Issue 3December 2012

www.WEMAonline.ca

Q&A with Olympia Trust Founder Rick Skauge Death of a Salesman

8 Industry Habits That Need Changing

PLAYING

- Stephanie McManus & Craig Skauge | P.19

- P.45 - Carris Cameron | P.29

WITH FIRE

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Exempt Market, supporting strong business partners, top financial professionals and diverse capital opportunities.

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1

Table of Contents

Cora Pettipas

Industry Quotes

Letter From The Editor

Industry Feedback

Harvey Kraft

Exempt Market: Dragon Slayer

David Pett

Exemption Order

Marcin Drozdz

Moving From the Stock Market

Rod Burylo

Doing Well by Doing Good

Paul Ghezzi

Investing in the Sun

Bill McNarland

Under the Microscope

Stephanie A. McManus & Craig Skauge

Playing With Fire

Happy Holidays

232 293 315 337 359 39

45131719

43

51 info@blueprintglobalpartners.com 1-888-707-5777

Blueprint Global Partners We help Financial Professionals!

As a nationally recognized leader in the alternative investment industry, Blueprint Global Partners is a multi-product wholesaler in the

Exempt Market, supporting strong business partners, top financial professionals and diverse capital opportunities.

Proudly Representing: v Fortress Real Capital Syndicate Mortgages v Tandem Assets LP

Advisor TrainingProduct knowledge Industry training Portfolio diversification strategies

Advisor Marketing Support Marketing materialsTrade show supportClient seminars

Not a registrant? Ask about Referral Fee Programs!

To add these investments to your product shelf, please contact us.

www.blueprintglobalpartners.com

Cora Pettipas

Which Way to the Exit?

Darris Cameron

Death of a Salesman

Adam Derges

The Gatekeeper

David Todd

The Role of the Issuer

Josh Will

Bricks & Mortar

James Dahl

The Audit Dilemma

Cora Pettipas

Innovation of Education

Olympia Trust Founder

Q&A with Rick Skauge

Unknown Artists

The Lighter Side

wemawestern exempt market association

{LETTER FROM THE EDITOR}

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

Letter From the Editor

1

Thank you to all our members for your

ongoing contributions to WEMA and our initiatives. We are now the largest exempt market association in Canada. As we continue to grow, we will remain committed to our grass roots spirit and our focus on helping shape and cultivate the integrity of this important part of the Canadian economy. We also want to thank everyone who participated in our Exempt Market Education Forum in Calgary, Alberta. Our stretch goal was to have 250 in attendance and we ended up with 300 advisors and financial professionals present. The response we received was overwhelmingly positive. This indicates the financial services industry is interested in learning about the exempt market in

Canada, and what opportunities it can offer their clients. If you missed it, you can view the videos on YouTube through our website link.

Despite our Western roots and namesake, we have been increasing our membership base in Eastern Canada and are in an ideal position to represent and support this market, especially those in Ontario. WEMA is fully committed to our mandate on a national level. We are very proud of the active contributions of our members in our successful public mailing campaign for Ontario, which initiated the creation of the Ontario Securities Commission Exempt Market Advisory Committee and the appointment of our President, Craig Skauge to the same. We are in a fortified position to help shape the private capital markets in Ontario due to our vast experience with the prospectus exemptions (namely the OM exemption) available in the West. Our talented members and directors have direct experience working in the retail exempt market. WEMA has leading expert knowledge to provide the most relevant voice on how to improve our industry for business, dealers, advisors, regulators, and investors alike. Education for investors and advisors is vital to supporting our industry’s high growth rate and promoting its integrity. WEMA is pleased to announce our partnership with the Business

Career College to further our mandate of continuing education and professional development in the Exempt Market. The Business Career College offers quality licensing programs, including preparation courses for the exempt market. They have offices in Calgary, Edmonton, Toronto and Vancouver. Bob Watt; president and founder of Business Career College has accepted a role at WEMA as Chair of Education Initiatives. We welcome Bob to our team and look forward to working together on education development and enhancement for both existing and prospective Dealing Representatives, as well as investors. Bob Watt, will be Chair of WEMA’s education subcommittee. WEMA has also formed a second subcommittee dedicated to on-going improvements in compli-ance best practices. This commit-tee will be chaired by Kathleen Black who is the Chief Compli-ance Officer of Pinnacle Wealth Brokers and has 27 combined years experience in IIROC, MFDA, and the exempt market. Kath-leen has a vast skill set and pas-sion for compliance, and was one of the founding members of the Association of Canadian Compli-ance Professionals in Canada, and also made past contributions to the Western MFDA Hearing Panel and the IFIC AML committee. The purpose of this subcommittee is to share experience and best practices about how to ade-

quately navigate regulatory rigor and ambiguity. Both subcommittees will meet quarterly and report back to WEMA’s directors. They will also contribute regular articles to our publication. Congratulations to both Bob and Kathleen on their initiatives. If you want to participate in either our education or compliance subcommittee, apply by emailing me at cora@wemaonline.ca In an effort to ensure there is a collective place where people can follow all the great work of our members through their own events and initiatives, we have established an online events calendar on our homepage. Please email us with your events. Members are also always more than welcome to participate in this publication. Please continue to email me with your ideas and concerns as WEMA is your industry, your voice, and your future.

Cora is currently the Vice President 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.

WELCOME NEW MEMBERS

This publication, the Exempt Edge, is a part of WEMA’s efforts to provide quality information and education about the exempt market to industry and financial

professionals. In just six months and after only two issues, we have grown to an online distribution of 11,000 people. The feedback we have gotten on this publication has been overwhelmingly positive. We thought we would share what some of our industry leaders are saying about this magazine:

“We received the recent hard copy of the Exempt Edge. It looks fantastic! This is a wonderful contribution to the professionalism of the growing exempt market sector.”

- Rod Burylo, National Marketing Director of Access Capital

“Exempt Edge is an excellent resource which serves to unite the exempt market.”

- Brian Tang, President of Fundamental Analyst

“I have been involved in the exempt market world since 1995. The September issue of Exempt Edge was both informative and sends a notice that we are here to stay. Articles were informative and substantiated that WEMA is garnering traction with the best yet to come. Our collective efforts will assure WEMA’s strength in the coming years.”

- Gord Bylo, President & CEO, Investec Solutions Inc.

“Everyday I spend a couple of hours reading published material regarding the financial industry and find Exempt Edge to be a high quality and informative publication.”

- William McNarland, CFA, Founder and Managing Director of Exempt Analyst

“Exempt Edge serves as my window into the exempt market as a whole and the western market in particular. Our practice is based in Quebec but we are forging significant relationships with Dealers and Issuers in Western Canada and the magazine allows us to keep abreast of the trends and tendencies of the industry which we can then act upon making us more agile and responsive. I give high praise to the team at Exempt Edge for a well-documented and pertinent publication that adds to the credibility of the exempt market.”

- Eric Cardinal, Investment Banker, IBS Capital S.E.N.C.

“I can say without hesitation that this is an excellent compilation of information. The style is clear, informative, engaging and the material is very carefully organized. The Exempt Edge has truly made a very concerted effort to “demystify” the Exempt Industry and has become a resource for the advisor, issuer and the dealer to stay updated with the news of our industry.”

- Riki Roy, President, Omnus Investments Ltd

2

Industry Feedback

INDUSTRY FEEDBACK

The Exempt Market: Dragon Slayer

By Harvey Kraft

Recently I was watching an episode of the Dragon’s Den where a young entrepreneur had an idea in the auto supply

industry. The Dragons were salivating over the deal and wanted in badly. The young fellow held his ground and ended up getting $3,000,000 for a 20% equity stake in his company. From

what I have seen of the show, this is the exception rather than the rule. Most of the deals are pure entertainment somewhat like watching a combination of the Gong Show and Canadian Idol and in those rare cases where a deal is struck, it is almost never what the entrepreneur wants and usually not in his/her favor (as they have little bargaining power due to feeling that they’re out of options). Most entrepreneurs’ biggest obstacle is finding ways to fund their start-up. The banks really only want to provide financing after you have already succeeded and in the current economy most people are holding on to their excess cash just in case a ‘rainy day’ unexpectedly shows up. That doesn’t mean there’s no capital to be had though. Why not forego dragons, vultures, and even ‘angels’ and offer up equity in your business little by little to investors from one of the

biggest pools of capital in Canada, the RRSP and TFSA pool?

A big opportunity is emerging now to jump start your ideas and fund the growth. It is the Exempt Market. It has been around for a while but only recently became much more regulated. The credibility that came with tighter regulation has attracted a lot of advisors and investors that wouldn’t have looked here otherwise and the ripple

effects have created a viable brokerage industry willing to fund small to medium businesses, and even start ups. A huge source of capital for these brokerages (known as

Exempt Market Dealers) is RRSP and TFSA capital. There’s a common misconception that RRSPs and TFSAs can only invest

in the public markets, mutual funds, and GICs but subject to a few restrictions, investors can in fact use their RRSPs and TFSAs to purchase shares in a private company/start up.

While there are a number of RRSP and TFSA eligible structures available outside of the public markets, the one most commonly used by small business and startups is called the specified small business corporation. This structure is also commonly referred to as a Canadian Controlled Private Corporation (CCPC). Subject to a few restrictions relating to the type of underlying business and individual investor ownership, this structure is one of the eligible ones listed in the CRA’s list of qualified investments for both RRSPs and a TFSA. This structure is popular with entrepreneurs who wish to have investors join their small business as an equity partner.

There are many different business types that are going this route that I have reviewed in my role with Olympia Trust. In addition to the more common real estate and oil and gas offerings I

3

Dragon Slayer

see, there are many other examples of funded entrepreneurial businesses by RSPs and TFSAs in the exempt market. For example, I have reviewed offerings related to:

• Software developers• Pubs and restaurants• Financial Services• Medical & Scientific Research• Greenhouse Operations• Alternative Energy • Television & Film

It is important to keep in mind that no one investor or those related to them collectively can own 10% or more of any class of shares of this issuer in their registered account in this structure. Severe penalties can be encountered through CRA prohibited investment rules if an investor goes offside with this threshold investment level. Another important CRA rule for this particular qualified investment is that substantially all of the fair market asset value of the business must be principally used in an active business in Canada. Active business is defined by CRA regulations.

