Thompson proposal would cut dealers’ compensation

The Thompson committee on junior mine financing has gone back to the regulatory drawing board and returned with major changes to its proposals for dealer compensation. The Ontario Securities Commission describes the changes as “startling.”

The committee has proposed that a dealers’ commission significantly lower than that recommended in its July report be phased in over a period of about three years. This would, in effect, double the proceeds going to Ontario mining companies while leaving significantly less in the hands of securities dealers. The new proposal was presented last week as the OSC was winding up hearings on the Thompson report.

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%).

But over a 3-year period the commission would be lowered to 35% (20% in the form of cash up front and 15% in the form of “bonus shares,” given free at the time of issue). As a result, a company would receive a possible 65% of the proceeds it raises.

Two weeks ago the OSC staff released its written response to the detailed, voluminous Thompson report (N.M., Oct 27/86). The OSC criticized the committee for recommending that “unconscionably” high dealer mark-ups of up to 100% of the proceeds to the issuer be sustained. Such mark-ups (which are already permitted under the much-maligned OSC Policy 3-02) cheat investors and result in deterioration of the after-market, the OSC says. It recommends a 15% dealer commission.

A 100% mark-up, though not normally charged, is equivalent to a 50% dealer commission. Under the Thompson recommendations a potential 50% commission, plus additional stock, would have resulted in an over-all broker’s commission rate of about 65% of the take. Alberta is the only other province which permits 100% mark-ups, though it is moving toward a 25% commission, James Turner, the OSC’s general counsel, said. Too Generous

Rocco Schiralli, a Toronto lawyer and Thompson committee member, said the decision to lower the commission was based on the advice of three securities dealers who agreed that the proposed commission structure should be revamped. He added that testimony from the OSC and investment dealers at the Oct 21 hearing was another influence. Some of the testimony criticized the Thompson recommendations as being “too generous” to dealers.

One of the speakers at that hearing, Douglas Reeson, vice-president and director of corporate finance of Davidson Partners, also called for a commission not exceeding 35%.

The OSC has not yet responded to the last-minute changes proposed by the Thompson committee.

The committee said it approves of the OSC staff recommendation that secondary distributions of shares be priced no higher than treasury shares. “This means that secondary offerings would become a thing of the past because there would be no incentive for the dealer to do them,” Mr Schiralli said.

OSC staff member Donald Charter attacked secondary distributions as simply a mechanism for further compensating the dealer. “Secondary offerings create the impression of a rising market for the shares being sold,” he warned. “But this is entirely an artificial market.” Remained Firm

While the Thompson committee proved flexible in the areas of dealer’s commission and secondary distributions, it remained firm on its other recommendations.

The Thompson proposal to give promoters a 3-year option on up to 20% of the treasury share issue is opposed by the OSC staff. “The “promoter’s option” is not in place in British Columbia (where most junior resource financing is raised and where most promoters are based),” Turner said. “Furthermore it isn’t required to foster an ongoing interest in the company.

“Under the Thompson committee’s recommendations, the promoter benefits the most,” he complained.

“But he’s the key man in the deal,” argued W. S. Vaughan, another committee member. “The promoter is the fellow most important to making a deal work. We have to give them (promoters) a reason to come back to Ontario from B.C.”

Mr Schiralli agreed. “The promoter was the forgotten man in OSC Policy 3-02 (introduced in 1977) — let’s not forget him now.” Bonus Shares

The OSC also wants to scrap bonus shares (part of the dealer’s commission), which are traditionally given by the underwriter to salesmen or promoters of the stock. The elimination of these shares would make the Ontario rules more consistent with those in B.C., where bonus shares don’t exist, the OSC says. Instead, it wants to increase the “compensation option” (an option for the dealer to buy a certain stock up to a certain period of time) to up to 25% of the number of treasury shares distributed on the public offering.

The Thompson Committee, on the other hand, recommends a 10% compensation option for a maximum period of three years. It also wants bonus shares maintained so that the dealer may receive a bonus of 15 shares for every 100 shares sold.

“There’s nothing wrong with bonus shares,” declared Mr Schiralli (who prefers to call them commission shares). “In fact they benefit the treasury of a company because they represent the sale of more stock.”

The committee and the OSC are also at loggerheads over an OSC recommendation that Ontario adopt British Columbia’s new “seed capital” rule. The rule requires that a minimum of $100,000 of equity capital be raised privately by an issuer prior to its initial public offering and that at least $60,000 be spent on exploration and development.

“We strenuously disagree with this recommendation,” Mr Schiralli said. “Requirements as to how much money must be spent on a property is a problem in B.C. But it isn’t a problem in Ontario. There’s an old saying: Don’t fix it if it ain’t broke.”

Most small mining companies in Ontario start off with much less than $100,000, so the recommendation is inappropriate, he said. Situation Bleak

The situation in Ontario is even bleak for companies that want to raise $500,000, he added, citing a company which approached Walwyn Stodgell Cochran Murray in 1983, asking that amount for exploration on the Hemlo claims. Walwyn wasn’t interested.

“There are lots of dealers in Toronto that can get you lots of money, but there are very few dealers that can get you very little money,” Mr Schiralli said. “Strange.”

Edward Thompson, a mining consultant and chairman of the committee, said “a major reason we need a risk capital market in Ontario is because the premier of the province says we need one.” He warned that a risk capital market will only be successful if the OSC wants to make it so. “The regulators can either facilitate or obstruct,” he said.

He explained what he sees as a fundamental difference between the Thompson committee and the OSC:

“The committee consists of experienced practitioners in the legal and mining communities. It recognizes that Ontario needs a risk capital market and that certain incentives are needed to get it going.

“The OSC consists of people with little industry experience who are bothered by the possibility of promoters being allowed to make too much money. It regards risk capital as something of a pain and would rather turn a blind eye to it and keep it in Vancouver.”

OSC vice-chairman Charles Salter said the hearing should resume after the OSC — and the Thompson committee — has considered the impact of the new proposals. No date was announced.