OSC seeks comment . . . so comment

Canada’s junior resource sector has been significantly downsized in the past year, mostly because of low commodity prices and the diversion of capital to technology ventures. But there has been some forced downsizing too, judging by the number of reporting issuers left homeless by last year’s restructuring of Canadian capital markets. Most of these juniors previously traded on the Canadian Dealer Network (CDN), which was phased out of existence last fall. They were supposed to be adopted by the Canadian Venture Exchange (CDNX), but only the best were given room at the inn.

About 800 of the remaining CDN companies were moved to the Canadian Unlisted Board (CUB), a reporting system where investment dealers file trading information using Internet technology. There is no public dissemination of data, not even dealer-to-dealer, which is why many companies feel they have been left to wither away in a cyber-house with no windows.

For many of these companies, life has been a mean game of musical chairs. Some didn’t survive the Toronto Stock Exchange’s post-Bre-X house-cleaning. Others couldn’t meet or maintain the CDNX minimum listing requirements. CUB is the end of the line, and if present trends continue, more companies will land there in the years ahead.

From our perspective, this issue goes beyond the 150 unlisted mining companies that find themselves confined to a no-man’s-land in cyberspace. It also affects some 200,000 citizens who hold shares in these companies and who no longer have a public market for them. And beyond that, it has serious implications for Canada’s junior resource sector, and for the nation’s economic prosperity.

That brings up Policy Statement 5.2, which still regulates financings, and, to some extent, operations of non-TSE-listed junior resource issuers in Ontario. However, the Ontario Securities Commission (OSC) intends to allow it to expire this summer. The OSC doesn’t see the need to replace the policy with a new rule because junior resource companies are now primarily listed on the CDNX, “which has broadly equivalent regulation to that contained in Policy 5.2.” CDNX has already obtained an order that exempts its issuers from the policy’s provisions.

The OSC also views the Ontario-only policy as inconsistent with the broader goal of securities administrators to establish consistent regulation across all jurisdictions. The OSC also points out that the policy doesn’t regulate technical reporting and disclosure, matters now governed by National Instrument 43-1010.

The OSC’s preliminary findings are subject to a 90-day comment period that ends March 30 of this year. Market participants are invited to make their views and comments known through written submissions. More on that later.

Another issue is how to resolve the growing dissatisfaction with CUB. The CDN orphans regard the current situation as “untenable” and have already formed the Ontario Association of Unlisted Reporting Issuers (OAURI) to lobby for changes.

As a first step, OAURI intends to approach the OSC and request that an open and published marketplace be provided for their issuers. Organizer Beth Kirkwood says this could be accomplished by either re-instating the system previously used by the CDN, or by expanding the CUB Internet-based system to provide universal access to real-time information on bids, offers and trades. If the situation is not resolved, a grey market could develop and lead to a variety of abuses by unscrupulous promoters.

Surely some better mechanism can be found that will allow unlisted companies to carry on business, and to enter into business arrangements, including possible mergers. After all, some companies might have qualified for a CDNX listing a few years ago . . . before the technology boom pushed them below the radar screen of most investors.

One possible solution is to use London’s OFEX market as a model. It was established in 1995 to provide a share-trading platform for unlisted and unquoted securities, off-exchange. It began with 45 companies whose shares had previously been traded under the now-defunct Rule 4.2 of the London Stock Exchange.

The OFEX market isn’t operated by the London Stock Exchange but by member firm, JP Jenkins, which in turn is regulated by the Securities and Futures Authority. Companies must comply with the OFEX Code of Best Practices and the OFEX agreement. If they don’t, JP Jenkins has the right to suspend and/or withdraw the facilities of the OFEX market at its own discretion.

JP Jenkins operates the OFEX market by providing a share trading mechanism and is therefore the market-maker in all the securities. It also receives and processes applications from companies wishing to have their shares traded on the OFEX, though an external panel also reviews the applications.

The OFEX requirements and continuing obligations aren’t as stringent as they are for companies seeking admission to the London Stock Exchange, or even the Alternative Investment Market (AIM), which is regulated by the exchange. And investors are told that OFEX companies are high-risk, in part because the securities can be illiquid at any given time.

JP Jenkins operates the market in conjunction with subsidiaries, Newstrack Limited and ofexmedia. Newstrack distributes price and company-related information to quote-vendors, such as Bloomberg, Reuters and FT Information. And ofexmedia is the OFEX web-site manager, responsible for maintaining content and design. It also organizes seminars that allow OFEX companies to exhibit their wares to potential investors.

As for Policy 5.2, most market participants agree it is outdated in many respects. However, the OSC’s decision not to replace it with something more modern may generate criticism. The argument that regulatory regimes need not be industry-specific (as recommended by the Commission Task Force on Small Business Financing) is also likely to be challenged. The task force saw “no clear basis” on which to distinguish between a junior with an unexplored property and a bio-tech company with an unproven product. However, governments and policy-makers have long recognized the differences between mining and other industries, as evidenced by laws and policies that were specifically engineered to encourage citizens to make discoveries that would create wealth for the nation. Staking claims, vending mineral properties, raising seed capital — even the mechanism of escrow shares — followed by exploration and development, are the building blocks of a unique, free-enterprise, wealth-generating system that is being emulated all over the world.

Canadian exchanges and regulators should also be mindful of growing competition from London, which has cheerleaders trumpeting its status as a global mining finance centre for both senior and junior companies. We’ve heard Australian and African companies singing the praises of London’s AIM market at several industry events. Perhaps market participants there sense a change in investor sentiment, away from over-priced technology stocks to under-valued resource companies. In contrast, Canadian exchanges seem obsessed with “new economy” ventures, even at the expense of their traditional resource base.

While the restructuring of Canadian capital markets has led to many improvements, it seems to have inadvertently closed the door to early-stage junior resource companies. Many juniors find the hurdles at CDNX too high, and the costs of listing there prohibitive, given their limited resources. The CDN used to be the door through which prospectors, grub-stakers, explorationists and any citizen bold enough to stake claims with real potential could gain access to capital markets. With that door closed, access to capital could become by invitation only, which perhaps benefits the gate-keepers but does little to stimulate investment in high-risk, early-stage exploration.