It is common that businesses utilizing this structure are established with two or more different classes of shares. Often they are structured this way to exclude voting rights from those shares purchased by investors (to retain control) and in some cases to cap investor returns at a certain threshold as well. While the ways in which a company can be structured are effectively endless, in basic terms there are generally two types of shares that are issued: Common Shares (both Voting and Non-Voting) and Preferred Shares. By purchasing Common Shares investors are generally entitled to a piece of the business on an ongoing basis and are not capped on the types of returns they can receive. Preferred shares on the other hand typically come with a capped return in exchange for precedence over the common shares in the event of the company winding up.

Raising money from multiple individual investors can put an entrepreneur in a better negotiating position than dealing with a couple of “Dragons” but it’s important to ensure your company is structured so that you treat investors fairly and don’t become a “Dragon” yourself. In reviewing some issuers, I occasionally encounter unscrupulous individuals who have their interests

first and foremost, and the investors’ interests somewhere more distant. I look closely at the ownership structure and too often have seen deals structured with large dilution to the investors in favor of the promoters. For example I recently reviewed a startup that issued management 5,000,000 shares for a total of $500 ($.0001/share) and then intended to sell shares to investors for $1.00 each when the company didn’t have any real assets to speak of yet.

Imagine the shares of your start-up of choice growing into the next Apple or Google while parked in an investors’ RRSP or TFSA? Investors today are faced with the volatility of the public markets and poor yields on savings. If structured properly, funded adequately, and executed according to their business plans, shares in a small business could prove to be a viable place to invest a portion of one’s retirement funds. The exempt market is a growing segment of the investment world and should continue to offer a solid funding alternative for the astute entrepreneur.

Harvey Kraft, CA is the regulatory compliance officer for Olympia Trust Company and reviews all securities wishing to be held in Olympia Trust registered plans. Harvey has been in the securities industry for 8 years. He started out this career with two years in a compliance role with the ASC and subsequently he worked in a compliance role with an MFDA regulated dealer and then with a Calgary based exempt market firm.

4

Dragon Slayer Continued

Material reprinted with the express permission of: National Post, a division of Postmedia Network Inc.

The goal when Craig Skauge formed the Western Exempt Mar-ket Association in 2011 was to unite companies and individuals in Canada’s four western provinces who were eager to change the regulations governing exempt securities, while also pro-moting their many benefits to investors. As it happens, WEMA gained traction from B.C. to Manitoba under Skauge’s presiden-cy, but it has also attracted dozens of members from across the country.

Having surpassed his regional ambitions so quickly, Skauge is now setting his sights higher. Whether others in the industry like it or not, he wants WEMA to become the country’s first truly national organization that represents the interests of exempt market participants. “We didn’t want to step on anyone’s toes,” he says from WEMA’s headquarters in Calgary. “But I’m the type of guy that believes if you want something done right, you do it yourself.”

Exempt market securities are ones that can be sold without a prospectus, the information document generally required by law to sell publicly traded stocks, bonds and mutual funds. The exempt market in Canada has substantially grown since the global financial crisis in 2008. Last year, $86.5 billion was raised in Ontario alone, up from $78.6 billion the year before.

EXEMPTION ORDER

MOVER

CRAIG SKAUGE SAYS IT’S TIME CANADA HAD A NATIONAL EXEMPT MARKET ASSOCIATION

Skauge, who is also a business development manager at Olympia Trust Co., a company his father started by tapping the exempt mar-ket, says more entrepreneurs are being forced to turn to alternative methods to raise capital for their businesses. Large brokerages in the country won’t return prospective financing calls unless it’s regarding at least a $20-million deal and they certainly have no interest in fi-nancing requests for a million or two, he says. Canadian banks, mean-while, have tightened their lending parameters in the past few years, making it more difficult for small businesses to qualify for loans and lines of credit. Exempt markets have also been fuelled by investors un-happy with volatile stock markets and near-zero saving rates.

Despite the industry’s growth and resulting investor attention, Skauge says the exempt market remains largely misunderstood and unfair-ly characterized by regulators as a kind of capital markets Wild West that needs stricter rules than public markets. For example, he doesn’t like that companies looking for seed money are required to provide audited financial statements when they go to the Street for exempt financing. “Management prepared statements used to be fine. Now guys are spending as much as $7,000 on an audit for a brand new company with $100 in an account,” he says. “The more regulation, the more cost, and it can drive guys out of business.”

Another frustration for WEMA members is the requirement to pro-

FP FRONT

by David Pett

5

Exemption Order Re-Print

NEW WEMA MEMBER BENEFITNo Annual Trustee Fee Personal Accounts for D.R. Members

WEMA is pleased to announce that all Dealing Representatives (D.R.) Members will receive the waiving of the annual trustee fee on their personal Self Directed account held at Olympia Trust Company *

Olympia Trust is pleased to provide this benefit to WEMA Members in an effort to help WEMA continue to grow their member base and accordingly continue to improve the Exempt Market industry.

This is an immediate savings of $150 per year per D.R. Member for their $200 Membership Dues.

Join now at www.WEMAonline.ca

* Only applies to one account which must be in the name of the WEMA D.R. Member (not their spouse/child/etc.). Discount only applies to annual trustee

fee of $150. All other fees still apply. Subject to applicable taxes.

MOVER

vide costly quarterly statements and perform manda-tory “know your client” updates. “In the public market, if someone’s risk profile changes, you can do something about it, but in the exempt market, where securities are illiquid, once you’re in it, you’re in it,” he says. “It’s your ad-visor who should have given you proper advice to begin with.”

The biggest regulatory issue, however, is Ontario’s take on who can invest in exempt markets in the province. In the rest of the country, anyone can invest in exempt market securities -- to a limit of $10,000 in certain prov-inces unless they meet certain investor net worth or in-come criteria that would allow them to invest more. But only accredited investors or people who have $150,000 to invest in one deal can purchase exempt securities in Ontario. Skauge says the rule leaves more than 90% of the province’s investing population unable to access the exempt market.

“Our members have lists of thousands of Ontario res-idents who have attended their seminars, but have been told, ‘Sorry, until the rules change you can’t do it,’” he says. “Given the fact that the Ontario economy is not without its hardships, it is time to open up another fund-ing mechanism for small businesses and give investors whose confidence is shaken another option.”

The Ontario Securities Commission’s recent decision to form an exempt market advisory committee in Ontario is at least partly due to WEMA’s exhaustive letter-writ-ing efforts. Ultimately, Skauge wants to see regulations changed so that exempt markets in all 10 provinces and three territories are better aligned. “We’re not for free-wheeling and no regulation, because that hurts confi-dence in the market and makes it harder to raise money. We’re just trying to help find the right balance.”

6

It’s become unpredictable and emotional. Surprised? Probably not…

Nothing sums up the above statement better than what happened with the blue chip tech giant Google. A company that has seen nothing but their bottom line increase since 2004 saw their stock get pummeled in 2008 losing over 50% of its value from months earlier.

Were people “googling” less? Did the Internet turn off? Of course not.

Blue chip companies like Google are not alone though. The volatility and undermining doubt that the masses have in the stock market is affecting everyone.

Times have changed and the stock markets have gone digital.

Wall Street/Bay Street is no longer vastly controlled by the stereotypical ‘stripe suit, MBA educated, over-achiever’ taking the subway into downtown type.

Trading floors are no longer ‘floors;’ they have gone digital and the people making moves in the market do not actually need to be anywhere near the market. Individual investors equipped with nothing more than a trading account connected to their Ipad can collectively move millions of dollars in a matter of seconds based on something they just read about on twitter. Hedge Fund Managers hire

moving away from the stock market

By Marcin Drozdz

eccentrically smart mathematicians and actuaries (like a super accountant) to calculate mathematical probabilities and employ sophisticated computer technology to make multiple trades simultaneously in an effort to expose short ‘windows’ of opportunity.

What is the smart money doing during these volatile times?

Large pension funds such as OMERS (Ontario Municipal Employee Retirement System) who manage over 55 Billion dollars on behalf of over 400,000 employees and pensioner’s, are making moves into the private sector to avoid all the spikes and dips of the public markets. In 2004, the CEO Michael Norbrega made a (then) drastic move and announced his intentions to move from holding over 80% in public assets through the stock market to (over time) creating a more balanced portfolio between public (53%) and private (47%) holdings. His reasoning was simple. He believed that the public capital markets were becoming too volatile for his fund to be able to make a consistent return on their investment.

In 2011 OMERS created a return just shy of 8% in their private in-vestments such as real estate, infra-structure and private businesses; however they had a negative re-turn of 0.22% in the public markets.

All in all they created a blended return of approximately 4%, solely because they had private investments in their port-folio.

“Take a page from the large successful investment groups out there and start exploring private opportunities.”

why millions ofpeople & billions

of dollars are

7

Large investment firms out there, like OMERS and CPP (Canadian Pension Plan), are currently investing directly into opportunities that the majority of advisors cannot sell, such as: real estate, infrastructure and private businesses because they see the stability, consistency and dependable returns

that these types of investments can produce for their investors.

Learning about the exempt market is easier than ever now that this booming industry has become

regulated. Everyday Canadians can reach out and explore these opportunities through Exempt Market Dealers to see if alternative investments can be a fit for their portfolio. For related articles, you can view our blog at blueprintglobalpartners.com.

What can you do?

Wayne Gretzky was once asked in an interview why he was so successful. His answer “I skate to where the puck is going to be; not where it is now.” Using that analogy, I believe that most of us are chasing after the puck and missing existing opportunities along the way.

