago to offer individuals alternative investment opportunities within a growing and dynamic marketplace. We believe,

By Ryan Lee, PresidentWelcome!

“Alternative,” “Private,” “Exempt,” should not be synonyms with high-risk due to lack of liquidity. They should foster thoughts of low volatility, calculated returns, and low-correlation and true diversification.

36

while our commitment in bringing a suite of conservative, alternative offerings continues to grow, our principles have remained unchanged through nearly two decades in the industry. Our longevity in this ever-changing exempt market is proof-positive that we have the skills, experience and foresight required to succeed in this challenging environment.

This market has carried both the reputation of being inaccessible to the “average” investor, as well as the stigma of being “high risk.” This is an unfortunate misconception. Granted, one must realize, when investing in private companies within the Exempt Market, where access “behind the curtain” is not readily available, there is an elevated risk associated. However, from an investment standpoint, some of the more consistent investment returns have come from exempt securities.

Adding an Exempt Market Dealer Representative registration to your professional credentials opens doors to alternative investment offerings, without limiting you in your existing business. Partnering with an experienced Exempt Market Dealer allows single licensed Investment and Insurance Advisors the ability to bring an alternative Investment strategy to their business, under their own brand. Becksley Capital offers a wide range of investment options to Canadian investors, which can enhance the businesses of Financial Advisors across Canada. During its nearly two decades in the Exempt Market industry, we have seen many others come and go. Over this period, Becksley has developed and fine-tuned its expertise in many areas valuable to its core business. Although the investing environment in Canada continues to grow and change at a rapid pace, Becksley Capital’s commitment to simplicity, clarity and transparency for its clients and Dealing Representatives will continue.

Our Philosophy: “Proper due diligence and compliant practices in the creation and

distribution of c o n s e r v a t i v e , a l t e r n a t i v e i n v e s t m e n t o f f e r i n g s , providing true

diversification from public equities,

while removing volatility, reducing correlation and enhancing returns.”

For more information about Becksley Capital, please visit www.becksleycapital.com or contact me directly at ryan@becksleycapital.com

Ryan Lee, President, Becksley Capital

Becksley Capital Continued

WELCOME NEW MEMBERS

37

When we invest in outstanding businesses with outstanding managements, our favorite holding period is forever.

-Warren Buffett

Q & : with Bob Watt of the Business Career College A

1Why did you start the Business Career College as opposed to working in a traditional educational institution?

In 1997, I was going through some health challenges, was on disability, and could not handle sitting at home doing nothing. So I worked with the disability insurance company to allow me to return to work, but I could not go back to doing what I had been doing as an insurance agent or agency owner. I had long-ago recognized that education was vitally important to insurance professionals and financial advisors. The industry has become quite complex and new tax laws, products, societal shifts, financial challenges and ways of doing business require ongoing education to keep up with the changes.

Very early on in this new business venture I dealt with many of the institutions and organizations that were providing education through licensing and designation programs and found them to be too corporate focused and stuck in the old ways of controlling customers through various rules and restrictive procedural practices. They did not seem to be focused on the success of the learner and the value provided through their educational offerings.

I saw a need for a different approach, one that focused on the need to provide learner-centric service to financial services professionals. The people we deal with are adult professionals and should be dealt with as such. After 5 years of building the business quite by accident and after having obtained status as an Life License Qualification Program (LLQP) provider, my wife, Penny, decided to give up her 30 year nursing career and join me in the business to help me become a little better organized. She has become our marketing guru and keeps the business focused and organized and helps to promote the culture of helping people that

sets us apart from most of our competitors, taking advantage of the tender, loving, care, (TLC), mentality that is such an important part of the nursing profession.

A couple of years later our son, Jason, left his military career to join us as part owner and took over the product development function and leads advanced education, instructor recruitment and development aspects of our business. His military background brings some well-learned structure to our business. We have expanded into a national organization with offices in Toronto, Edmonton, Calgary and Vancouver. Our customers come from all provinces and territories in Canada.

