A new junior mining policy OSC expected to approve most of

Chances are good that most of the Thompson committee’s proposals for a new securities policy for resource financing in Ontario will be approved, according to the general counsel for the Ontario Securities Commission.

“I don’t think there is much doubt that the proposals, in substance, will be adopted by the OSC,” James Turner said last week at a Toronto seminar on mine financing. “The commission is committed to facilitating the financing of junior resource companies and will ensure that the ultimate policy works.” A public announcement by the OSC regarding the proposals is expected by the end of this month, he said.

Mr Turner added that some of the technical issues raised by the Thompson committee have yet to be worked out. Chief among those are the level of commission rates for securities dealers.

Last October the Thompson committee responded to OSC opposition by proposing a dealers’ commission rate significantly lower than that recommended in its July, 1986, report (N.M., Nov 3/86). Originally the committee recommended dealer mark-ups of up to 100% of the proceeds to the issuer be sustained. The new plan calls for an immediate slash in commission to 45% of the proceeds to the issuer (from up to at least 60% under current Ontario regulations). This would make it possible for a mining company to initially receive 55% of the proceeds it raises for exploration work (compared to the current 30%). The Thompson committee proposes that, over a 3-year period, the commission be lowered to 35%, allowing a company to receive a possible 65% of the proceeds it raises. High mark-ups

The OSC staff argues that such high dealer mark-ups (already allowed under OSC Policy 3-02) cheat investors and result in deterioration of the after-market. It recommends a flat 15% dealer commission.

“We (the OSC staff) don’t know where the commission is going to come down on this issue,” Mr Turner said. “We don’t expect it will decide on 15%; and whether it will come back with 45% or less, we don’t really know. But we expect there will be a change from the commissions now permitted under Policy 3.02.”

OSC staff is also opposed to the committee’s proposal that dealers be entitled to 10% of the founder stock. Mr Turner dismissed the proposal as simply another means by which dealers can be compensated. “The level of dealer compensation would be too high (under the proposal) and it is more appropriate for founder stock to be reserved for the promoters and the vendors of properties (and not registered dealers and public subscribers, as suggested in the Thompson report).”

Mr Turner expressed concern over the means by which the Thompson committee would like founders of junior mining companies to receive “value shares.” These shares would be received free of escrow and calculated on the basis of the net tangible book value of the issuer. There is a potential for abuse when the net tangible book value is used, Mr Turner said, adding that he, personally, would rather see an increase in the number of upfront shares available free of escrow. (The OSC is expected to agree, in principle, to the committee’s proposal that founders be able to acquire cheap stock without having to put up their own funds.) Seed capital rule

The Thompson committee hasn’t agreed to OSC recommendation that Ontario adopt British Columbia’s “seed capital” rule, which addresses properties in which there is not sufficient work done to justify public financing. In B.C. a minimum of $100,000 of equity capital must be raised privately by an issuer prior to its initial public offering and at least $60,000 must be spent on exploration and development.

Vancouver has produced most of the risk capital in Canada in recent years. The Vancouver Stock Exchange set a record in 1986 by raising $705 million, compared to $350 million in 1985.

Regarding the Thompson committee’s proposal that the Canadian Over-the-Counter Automated Trading System (COATS) be upgraded to a full computer trading system (rather than a simple quotation and reporting system), Mr Turner said the time isn’t right. “OSC staff does not perceive there is a clear consensus among the users of COATS that a full upgrading is appropriate at this point.” But he added that he expects the OSC will recommend a committee to consider the issue.

In a luncheon address, Edward Thompson stressed that COATS is essential to the development of a risk capital market in Ontario, adding that the system should be acting as a farm team for new Toronto Stock Exchange-listed companies. Compromises

Mr Turner also highlighted areas in which the OSC was originally unsatisfied with the proposed policy and in which the Thompson committee came back with compromises:

* The committee has agreed to the elimination of higher-priced secondary distributions of shares. The OSC would like, at least, to continue the current 50% limit on the size of secondary offerings permitted. It is also calling for a cap on the extent to which founders can cash out early.

* Originally the Thompson committee recommended that a dealer be able to receive a bonus of 15 shares for every 100 shares sold. Now it is suggesting that a dealer still be allowed to receive bonus shares, but only as a debit to its commission.

* There is agreement that the current rules regarding short-selling be eliminated. The OSC proposes only that short-selling be limited to a certain percentage and that the dealer be required to cover the short position within a period of one year following the completion of the distribution.

The OSC was supposed to have decided on the Thompson report last December, Mr Turner explained. The delay was caused by the recent hearings into the venture by 348 owner-operators of Canadian Tire retail stores to buy control of the parent wholesaler. The OSC ruled against the dealer takeover.