Take a page from the large successful investment groups out there and start exploring private opportunities. If you don’t have the time to immerse yourself in all the details (or do not want to), I would suggest working with advisors that are able to offer you alternative investments that are not tied to the public markets. In the investment industry these are called “exempt products” and are available to almost anyone in Western Canada through a disclosure document called an Offering Memorandum.

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.

“Learning about the exempt market is easier than ever now that this booming industry has become regulated. ”

Moving From the Stock Market Continued

8

Exempt Market InvestmentsDoing Well by Doing GoodOne of the more interesting features of many exempt

market investments is that they represent an op-portunity for the investor to participate in a primary distri-bution. The investor purchases the investment from the issu-ing entity, rather than from an-other investor, and the capital is used by the entity to further some business activity. This fea-ture also suggests that these exempt market investments may have a particularly strong appeal to investors with a particular disposition: those looking to make an impact.

Impact investing refers to assessing the merits of a particular investment not only for its potential to generate a financial return, but to influence some other state of affairs deemed to be important to the investor. These states of affairs are often related to some environmental or social condition. The expressions environmental investing, socially responsible investing, or simply ethical investing, have become common descriptions of such activity.

There are typically three distinct approaches used by impact investors in pursuit of their agenda. With the avoidance approach, the investor seeks to avoid the purchase of an investment, or sell the investment if already owned, if it is associated with some condition or state of affairs the investor deems to be inappropriate or undesirable (this is often referred to as a screen). Second,

with the positive approach, the investor purchases an investment, or continues to hold the investment, if it is

associated with some condition or state of affairs deemed by the investor to be desirable or worthy of support. Finally, with the activist approach, the impact investor buys or holds an investment in the hopes that by being ‘an investor’

they may influence management or promote changes of conditions from less desirable to more desirable.

The impact investor may

also believe that, by avoiding or

supporting a state of affairs, or influencing

change, they may ultimately also impact

the potential ROI or reduce risks related to the investments.

However, this belief is not an essential element of these approaches.

Whether or not these approaches have any meaningful impact on the state

of affairs deemed important to the investor is certainly

open to debate. While measuring a financial return

on an investment should be an

objective exercise, measuring a social

or environmental ‘return’ may be

By Rod Burylo

“Competition among the participants in the Canadian exempt market sector for scarce capital is fierce and Entrepreneurs may want to consider how their business activities may be of interest to impact investors.”

9

Doing Well by Doing Good

relatively subjective. Moreover, in many instances, it may be impossible to verify a causal relationship between the specific investing activity and any other static or changing state of affairs, and therefore, impossible to measure the success of a particular ethical investment.

Follow the MoneyThe crux of this issue is the distance between the investment activity and the state of affairs of interest to the investor: the greater the distance, the less influence exerted, and so, the less meaningful the exercise. For example, many enthusiastic impact investors pursue their agendas in the secondary market through purchases of publically traded stocks and bonds, or through mutual funds of such instruments (most notable are those funds branded and marketed as ‘ethical’). In the secondary market, however, investors are purchasing instruments from other investors. When we follow the money on such transactions, the distance between the investment activity and the state of affairs of interest to the investor may be cavernous; the money flows from investor to investor with perhaps very little influence on the entity that initially issued the instrument. In this environment, the actions of the so-called impact investors may be merely symbolic.

In contrast, a primary market distribution features a flow of capital from investor to business organization. That capital serves to support very specific business activities, and related social or environmental states of affairs that may be deemed important by the investor; as well, withholding or removing capital from such business activities effectively withdraws that support. The distance between investor, investment activity and the beneficiary business is reduced. As such, the exempt market sector includes investment offerings that may be of interest to impact investors.

Since the range of business activities supported by exempt market investments is considerable, the types of ethical considerations are numerous and varied. For example, one area of concern to impact investors is with respect to construction techniques, land use, and development. Such folk may be more inclined to support projects that address environmental topics meaningfully, or support inner-city

projects associated with improving density. Real estate projects or REITs that consider topics such as affordable housing or immigration may attract impact investors either with an interest in current local social issues, or longer-term national economic and political issues. Business activities associated with the traditional energy sector, and with emerging alternative energy sources and technology, also either attract or repel impact investors.

Competition among the participants in the Canadian exempt market sector for scarce capital is fierce and Entrepreneurs may want to consider how their business activities may be of interest to impact investors. For some, there may be elements of these activities that are particularly attractive to

some investors, beyond the opportunity for financial return, but these elements were never expressed prominently when pursuing or retaining capital. In other cases, the opportunity exists to alter aspects of business

activities to be more appealing to these investors. For the dealing representatives in pursuit of new clients, knowledge and appreciation of impact investing may present the means for differentiation in their competitive environment.

While discussion about our sector, especially over recent years, seems to have featured an emphasis on some less than attractive issues, the opportunity remains to fashion and brand our segment of the capital markets in a very positive light. Rather than an association of EMD’s with WMD’s (weapons of mass destruction), the reality is that, perhaps more than any other sector, the exempt market can provide the means for doing well and doing good.

Rod Burylo is an international speaker, business author and National Marketing Director for Axcess Capital Advisors. The articles written by Burylo are intended to be general in nature and not intended as specific financial advice to individual investors. Such investors should consult with their advisors to determine the relevance of these concepts to their personal circumstances.

“For the dealing representatives in pursuit of new clients, knowledge and appreciation of impact investing may present the means for differentiation in their competitive environment.”

10

Doing Well by Doing Good Continued

TriView Capital is pleased to introduce itself as one of Western Canada’s newest Exempt Market Dealers. From our headquarters in Calgary, we look forward to bringing our vision to this marketplace with sales and operations located in centers across the West.

We are undertaking to build a new type of exempt market dealer, one that specializes in best in class private investments and alternative markets by putting our clients first. The exempt market in Western Canada is a $28 billion dollar industry and continues to grow. Given the massive change in how capital is being raising in our country, we see the need for a market leader that offers astute opportunities for its clients, are accountable to them, and offers full transparency.

We believe a balanced portfolio includes a mixture of traditional assets but also needs to include alternative investments and private securities, our niche specialty. We see room in this marketplace to implement our vision to the benefit of not only our clients but also to the issuer community in helping them to conduct their capital activities in a cost-efficient, expedient and regulatory compliant fashion.

Our commitment to the industry, our clients, issuers and Dealing Representatives can be summed up in three words;

Astute: We have a team that has raised and financed over $6 billion in the private and alternative markets and a Portfolio Manager with $250 million in institutional managed assets. A track record of success does not guarantee future success but having successful investors who’ve seen many business cycles provides experience to reduce poor decisions and returns.

Accountable: Our priority is simple, our clients. Our business depends on providing good investment choices to our clients. Without them, we don’t exist. We do not put ourselves in a conflict of interest between the issuer and our client unlike some dealers who actually create the product that they sell to investors.

Transparent: Our clients have the right to know exactly what they are investing in. They need to know the pros and cons as well as the importance of a well-diversified portfolio. We will lead the industry in best practices when it comes to due diligence and compliance to regulatory bodies.

To learn more about our philosophy and vision, I encourage you to go to our website at www.triviewcapital.com. We look forward to being a strategic partner and proud member of WEMA.

Sincerely,

Craig BurrowsCo-Founder, President & UDPTriview Capital Ltd.

www.triviewcapital.com

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10233 ELBOW DRIVE SW # 345

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Karina.Canfield@bmo.com

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investing in the sun: how to invest in canada’s most abundant natural resource

By Paul Ghezzi

The solar energy power generation industry has surpassed 30,000 Megawatts globally and continues to outpace the

growth of traditional fossil fuels. What is fueling this growth? And what is the best way to participate?

There are three key factors driving solar energy power generation growth:

The first is related to the massive cost decline in solar panels. Since the year 2000 the cost of solar panels has declined by 80%, while the cost to extract a barrel of oil has more than doubled. The cost decline in solar panels has been terrible for solar energy stocks, which trade on the public markets, but conversely has been very beneficial for private infrastructure investment in solar power generation. The drive by manufacturers to consolidate and to continue to lower the costs of solar panels directly benefits those firms who are focused on acquiring solar panels for their solar energy power generation projects. This trend is expected to continue for the next 3 years as the solar manufacturing sector remains in the midst of a global industry consolidation.

The second reason is related to Feed-in Tariff (FIT) Programs which support the installation of renewable energy with guaranteed energy pricing and the stability of 20 year Power Purchase Agreements. Germany is the global leader in installed solar energy power and is now producing approximately 40% of its peak energy through solar energy. Germany, under its Federal Energy Act (EEG), has installed more solar energy power than twice the amount of energy which the Province of Alberta consumes on an annual basis. As the global leader in installed solar energy power generation, Germany’s renewable energy legislation has been adopted by many other countries and states.

In 2009, the Ontario Government passed into law the Green Energy Act with a FIT Program similar to Germany. Since that time Ontario has attracted over $20 Billion in private sector investment and awarded more than 2,000 megawatts of solar energy Power Purchase Agreements and 3,000 megawatts of wind energy

Power Purchase Agreements. The Power Purchase Agreements issued by the Ontario Government include a guaranteed FIT rate, per kilowatt hour, for renewable energy power generators. A Power Purchase Agreement carries with it the rating of the underlying issuer, and in the case of Ontario Government an AA- rating. This makes Power Purchase Agreements attractive as a form of security for debt and equity financing.

However, Power Purchase Agreements also have their limitations. The amount of energy that can be sold into the electricity grid, under a Power Purchase Agreement, will depend on each specific renewable energy installation and how well each installation is managed. In this regard Power Purchase Agreements can provide revenue certainty and transparency but do not take away the inherent business risks of owning and managing power generation investments.