2 Where does your passion for advisor education and professional development come from?

I struggled early on in my career as a life insurance agent and mutual funds representative and found like most of my peers that I had a hard time staying abreast of all the changes. As indicated before, the business came about as a personal way of struggling to survive and grew accidentally to the level where I needed help and other family members joined in to help. The passion for advisor education comes from seeing the results in our students and watching them develop in their newfound careers and becoming successful. A huge part of our business today is being involved in the provision of continuing education for advisors, now a significant regulatory requirement.

When I get some long-in-the-tooth, financial advisor with 40 plus years of experience, coming to me after a full-day session saying that in all his years he has never enjoyed himself so much and learned so much from an insurance industry course, one can’t

“My hope is that one day there will be one unified voice for the exempt market industry in Canada, and WEMA seems to be well-positioned to take a

leading role in providing that voice.”

By Bob Watt

Question & Answer

38

of the Business Career College

help but developing a passion. Or when a group of newbies taking their insurance licensing course clap at the end of a one or three day course because they learned so much and got so much value out of their experience. Beyond helping people learn what they need to know to succeed in the business and to pass the various exams required, our jobs as instructors and educators are really about helping people feel better about the industry that they are in, or have chosen to enter.

3 Why do you think the Business Career College is so successful?

I am not sure that we would use the term “so successful.” We are like any other private, family owned business. We make a decent living and strive toward creating value in the business so that one day the next generation can take it and build it into something else or like a lot of businesses, build value so that we have something to sell. We derive a lot satisfaction from watching people succeed, and that might be defined as being successful. My wife and I currently maintain a residence in both Calgary and Toronto and we get to travel back and forth between those cities. We get to work in most large Canadian cities on a frequent basis, so the lifestyle that our business provides is what most people would think would be an idyllic lifestyle. From the feedback that we get from our customers; we are well known and well respected throughout the financial services industry. To be known and respected across a great country like Canada would be a measure of success in the eyes of most people.

4 What types of need do financial advisors have for professional development?

The financial services industry rapidly changes as financial institutions scramble to be successful and gain market share. The ever evolving products and methods of assisting people in achieving their financial goals put tremendous pressure on advisors just to keep up. For most people, understanding the fundamentals concepts is about as much as they can manage. Learning new products and the myriad of information required to succeed can be very intimidating and frustrating for many advisors. We recognize that and do what we can to structure our delivery to meet the varied needs of our thousands of customers. When you bring in 3,000 to 5,000 new customers every year for over a decade you get to establish a lot of meaningful relationships and you get to identify and develop a wide range of educational offerings.

5 How does this differ from financial advisors in the Exempt Market?

Because advisors in the Exempt Market have chosen to

pursue a road less travelled, the pressure is on to be well versed in all options available to clients. The Exempt Market industry is relatively new compared to banking, mutual funds and insurance thus it is still highly misunderstood by the traditional industry and

therefore subject to the usual misguided judgment and myths. As human beings we have a tendency to quickly condemn that which we don’t understand. For those reasons, people in the Exempt Market space need to learn as much as they can so that they can guide the industry through its inevitable evolution. If the advisors don’t keep up to speed, the regulators, the financial press, and the academics will control the future.

6 What offerings do you have for financial advisors in the Exempt Market? Why are they a good investment for these

dealing representatives?

We entered the Exempt Market space at the request of a long-time insurance industry friend to help a bunch of his advisors deal with the challenges of working through the new registration requirements that came about as a result of NI 31-103. From that experience, we developed a 2 day Exempt Market boot camp to help people meet the challenge, learn about the industry and most importantly achieve success on the Exempt Market registration exam.

7 What prompted you to join WEMA?

We have been involved with another association for a couple of years now and watched WEMA form and evolve into what it is today. From our extensive work in the Western Canadian financial industry space we think that WEMA has done an admirable job of striving to meet the needs of its members. I read the first publication and was highly impressed with the interview done with our good friend and client Riki Roy at Omnus Financial in Edmonton. I liked what I read and thought that if WEMA does that type of job, and aligns itself with that type of person, it deserves a good look and then subsequently decided to become a member. WEMA’s plans for member education and ongoing education fit well with our business goals and philosophy.