The third reason solar continues to grow at above average rates globally is the continuous improvement in the bankability and reliability of solar energy panels. The term bankability refers to the quality and reliability of the solar panels to produce a desired amount of energy output over the life of the Power Purchase Agreement. Solar panels, produced by the world’s leading manufacturers, have a useful life in excess of 40 years and a 25 year performance output warranty. The warranty provides that the power output of the solar energy installation will not be lower than 90% of the expected output for the first 10 years and will not be less than 85% of the expected output for the remaining 15 years. The bankability of solar energy power generation is attracting significant investment from traditional power producers who are diversifying their power generation assets. Most recently in Ontario, Enbridge and TransCanada have collectively invested over $1 Billion in the ownership of large solar energy power generation installations. These installations include the use of solar panels with a strong track record of performance and an underlying 25 year original equipment manufacturing warranty.

13

How can Investors Participate?

1Build to Own:Most Canadian homeowners, depending on locality, now

have the opportunity to become their own power generator by building a solar installation on the roof of their home. The power they generate can either offset their electricity use or may be sold into the local electricity grid.

2 Public Markets:Investing in pure play solar energy opportunities in the

public equity markets is another option. While the public markets are liquid they are highly volatile and solar energy stocks have performed poorly. This trend will likely continue as the solar manufacturing industry continues to consolidate.

3 Exempt Market Offerings:Private infrastructure investments in solar energy power gen-

eration, backed by long-term Power Purchase Agreements, offer investors an income and growth opportunity. Compared to the public equity markets, participating in the ownership of solar power generation assets, through a limited partnership or mutual fund trust can be more stable and less volatile. Private infrastruc-

ture investments are not meant to be traded like public stocks. In this regard investors who demand instant liquidity are likely not well suited to owning long-term energy infrastructure invest-ments. There are also risks inherent in the ownership and oper-ation of a solar energy power generation installation. Investors must carefully read the Offering Memorandum for any solar en-ergy investment and clearly understand the risks associated with the underlying business of power generation and the Offering.

With the cost of solar panels continuing to decline many Provinces are seeking opportunities to grow their solar energy power generation portfolio. Ontario is now the leading Province in Canada to adopt solar energy; however the future for the growth of solar energy power generation across Canada is very bright.

Paul Ghezzi is the President of Solar Income Fund (SIF). SIF is a Canadian-based company focused on the development, ownership and management of solar PV energy power generation installations backed by long-term Power Purchase Agreements. Following a professional career as a Chartered Accountant and financial asset manager Paul has been focused on creating structured investment opportunities in the renewable energy sector since 2005. Paul is a professional member of the Institute of Chartered Accountants of Ontario and the Socially Responsible Investment Organization.

14

Investing in the Sun Continued

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

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An Analytical Research Process for anExempt Market Dealer

UNDER THE MICROSCOPE

By Bill McNarland

I nvestors in exempt market products have often experienced much higher

returns than available in the traditional capital markets. Unfortunately, some investors have experienced total loss of principal. This high-risk, high-return environment means that investing in exempt market products requires a higher level of due diligence than traditional investments like mutual or segregated funds. This article provides an overview of some of the steps taken by our research team at Pinnacle.

1)Upon initial approach by an issuer, the first task is to determine if

there is investor interest in the issuer’s niche market. For example, there is currently more investor interest in income over equity investments. At present, there is little demand from investors for speculative investments. Many opportunities that do not meet investors’ appetite will not require further consideration.

2) Second, if an issue is in an area of interest, what are the initial views of

its quality? A fair amount can be determined through a brief overview which would eliminate the need for further due diligence. Between the initial screens mentioned in points one or two, a high percentage of issues would not go through further due diligence.

3)At this point, the issues not eliminated through step one or two would go

through a full due diligence review. This is a time-consuming and expensive process that requires a large commitment by both the dealer and the issuer. If both parties agree to go through with the due diligence process, an agreement is put in place.

4)The first step of the process is to design a customized questionnaire

that will be the basis for a formal interview. There are many boilerplate questionnaires, but a customized one will eliminate the irrelevant material found in these. Typically,

a questionnaire covers 150 to 200 areas that require formal responses from the issuers.

5)The questionnaire forms the basis for a formal interview.

We hold these interviews via a recorded conference call. Often these interviews can take up to four hours! The information recorded is then transcribed into a document that can be more than 100 pages long.

6)A member of our research team will conduct an on-site visit to

confirm some of the representations made in the conference call that require verification. Past experience has taught that these visits are invaluable.

7)Next, the formal due diligence report is summarized in a

comprehensive research report. These documents are typically 50 to 70 pages long.

17

8)A short summary is then created, which highlights the key “Know

Your Product” points that securities regulators would be looking for as expressed in CSA Notice 33-315.

9)The Ultimate Designated Person and Chief Compliance Officer

would not rely solely on the opinions of the research team in approving products. An assigned product approval committee would review the materials and make a decision on the products to be offered by the dealer.

10)Before a product is offered, an agreement on future reporting

and due diligence has to be executed.The process of exempt market due diligence is still evolving, and has come a long way from a few years ago. Going forward we are working to bring additional positive changes to the marketplace.

Some of the ideas we are working on now include:

A)An analytical framework designed for the exempt market

that allows for easier comparisons between all exempt market products.

B)An administration process that separates investors’ assets from

issuers’ discretion.

C)Independent board and trustee roles that watch over investors’ dollars.

With a solid due diligence process, investors can benefit from the potential high returns found in the exempt market. The exempt markets could be part of a partial solution for the current income crisis in the traditional capital markets.

Since William’s first position with Midland Walwyn, his passion for the global finance has taken him to all five continents. For the last 16 years William’s career has focused on focus asset management, analysis, investment banking, private equity and trading with some of Canada’s most notable firms. With 9 professional financial designations and vast experience in Global equity markets, he recently held the position of associate instructor of Finance at the University of Toronto’s faculty of continuing education. William efforts have recently been featured in the Edmonton Journal, Wall Street Journal, Globe Advisor, Investment Executive, Alberta Venture, Canadian Exempt Market Watch and Pie Magazine. In addition to the McNarland family office, William works with other Family Offices, EMDs, Pension Funds and Securities firms to provide analysis of investments. In additional to William research activities, he also is a Co- founder and former director of the Western Exempt Market Association. His volunteer efforts for this association is to create an organization with a strong voice for the Exempt Markets.

“Providing sales, marketing, and wholesale

services to issuers in the exempt market

investment industry.”

Contact info:

Email: info@i9capital.comPhone: 403.837.8341

18

Under the Microscope Continued

By Stephanie A. McManus LL. B. & Craig Skauge

industry habits that need changing

PLAYING WITH FIRE

W hen Adam Derges, VP of Raintree Financial Solutions, spoke at our recent education forum he made a strong

point about both the great opportunity and responsibility that the Exempt Market, particularly in Western Canada, has in the coming years. The oppor-tunity is evident in that there is a spotlight on our industry in the “new economy” as a potential investment and capitalization solution for investors and busi-nesses respectively. The respon-sibility, which may not have been as obvious, is nonetheless just as important. Our responsibility as an industry is simple…to not screw up. Governments all over the world are trying to figure out how to correct a long ago broken system in our collective capital markets and get their respective economies back on track.

While most governments are still just trying to stay afloat on a day-by-day basis by printing money, some are in the conceptual planning stage as to how to get things back in gear in our new reality. Take the United States for example. Now that the never-ending story of the U.S. election is behind us (Obama having retained his seat) the final kinks are likely being worked out in the J.O.B.S. Act and crowdfunding will likely become a reality south of the boarder in 2013. Whether it proves to be a viable solution for entrepreneurs, a train wreck for naïve investors, or somewhere in between won’t be known for some time but the plan is in the works. The spotlight will be shining brighter than ever when theory becomes reality. However, for the time being it’s still just that…a theory.

In Western Canada on the other hand, our moment in the spotlight, albeit not as bright, is right now. While the Exempt Market has only recently become regulated in its present form (with EMDs, KYPs, KYCs, and a whole other list of acronyms being our reality), it has become a dominant force in our capital markets in the last 10 or so years. It’s been well-documented that the pre-NI 31-103 Exempt Market had its share of problems with unscrupulous promoters, uncaring salespeople, and failed deals. In addition to scaring away a vast majority of the big bad wolves of our industry, increased regulation has brought us much needed credibility with businesses (as a source for fundraising), Advisors (as a place with viable client solutions), and investors (as a place with

investment options beyond Ponzi schemes). While the new regulations have begun the job of cleaning house and adding credibility, regulation in and of itself is not going to be enough to ensure the integrity of the Exempt

Market on an ongoing basis. Regulation under NI 31-103 is principles-based. That means the instrument only tells you what you must do in principle, not how you must do it in practice. For many, that is a welcome change in approach, allowing freedom

to develop policies and procedures that are tailored to the firm or business. But for the unscrupulous sorts, the approach leaves open the possibility of sidestepping intended requirements by claiming that the “principle” was respected. There is also much about the Exempt Market that has remained below the radar until recently. So there’s a need to bring it all up into the light so it can be well-understood and well-run.

It’s time for our industry to take the momentum we’ve been given, lose some leftover bad habits and show those that are watching that the solution in the new world economy is right here….right now.

Let’s tackle some of those bad habits referred to above… Great expectations

Issuers and Advisors alike should ensure that commissions being offered and accepted are reasonable. Commission dollars that are above industry standard are coming from client pockets and may themselves jeopardize the viability of a deal. While that may not always be evident to clients because (in some cases) the compensation structure disclosure is either not there or is buried in a complex offering package, this information always comes to light eventually and is a black mark on the industry as a whole. Selling clients offerings with respectable compensation levels instead of those that bleed an offering to death will help ensure the long term existence of both an Advisor’s book of business and the viability of the offering itself. Advisors need to ask themselves, “If someone is willing to pay me that much >

“It’s time for our industry to take the momentum we’ve been given, lose some leftover bad habits and show those that are watching that the solution in the new world economy is right here….right now. ”

Playing with Fire

20

to raise money for them, how desperate are they for cash and how long is this thing going to run?”

pie sharinG

While an EMD’s role is to support its Advisors, it’s a two-way street. Advisors must understand that it’s preferable to work with an EMD that has strong operations and rigorous compliance. These are the things that ensure the sustainability of the industry and establish a credible foundation for years to come. They also serve to protect the asset that is the Advisor’s business. But these things cost money and EMDs expecting a fair portion of commissions and fees shouldn’t be viewed by Advisors as greedy but rather as doing what they have to do to keep the lights on, improve operations and build a strong support system for their Advisor’s businesses. In fact, as part of the “investigation” process Advisors undertake in choosing which firm to ally themselves with, they should be wary of firms that offer very high payouts – because the corollary to that is almost always, very poor ongoing support.

short term Gain for LonG term pain

Unlike in the brokerage or mutual fund sales industries, ongoing commissions and trailer fees are not usually generated from the sale of an exempt product. Compensation, with limited exceptions, is generally paid one time and up front and is generally higher than payouts in other investment areas.

To deter the natural drive to “over-sell” exempt products to keep cash flow healthy, (a strategy that could possibly create big problems for the industry as it matures), Issuers might be wise to offer a smaller up-front commission with ongoing trailer fees. This has the potential to improve the financial stability of Issuers, giving them more to work with in the early days of a venture, and it would provide an ongoing and predictable income stream for Advisors. A thorough analysis of and discussion around how the current model motivates Advisors to sell and market exempt products and their services would be a very useful exercise to help keep the industry above-board.

the suitabiLity factor

Exempt market products, like every other investment product, should be recommended because they are a suitable fit for a client’s overall investment picture – not because a particular product pays a higher commission than another, not because the Issuer is a family friend, not because an Issuer has flashier marketing (and is easier to sell)

than another, and not because there’s a Hawaiian vacation (or the like) in it for Advisors who sell the most of it. Every recommendation has to be founded on the client’s needs and circumstances. Advisors

need to focus first and always on what’s in it for their client, not their own pocketbook.

the biG picture

Exempt market products are generally regarded by regula-tors at the moment as high risk. It is therefore rarely the case that a client should have all of their eggs in the Exempt Mar-ket basket, even if diversification is offered within that bas-ket. Exempt products should be viewed as a complement to other types of investment vehicles. The percentage and mix should be determined by client circumstances. It is therefore important for Advisors to reach out to more/new prospects to meet their targets, rather than trying to sell a large variety of exempt products to existing clients and to bring all their clients’ funds into the Exempt Market.

structuraL inteGrity

The best business idea in the world can be destined for disaster before it gets out of the gate if structured poorly. One common early pitfall is being burdened with too much high rate debt or pre-offering dilution.

As with the compensation issue, EMDs and Issuers are in a constant tug of war over share and timing of payment for investors v. founders. Too often our industry has deals with high rate debt or equity-based hurdle rates that are unsupportable by the underlying business. EMDs want their investors to earn X% and despite their inability to generate it, certain Issuers will offer it just to get cash raised for them.

“Exempt products should be viewed as a complement to other types of investment vehicles. The percentage and mix should be determined by client circumstances. ”

Playing with Fire Continued

21

Many deals are designed so that the cash flow paid to inves-tors can only be supported if the economy keeps growing and there are no misfires in the operation of the business itself. Some Issuers get desperate to generate the promised yields and desperation often leads to bad decisions. By push-ing for the best rates and cash flow for their clients, certain EMDs may in fact be putting their clients at risk by putting unsustainable financial pressure on the Issuers of products they approve for their Advisors to sell. If there’s anything that we’ve learned over the past four years it’s that the economy moves in many ways and Issuers need to provide for a cush-ion to manage the unforeseen and the troughs that inevita-bly come with the economy as a whole and the operation of a business in particular.

Another item of concern in many offerings is the offering size. Many Issuers that offer “blind pools” think that they can manage an infinite amount of money as their opportunity is that good. Much like Wall Street, our industry has already seen the disastrous results of giving one or two people too much money for their multiple “can’t miss” opportunities. The truth is simple…there is no Superman. One person or group can only properly manage so much money. If an individual or group gets too much capital to manage, they generally get unfocused, sloppy, or worse…creative. EMDs would be wise to look for target maximum capitalization in an Issuer’s plan and satisfy themselves that the target is realistic and manageable, given all the circumstances.

a seaL of approvaL

Our industry also needs to learn to keep communication channels more open and to collaborate more effectively. While there will obviously always be competition between EMDs for that elusive investment dollar, there are areas where sharing and working together can reduce costs and benefit all, equally. For example, independent due diligence reviews are commissioned by EMDs before they will approve a product for sale by their Advisors. At the moment, each EMD requires a separate and full-priced due diligence review for the same Issuer’s product. Any cost of this type is ultimately passed on to the investor and dilutes available profitability for everyone. Wouldn’t it be an idea to standardize the format of independent due diligence reviews and have a kind of

online ‘library’ for reviews that all subscribing EMDs could access for free? Issuers might have to update the review annually but that would still be less costly than having to commission a new report for every EMD.

This would also have the effect of making public (through their absence from the library) those products that are less than credible. So this could both reduce costs and offer a kind of “seal of approval” - a huge step forward to attract larger more credible Issuers and keep the weaker ones at bay.

investor education

Lastly, our industry would do well to offer free education to the public at every available opportunity. The biggest source of conflict between investors and Dealers/Issuers, and at the heart of most lawsuits and regulatory actions, is when a client’s expectations are not met. The most effective way to address that, apart from at account opening, is through ongoing thorough and frank public

education about the pros and the cons of the Exempt Market. At the end of the day, Adam Derges is right: the responsibility to keep this industry healthy and thriving is ours. There are many conscientious people

and good minds in the Exempt Market. If we put our heads together and continue to work toward strengthening things, those working in the industry, investors and the Canadian capital markets will all benefit.

Craig Skauge is the President and founder of WEMA. Mr. Skauge has nearly ten years 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. Mr. Skauge is the publisher of the Exempt Edge, a national industry trade publication.

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 above 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. 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.

“The biggest source of conflict between investors and Dealers/Issuers, and at the heart of most lawsuits and regulatory actions, is when a client’s expectations are not met. ”

Playing with Fire Continued

22

“How can you tell you are speaking with a skilled broker?” my former mentor, a wealth management

executive and brilliant woman, asked with a gleam in her eye. I stated I did not know. “Simple,” she said, “they have an exit strategy for the investments.” She went on to elaborate that choosing investments was the easier part, knowing when to exit the particular stock or portfolio strategy was a lot trickier. This conversation early in my career had a deep impact on me, as evidenced in that I remember it in detail many years later. When speaking about a client’s portfolio, an advisor needs to include a discussion about exit strategies and portfolio growth expectations. Doing so inevitably reduces the emotion of the client in portfolio management decisions.

In the public markets, there is a robust secondary market for most stocks as exchanges are structured to enhance liquidity. Even in the mutual fund world where fees and products are structured to be invested in passively on the retail level, the portfolio manager needs to be cognizant of an exit strategy with the assets. The ‘buy and hold’ mentality on the retail level may be why there is very little overt focus put on exit strategies in the public investment world.

Which Way to the Exit? The Importance of a Well Structured Exit Strategy in Private Placements

“A great exit plan should be explicit enough to keep management focus on the business and planned exit, but flexible enough to withstand external environmental roadblocks. “

Exit Strategies in the Private Market

In the exempt market, this conversation is even more important, but it happens much earlier in the process. Issuers need to be cognisant of exit strategies when they are building an investment product, as the exempt market has a very limited secondary market and product redeem-ability can also be limited. Also, a properly structured exit strategy will make the private placement more attractive for exempt market dealers (EMDs), and thus get it in the hands of investors, as they sift through the multitude of offerings that come across their desk. If an issuer wants to be placed on an EMD’s shelf, competition is fierce and the issuer needs to have more than a viable business plan.

This is not to say that an issuer should pander to investor fancy. If the sweet spot for investors is a three year timeline, it should not be structured that way unless it makes sense for the business plan. If the timeline would be better suited at six years, then the security issuance should be structured as such. This is all in the under-promise over-deliver mentality, it is better to have a structure that is a little out of favour with the investor early on than have investors panicked down the road

23

By Cora Pettipas

“A great exit plan should be explicit enough to keep management focus on the business and planned exit, but flexible enough to withstand external environmental roadblocks. “

when their money is tied up and their advisor is foretelling that they could have their money delayed or even worse, lose their entire investment.

An exit strategy is how the issuer plans liquidation or divest-ment of the underlying asset. The exit, or sometimes called harvesting strategy, is the third and final stage of the main business stages of a private issuance, after the product in and development stages. The exit phase should be explicit in the business plan as well as the offering memorandum. The exit strategy will either be in stages, or alternatively, where the investors exit all at once. This stage is very im-portant to the dealing representatives, and their clients, as this strategy directs the timeline and potential returns on the investment, which needs to be matched with the client’s know your client (KYC) parameters.

Studies by David Newton (entrepreneur.com) have shown that the majority of all formal business plans by entrepre-neurs name ‘going public’ as their exit strategy. Even though the finance world literature focuses on the remote possi-bility of going public as the most prominent strategy for a growing venture into a ‘legitimate’ business, there are other successful methods of achieving an exit. Other exit strate-gies for an issuer are the acquisition, the ‘earn out,’ the debt equity exchange, and the merger. The acquisition is when another business takes over the issuer’s venture. The ‘earn out’ is when the issuer is making significant cash flows from operations and buys out the investors. The debt equity ex-

change is where debt holder investors are offered equity shares in the business and investors become profit partici-pants through dividends. The fourth strategy is the merger, where two companies with significant synergies merge into one and become one business unit. The key for exempt mar-ket issuers is to structure the exit as an arm’s length transac-tion to a third party, to protect investor interests.