8 What is the future role of WEMA?

My hope is that one day there will be one unified voice for the exempt market industry in Canada, and WEMA seems to be well-positioned to take a leading role in providing that voice. It has a grassroots connection to the industry and seems to be well informed about industry challenges, changes and the never ending tide of regulatory involvement in financial services. WEMA can add value to its members and the public by being the source for information that will help people to make intelligent properly informed decisions that will positively impact their financial futures as investors, advisors and dealers. Maintaining that grassroots focus will be crucial if WEMA expects to take a leading role in the exempt market space in Canada.

Bob Watt

Question & Answer Continued

39

final thoughts

Real World Economy To Put It Simply

It is a slow day in the small Saskatchewan

town of Pumphandle, and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.

A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night.

As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher.

The butcher takes that $100 and runs down the street to retire his debt to the pig farmer.

The pig farmer takes the $100 and runs to pay his debt to the local escort, who

“Unless someone like you cares a whole awful lot, Nothing

is going to get better. It’s not.”

-Dr. Seuss, The Lorax

has been facing hard times and has had to offer her “services“ on credit.

The escort rushed to the hotel and pays off her room bill with the hotel owner.

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.

At that moment the tourist comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looks to the future with a lot more optimism. And that, ladies and gentlemens, is how a stimulus package works.

Author Unknown

The Lighter Side

40

www.WEMAonilne.ca

CLARITY CURIOUS ABOUT THE EXEMPT MARKET FOR YOU & YOUR CLIENTS?

LocationTelus Convention Center, McLeod Hall, Calgary Alberta

DateNovember 7, 2012

Time9:00 am to 5:00 pm

PurposeExempt Market Education for Financial Advisors

CostsComplimentary for Financial Advisors

The Exempt Market Advisor Education ForumForum DescriptionThe conference will provide basic education and information about private placements and how the exempt market is structured. Our speakers have a long record of success in the Exempt Market, and represent all industry participants in this forum: Dealers, Dealing Representatives, Issuers, Portfolio Managers, and Crowdsourcing.

Our Speakers Include: Yvonne Morrison (Purpose Inspired Solutions) Bill McNarlend (Exempt Analyst) Jawad Rathore (Fortress Real Capital) Jay Modi (Omniarch) Sandi Gilbert (CCI Strategic) Steve Elliott (Mineral Fields) Adam Derges (Raintree Financial Solutions)

The forum will end with a panel discussion about the Exempt Market by key industry experts where Advisors can have their questions answered and opinions heard.

To Put It Simply

visit www.WEMAonline.ca to register

Olympia Trust Company is pleased to announce the addition of:

Felicia O’NeilRelationship Manager, RRSP & TFSA Division, Western Canada

Felicia has recently relocated back to Calgary and is very excited about working as a Relationship Manager for Olympia Trust and building relationships with new and existing clients in Western Canada. Felicia brings over 15 years of sales experience in account management, business development and consultative selling in Western Canada.

Prior to joining Olympia Trust, Felicia worked as a National Account Manager in the credit card processing industry where she managed a portfolio of over $800 million in volume. She also has over 6 years of experience in the title insurance and the mortgage industry as an Account Manager and Trainer.

Erica FreemanRelationship Manager, RRSP & TFSA Division, Quebec

With us it’s Personalwww.olympiatrust.com

felicia@olympiatrust.com

erica@olympiatrust.com

Prior to joining the Olympia Trust family, Ms. Freeman was the President of the Ontario division of Cellular Solution for Rogers Wireless for over 10 years. During this time, she organized all operations and led a sales team of more than 80 professionals.

Erica is delighted to be back in her hometown of Montreal and she is looking forward to starting her new career as the Business Development Manager for Olympia Trust, Quebec Division.