Exit strategies are a vital component of a private offering; so important in fact, that popular industry opinion holds that the majority of issues currently facing the industry have to do away with inappropriate or undefined exit strategies. In the past, some issuers were so focused on getting the capi-tal into the company that the execution of the business plan was secondary; let alone planning properly for the exit of the project. Therefore, inappropriate terms and conditions were agreed to (or offered) by the issuer simply to appease the public’s sentiment on appropriate terms for their funds. The result of this planning method are now becoming ap-parent, as many short term offerings have simply run out of time to execute their initial business plan. This is not to say that the original business plan was flawed, but simply that their timing did not prove accurate.

What Are the EMDs Looking for in an Exit Strategy?

In our current exempt market environment, EMDs can cherry pick the very best offerings for their product shelves. What does an EMD look for in an issuer exit strategy? The main points that were highlighted by industry experts: back up plans, low conflict of interest, investor recourse, and explic-it, realistic goals of investor compensation. “When we look at a prospective offering that we may consider represent-ing to the marketplace, we first look for a sound business plan and model that ideally offers a number of potential exit strategies. An issuer who contemplates a number of poten-tial strategies is far more likely to be prepared to changing market conditions over the course of the investment term,” explained Rick Unrau, President and CEO of Pinnacle Wealth Brokers, one of the largest EMDs in Canada.

Darvin Zurfluh, founder and Executive Chairman of Pinnacle adds, “At Pinnacle we want a well-defined timeline, with ex-perienced managers that have done the model before. An exit that has no conflict of interest. Many issuers in the past >

24

“It is critical that the issuer not overcommit on timing nor set expectations with subscribers that cannot be met.” - Rick Unrau

have offered to buy out the project on exit (or sell it to a relat-ed company) but this leaves too many conflicts on the table. We like to see one to two back up plans as we all know that things don’t always go according to plan. Investors should get to vote on any exit that was different than the original plan. If the issuer doesn’t follow through on their exit plan, an EMD would like to have some recourse. This could mean giving up some of their equity or reducing their man-agement fee.” The issuers exit strategy is an important risk attribute and is factored into the due diligence the EMDs use to assess an offering: it includes taxable nature of in-come and timelines of funds returned to investors.

What are Common Exit Strategies?

In the Canadian exempt market, there are various exit strat-egies issuers use, especially with the varying business plans and strategies in play. The common strategies used vary de-pending on the growth stage of the investment, sector and type of offering. “It really depends on the type of investment, whether it is a company that is operational and growth-ori-ented, a development or business model with a finite life cy-cle, or an income investment. Operational/growth oriented companies will likely exit by being acquired by a larger com-pany or in fewer cases going public. A development project generally has a term in which the capital is deployed and then returned, or sometimes the project will be purchased by a larger entity. For income oriented investments, we have generally noticed a preference to having a redemption fea-ture in which the fund will return the capital to the investor, either through cash flow, new investment or by selling as-sets,” adds Kyle Jacober, one of the founders, and Vice presi-dent of Sales, at Raintree Financial Solutions, another prom-inent Canadian EMD.

What are Some Best Practises for an Exit strategy?

An issuer is ultimately looking for investors to provide the funds to establish and grow their business idea. Competi-tion is fierce for investment dollars, so issuers need to be

cognizant of what EMDs are looking for in an exit strategy when building their business plan and drafting their OM, to ensure best practises. “Everyone involved must identify that even though a particular date on the calendar may be a great guideline for liquidating, a particular point in the business plan is really the target that everyone aspires to,” explains Cur-

tis Potyondi, President of Prestige Capital Inc., “Therefore, a proper exit plan should look for a business plan that is exe-

cutable and defining points whereby take-out events can oc-cur. This builds in a common objective for participants while holding management accountable for reaching milestones.”

The exempt market could benefit from best practises for struc-turing an exit strategy for their business and have it explicitly stated in offering memorandum clauses. However, there is an innate conflict between the exact defined timelines the EMDs and DRs would like to see, and the real world circumstance that market results cannot always be timed and predicted even with the most astute planning. The recommendation from Potyondi is key; to add or integrate business milestones, not just pure timelines into the planning of the exit.

Planning ahead is very important, as is finding a balance of utilizing the proactive strategic planning of the business plan with reactive changes due to economic and external circum-stances. To complement this planning, a management that adheres to strong preparation of documentation and report-ing standards can be invaluable in a successful exit. “Best prac-tices would dictate that an issuer very clearly define their proj-ect lifecycle and multiple exit strategies. It is critical that the issuer not overcommit on timing nor set expectations with subscribers that cannot be met,” suggests Rick Unrau. In the exempt market, issuers should be cognizant of what the market desires to see in an exit strategy. DRs and EMDs are most privy to that information as they are closest to the investor. Adhering to best practises outlined in this paper, and avoiding policies that bury investor interests are highly recommended to create a product that EMDs want on their shelf, as well as an outcome that will have investors wanting to reinvest in future projects. A great exit plan should be ex-plicit enough to keep management focus on the business and

Which Way to Exit Continued

25

Cora Pettipas, M.Sc, FCSI, CFP, CIM, is currently the Vice President of Member Services, at WEMA. Prior to this, Cora was a Professor at Mount Royal University and has had ten-ures 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, inter-nationally.

planned exit, but flexible enough to withstand external envi-ronmental roadblocks. The structure of the security and the timelines provided should be based on projected business milestones, not just investor preference. The OM should set up a compensation model that limits agency risk as much as possible; with a realistic compensation model that pays the investor first and is set up to also protect them first. This way, investors know the direction of the business and the way to the exit.

Which Way to Exit Continued

26

MORTGAGES

CAPITAL PRESERVATION, WEALTH CREATION, INVESTOR CORPORATE ALIGNMENT

Urbanstar 1 MIC - Mortgage InvestmentsIntroducing UrbanStarLocated at the head office in Calgary, Alberta, UrbanStar is a specialized firm that designs, implements and operates real estate asset management solutions for investors. The portfolio strategy of its real estate offerings is firmly focused on investing in selected regional cities in the thriving markets of Western Canada. UrbanStar has the ability to offer an array of real estate services including real estate and mortgage brokerage services. UrbanStar uses its expertise to provide investors with quality land investment opportunities and currently manages over 600 acres of land along highway 1a between Calgary and Cochrane, Alberta. We make this land available to qualified investors through land-based real estate investment products.

The Principles and ManagementUrbanStar believes that the determining factors behind the success of any organization are the individuals involved in the day-to-day operations of that company. Experience and excellence in the field of traditional and alternative real estate investments are maximized with a team that includes:

Dean Gorenc BA, CHRP, AMP | CEO & President. Mr. Gorenc has worked in the Land Banking and Private Lending industry since 2004. His experience includes raising capital for various real estate offerings including syndicated mortgages, mortgage investment corporations, raw land and land development offerings.

Peter Fournier | Vice-President Business Development. Mr. Fournier has worked in the Private Lending Industry for 15 years. His experience includes fundraising, product development, land banking, mortgage investment corporations, syndicated mortgages, dealing with investors and equity capital providers at an executive and board level.

Ashif Merani | Corporate Secretary-Barrister & Solicitor. Founder and partner of Merani Reimer LLP, which specializes in Securities and Corporate law.

Our AdvisorsUrbanStar has assembled a distinguished advisory board that includes:

Fred Edwards | President / CEO of Servpro Cleaning (Calgary) Inc. & Servpro Canada Inc., a privately held corporation. Servpro has 44 years in the Calgary Cleaning industry and is composed of a team of over 900 employees. In 2008 Mr. Edwards was honoured with a "Leader of Tomorrow" Award presented by Business Calgary Magazine.

Miklos Nagy CFA, CFP | President, Director, CEO & CIO of Quadrexx Asset Management Inc. Mr. Nagy is Past Chair of CIFPs (Canadian Institute of Financial Planners Association), a member of CFA Institute and sits on the Exempt Market Dealer Board of Canada.

Marie Rajic BA, MA, MPA. Ms. Rajic was former, senior political staffer in Alberta for Prime Minister Stephen Harper's government as the Executive Director Regional Affairs, and was one of Calgary Top 40 under 40 in 2008.

Lee Thiessen MBA | Principle Partner at MNP. Prior to joining MNP, Mr. Thiessen was an Executive Vice President at Altus Group - a public company listed on the TSX that provides real estate consulting, professional advisory and technical services in the global marketplace.

Guy M. Priddle MBA, RPA, CAE. Former President of BOMA Mr. Priddle has been involved in the commercial real estate industry since 1986 and has worked with all types and classes of property including bare land and small retail, residential, large and small industrial, and major downtown class AA office buildings.

UrbanStar 1 MIC Approved by Quadrexx As An Exempt Market Product

UrbanStar 1 MIC would like to announce that our current offering has been approved and will be managed by Quadrexx an Exempt Market Dealer for distribution by their Exempt Market Product Agents.

Quadrexx – established in 2003 – is an EMD and a Portfolio Manager (in all the Western Provinces, Ontario and New Brunswick) that offers investment products and services expanding beyond what is offered by most EMDs. Quadrexx has offices in Toronto and Calgary and is a true national firm with an expanding asset and agent base. Quadrexx offers a variety of Exempt Market products to eligible and accredited investors in the area of alternative investments that is specifically tailored to the retail investor, providing lower correlation to traditional asset classes and not typically available to retail investors.

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UrbanStar 1 MIC8-11% Targeted Yield

Urbanstar 1 Mortgage Corporation offers mortgage investment opportunities on commercial, industrial and residential real estate through its Mortgage Investment Corporations (MICs). The MICs should be of interest to investors seeking an income producing investment with the following features.

Mortgage Investment Corporation (MIC)Highlights:

• Maximum 75% loan to value mortgages • Minimum initial investment amount of $10,000. • MIC mortgages secured by real property • Quarterly Payments and targeted yields of 8-11%. • RRSP, RRIF, RESP and TFSA eligible • Highly experienced management at all levels. • Regularly scheduled closings.

Mortgage Investment Corporations (MIC) UrbanStar 1 MIC offers investment opportunities in Mortgage Investment Corporations. UrbanStar will source or offer mortgage investment corporations that meet our strict due diligence process for vetting alternative investments to our investors.

Mortgage Investment Corporations are companies organized for investors to invest in pools of mortgages. Those funds, in turn are used to provide mortgage loans to select real estate borrowers.

Profits generated by MICs are distributed to its shareholders according to their proportional interest.The investor in a MIC earns a blended rate of return based on the interest earned from each respective mortgage. The pool is continuously managed with new mortgages replacing mortgages that mature. A MIC provides a convenient way to diversify a portfolio of investments; funds invested in a MIC are secured by real property.

A MIC is ideal for those investors who want a rewarding yet effortless investment and who do not have the time or interest in assuming the administrative responsibilities attached to running a mortgage portfolio. Investments in a MIC are RRSP, RRIF, RESP, LIRA and TFSA eligible.

1043 19 AV SE , Calgary, AB T2G 1M1

www.UrbanStarCapital.com

invest@UrbanStarCapital.com403-984-4050403-984-4060

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Mortgage Investment Corporations are uniquely Canadian, defined in Section 130.1 of the Income Tax Act. They are tax-free flow-through investments

designed to allow people to invest in the Canadian private mortgage market.

UrbanStar Mortgages - Loan OriginatorsUrbanStar Mortgages has developed strategic alliances with several experienced mortgage loan originators who have been sourcing, vetting and underwriting commercial mortga- ges. Many of these mortgage originators provide loans to developers and builders on a short-term basis when conv- entional lenders will not. These relationships will provide for an added layer of underwriting that ensures the MIC is only lending on appropriate, risk adjusted opportunities.

Typical mortgage investments include:

• Land acquisition • Land servicing • Low rise multifamily residential construction • Income producing property acquisition and redevelopment

How a MIC Works

Learn more about investing with UrbanStar and its current offerings by visiting www.UrbanStarCapital.com.

This advertisement does not constitute a solicitation or an offer to purchase the securities referred to herein, which is being made to qualified investors under an Offering Memorandum available from our office. There are risks associated with an investment in mortgages and our investments are not guaranteed, the projected results will depend, among other things, on economic factors and market trends.

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DEATH OF A SALESMANthe role of the dealing representative in the modern era of the exempt market

It has been 2 two years since National Instrument 31-103 was put into full effect, and

we have a problem ladies and gentlemen, a big one.

Very few of us, who are fully licensed and registered to do business in the exempt market understand what our roles actually are. There are a number of reasons for this, and not all of them have to do with ignorance, but rather the fact that most of the industry comes from a place where their previous roles were different. A good majority of those who are licensed come from a background marketing and distributing

mutual funds, stocks, life insurance and/or real estate where their obligations to their clients and prospects is different than what

one may perceive their role to be in the exempt

market. They come from a world where there is little to

no transparency, and where we were spoon fed information through prospectuses and

large group meetings. Indeed these are fantastic means

in which to indulge in the collection of information,

and quite frankly, not a lot more information is needed

to market a balanced fund to an investor. We are no longer

in the business of handing out ‘set it and forget it’ style mutual

funds, we are in the business of raising capital for privately funded and owned business deals that have a lot of moving parts. Deals that are not all created equal, but all fall under one category, they are

exempt, exempt from passing on the easily digestible information found in the prospectus. In one man’s opinion, simply put, the role of the Dealing Rep. is to live up to a higher standard, be an advisor, one who has a fiduciary duty to provide the best solutions possible for a clients wants and wishes. As an advisor, your role is three fold:

1 Protect your clients capital

2Make your clients money

3 Educate yourself, then the client

There are over 700 different projects raising capital on a prospectus exempt basis in this country at the moment, many of which have the potential to make money, and perform the specific tasks outlined in the Offering Memorandum. Some will not work out for a variety of reasons, the main reason being underfunding.

In order to protect your clients capital, in the exempt universe, you must go above and beyond to ensure you know every detail of any particular investments strategy to meet its advertised returns. Hopefully you are already, or are planning on joining a well respected Exempt Market Dealer (EMD) that has a rigorous due diligence process that leaves no stone unturned in the endeavor to provide you and your investors with the best possible investments in which to indulge. However, there is no reason not to do your own due diligence too.

By Darris Cameron

Death of a Salesman

29

The first step; read the OM, read it over, and over. You will not understand a por-tion of it, and that is ok, because the people who vetted, and produced the document should know its nooks and crannies, and should be able to answer any lingering questions you may have. It is imperative that you know your prod-uct. Knowing your product does not stop at the OM, it never stops, especial-ly in an open-ended investment such as a MIC or REIT. The managers of these funds are generally happy to share with you their future plans, in detail, if you ask them, so ask them. Get to know the peo-ple you are dealing with. The people who are asking you to help fund their project should be people you can trust, whom with which you can build a relationship with over a period of time. The good ones will never leave a door closed to you, the best will ask you to come see what’s behind the door before you have a chance to ask. You will want to ‘kick the tires’ so to speak. An Offering Memoran-dum may contain all the numbers and explanation to get the gist across to you, but have you seen the project in action? Have you talked to the managers about their widget and seen it move? Have you been to the dirt where the project will be built? Have you spoken to the scientists, and gotten their perspective? This extra step will ensure you that you KNOW ex-actly what you’re getting yourself (and your clients) into.

I myself, along with my father and partner have spent thousands of dollars of our own money flying from coast to coast to meet with the right people and see the deals for my own eyes; meet with

the ‘scientists’* and perform due diligence further to that which our EMD has provided. This process is not limited to Exempt Market Products, but also to all of our financial dealings.

With this level of education you will be able to inform your client base on all possible outcomes for the projects you wish them to be involved in. We can no longer just advertise that we can make our financiers a certain percentage, only to watch their capital disappear, along with their trust. With knowledge comes confidence, which you as an advisor can pass onto your clients. Once you have educated your client on the whole story, you can do a much better job

of protecting their capital, and in the event that the investment is successful, and you have made them money, you

will both be much more confident on a go forward basis.

It has not been stated yet that we as advisors have a duty to comply with the above; likely it never will be a requirement. Nevertheless, it would be my hope that if you are reading this, that you would heed the text held herein, because if you remember, there are 700+ exempt market products on the go right now, and even if they are all good ideas, managed by good people, not all of them will succeed.

To put everything into perspective, your client is asking you to find the ones that will work out, and make them money. If you cannot discern which projects will make any money, how do you expect to protect their capital? You will not. Therefore, as an advisor your only option is to educate yourself and advise based

on that information, whereas in the past a dealing rep will just sell whatever is put in front of them. A dealing rep was no better than the used car salesmen, just looking for their next target. An advisor takes the steps necessary to protect their investor, their career and their industry.

See the difference?

By Darris Cameron

Darris is an i n d e p e n d e nt life insurance, investment and exempt market advisor and a director on the board of WEMA

*The scientist being the people who have the ability to create a great idea based on their own data, but have no ability to market their idea.

“but we are no longer in the business of handing out ‘set it and forget it’ style mutual funds, we are in the business of raising capital for privately funded and owned business deals that have a lot of moving parts.”

Death of a Salesman Continued

30

THE GATEKEEPER[The Role of the Exempt Market Dealer]

By Adam Derges

On September 28th, 2009, new legislation took effect in order

to regulate the alternative investment industry – NI 31-103. These regulations basically stated that anyone who wants to sell private securities needs to sell them as a registrant of an Exempt Market Dealer (EMD). This legislation gave birth to the modern EMD in the Exempt market. The idea is simple, the EMD is tasked with finding Advisors who will register with their firm, find good investments to offer, and make sure that the investments are sold in a suitable and compliant fashion. The securities commission will oversee the EMD, and the EMD monitors the products, the advisors, and the transactions. Sounds simple, right?

In its most basic form, this setup is simple one. However, we are faced with some very interesting times in our current financial en-vironment. Let’s face it, the financial world is broken. In my opinion, the financial world is broken for two very simple reasons:

1Most investments are sold under a cloud of conflict. More often than not, when

an investment is offered to an investor, the person selling the investment is incented or encouraged to sell their firm’s in house product. They are not offering that product because it is best for the client; they are selling it because that is what is best for the firm they work for.

2Most investments lack alignment. In many cases, the people pulling the

strings on the companies you invest in are heavily compensated regardless of whether or not they provide their investors a return. It is very typical to see investments in the traditional markets where an investor is paid last and hurt first.

If you take these two fundamental flaws and apply them to the traditional markets, the investor will likely see sub-par returns. However, the public markets are equipped with safeguards and regulations that should ensure that investors are not hurt too badly. In other words, investors might not make any money, but they probably aren’t going to lose everything they invest. If you take these flaws and apply them to the Exempt Market world, you are more likely to see a result with extreme consequences. When something goes wrong in the Exempt Market, it can result in a complete loss of capital.

Unfortunately, the investments that have resulted in a complete loss of capital have received a lot of press lately. Most of these bad investments were sold prior to the regulatory changes in September of 2010; however, they are still making headlines today. It is a sad reality for our industry. Only the bad investments get publicly noticed. ‘Client Receives 10% Return’ is not exactly front-page material!

what can the emds do to change this?This newly regulated industry is truly evolving. There are a few large EMD’s who are tasked with setting the standard for our industry. In our view, the role of the EMD is not only a regulatory

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The Gatekeeper

compliance role; it is a role in which we have set out to do what is in the best interest of the investor. We, as EMD’s have an opportunity to raise the bar. The height at which this bar is set will have a long and significant impact on the financial industry. It will influence whether or not private securities are a viable and legitimate place for Canadians to invest their money, or if it will remain a haven for fraud, misalignment and conflict.

It is our job, as EMD’s to ensure that sub-standard offerings are not able to get distribu-tion from the reputable dealers. Our firm has reviewed over 250 invest-ments. We have found that most of the offerings are based on a sound busi-ness idea, however these deals are ‘won and lost’ in their structure. Many deals have mechanisms built in that are de-signed to protect the issuer in times of turbulence. Often times, these mech-anisms come at the expense of the in-vestor. When determining whether or not a deal is sound, the EMD must look at the deal now and at each stage in the future.

It is also our job to ensure that we only support top quality offerings by providing distribution. Assessing product issuers is a humongous undertaking. In order to do this, the EMD’s need to invest an incredible amount of time and capital in their up front, and continuing product due diligence. The EMD needs to communicate their standards clearly to the product issuers and make it crystal clear that these standards are non-negotiable.

The good news is, the bar has been raised and things are getting better. This is certainly very encouraging. If an EMD is operating in a responsible and ethical manner, the risk- balanced returns for the clients can be very strong. There is a borderline epidemic of baby-boomers who are now retiring with far less money than they thought they would. Most have made very little on their investments in the past 10 years and

now are faced with a decision to either work longer or retire with less. Alternative investments are

capable of providing enhanced risk-adjusted ROR, superior to those in the traditional markets. This can have a very positive effect on people who are trying to retire.

As industry continues to trend in the right direction, the exempt market can change the lives of Canadians for the better. In order for this to happen, the EMD’s need to set and maintain the highest possible standards requiring: discipline, transparency and competence. If we as an industry can raise the bar high enough, we have a legitimate chance at improving the way people invest their money. By setting the standard we will carry our industry forward for many years to come.

Adam Derges is the VP of Business Development and one of the original founders of Raintree Financial Solutions. Raintree has emerged as one of the leaders in the exempt market space. They have over 100 licensed dealing reps and are registered from Ontario to British Columbia (and everywhere in between). Since becoming a registered Exempt Market Dealer in September of 2010, Raintree has reviewed over 240 exempt market offerings. They have raised over $175,000,000 in that time.

“Alternative investments are capable of providing enhanced risk-adjusted ROR, superior to those in the traditional markets. ”

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The Gatekeeper Continued

Building an Exempt Market Investment[The Role of the Issuer]

On September 28, 2010, the Canadian Securities Administrators (CSA) formalized the application of Exempt Market Legislation and oversight through the use of National Instrument 31-103. Through this legislation, the Provincial Governments, working through their respective Securities Commissions, would more throughly monitor the sale of Investment Products in Canada that were Exempt from Prospectus.

The sales process of these investment products can be viewed as a chain of events or functions which must be adhered to before the product can be purchased, or invested into by the in-vestor. The issuer begins this process by creating the investment opportu-nity to be eventually represented to the investor. Once the steps involved in creating the opportunity package have been completed, the product is then presented to Exempt Market dealers for possible distribution. The dealers are ultimately responsible to the commission for sufficient due diligence of the investment product. Once the Due Dili-gence has been completed and the product approved for sale, it is then made available to the Exempt Market Representative, registered

with that specific dealer, for sale to investors.

The first steps in bringing an investment product to market are executed by the issuer. Within this lead position there are six steps that the issuer will normally execute, however, these steps are part of an overall process and not formalized by NI 31-103, or scrutinized by a Commission.

Step 1: The Product ‘In Development - Exit’ is plannedIn this very first product planning phase, the issuer will strategically develop an investment opportunity. This will include the ‘In’ phase which determines when, where and how an investor will have the opportunity to ‘get into’ the investment. Typically this phase can last several years and will be finalized through the full financial materialization of the Offering Memorandum’. The development of the investment opportunity can vary greatly depending on several factors including: vertical market application, window of opportunity, and macro development plans of partnerships or other organizations not

associated to the issuer or its partners, such as city development plans, for example. The final phase is

commonly referred to as ‘the exit,’ or the period of time when all investors exit the opportunity. This phase can happen all at

once (a building is sold) or over several

years (parcels of land are sold to home builders). With this

strategic plan intact, the issuer then proceeds to step two.

Step 2: The Analytics / Partnerships / Strategy PhaseWith step one completed, the issuer now enters into a phase of overlaying the analytics, the financial model, and the required associations or partnerships and their associated and integrated financial models and the overall execution strategy of the investment. This is where the foundation of all the required steps and analysis are laid down and agreed to by the issuer and their partners.

Step 3: The Offering Memorandum (OM) is written and vetted This phase is the technical writing of the OM which provides disclosure of the investment. The OM is the most important document in the process, and reflects all the parts of the investment which the investor needs to be made aware. This would include the overall strategy, the partnerships included to execute the strategy, the financials of the corporations involved and the financial expectations of the investment to the Issuer, its partners and the investor. OMs are typically

“The governing document, the Offering Memorandum, represents the entire business plan of the investment opportunity and is the document by which everyone, from the issuer to the investor, will be held accountable. ”

By David Todd

The Role of the Issuer

33

large documents which resemble a full corporate business plan. Holding the position as the main document of the investment, the OM will be finalized with law firms, analyzed by distributers, studied by representatives and mandatorily presented to the investor.

Typically as well, the law firm will have expertise in the exempt vertical market and understand the implication of its document structure, wordings, and overall disclosures of the investment, to the commission, the dealership and the investor.

Step 4: The OM is filed with the Provincial Securities Commission(s)This step firstly involves a strategic deci-sion on the part of the issuer concerning which provinces of Canada the OM will potentially be represented in the distri-bution for resale to the investor. Exempt Market legislation is provincially reg-ulated and differences exist between provinces. Therefore, depending on the location of the issuer and the invest-ment opportunity, varying strategic decisions may be made. For example, a land developer based out of Saskatoon, may choose to have the OM only repre-sented in that province. Typically, OMs are frequently filed with securities com-missions in Canada’s western provinces due to favorable investor eligibility rules and the relative wealth of the popula-tion, and their corresponding ability to invest. Also, an issuer may wish, for stra-tegic reasons, to offer the sale of their investment product in Quebec. Under the definitions of the ‘Eligible Investor’ for Quebec, the OM and associated pro-cessing paper work must be in French. If the OM and associated documents is not in French, the product may still be invested into by Quebec residents

providing that they are able to invest under other exemptions known as Accred-ited Investor or Friends and Fam-ily, and that they sign a document stating that they understand that all written representation will be in English.

Step 5: The OM is presented to the EMDOnce the OM has been written, vetted through law firms, and filed with provincial securities commissions, the issuer must then present the OM to distributors for possible placement on the distributors shelf as ‘one of’ the products for sale. During this process, the entire OM will be reanalyzed by the distributor and often a third party analyst who will rate the investment on a variety of levels. Assuming all of these processes have been executed and completed, the issuer will then enter into the formal sales phase. During this phase the issuer will typically train the representatives on the key points of the investment and will support the representatives’ ongoing sales efforts through product presentations and the provision of a deeper level of understanding, for the investor, as required.

Step 6: The OM presented to investorsSpecifically, under provincial securities com-mission’s legislation in Canada, the OM must be presented to the investor and the inves-tor must sign off that they have received the OM from the dealing representative. This exact step does not involve the issuer and is the responsibility of the distributer and their representatives. However, once complete, the representatives will present all appropri-ate paperwork to the issuer for processing and filing. The issuer will then accept the investment dollars into its organization and

begin the process of financially ‘consum-ing’ the OM and deploying the invest-ment dollars to accomplish its strategic goals as it now moves forward

through the deployment phase towards the exit.

Therefore, ‘The Role of the Issuer’ within the Canadian Exempt Market is a key role in bringing investment opportunities to market. It is the responsibility of the issuer to ensure that all of the above steps are completed in sequence and that the details within each step are executed completely. The governing document, the Offering Memorandum, represents the entire business plan of the investment opportunity and is the document by which everyone, from the issuer to the investor, will be held accountable. Within Canada other exemptions exist which does not require all of the above steps and processes, however, the Offering Memorandum Exemption for the Eligible Investor, as provincially regulated, reflects the vast majority of interactions within the retail Exempt Market.

Prior to entering the exempt market, David was a Vice President of Sales and Business Development both in the Telecommunications and the Electronic Manufacturing Industries. In these capacities David has worked in Canada, South Korea and Texas and has managed sales teams on a global basis. Within the Exempt Market David has been the Vice President of Sales for the largest Financial Education Club in Canada and managed an Exempt Market Dealership based out of Calgary. He is currently the Director of Sales with Omniarch Capital who’s Bond Fixed Income Product is renown as the fastest growing investment product in the Exempt Market.

“Typically, OMs are frequently filed with securities commissions in Canada’s western provinces due to favorable investor eligibility rules and the relative wealth of the population, and their corresponding ability to invest. ”

The Role of the Issuer Continued

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Bricks & MortarWhat Are the Options Available to Investors in the Real Estate Asset Class?

By Josh Will

Within the Canadian real estate investment space, there is an array

of great products that individual investors have the opportunity to invest in, aside from owning rental properties directly. What other options are out there for you to offer your clients? MICS, REITS and Syndicate Mortgages are all terms that are not likely foreign to anyone reading this magazine. But do we truly understand the differences between each investment structure? We know that they are all real estate investments, and that they all seem to have great terms, returns, assets and managers. But what separates these types of investments from each other? Let’s look at the way these products are structured to determine what the differences are between them, the merits and risks involved in each and ultimately which ones are better for your clients, because we all know that certain investments work for some client, but not for others.

Mortgage Investment Corporation (MICs)

While attempting to position real estate investment, have you ever heard a client say: ‘I already invest in real estate, I just purchased a MIC.’ Did they directly invest in real estate? Or did they invest in more stocks? So how does a MIC work exactly? Does the client truly understand what is generating those returns? MICs have been around since 1973

when federal legislation was enacted to promote private financing and make it easier to invest in mortgages. A MIC is an investment company that is designed specifically for mortgage lending to (generally residential) developers or individual borrowers that cannot access a traditional mortgage. This investment structure allows investors to pool their funds together in the MIC. The managers of the MIC then loan the pooled funds out to people or companies that cannot access a traditional mortgage.

What is important to note is that MICs will have a focus on which asset class they are investing in. Some MICs focus only on residential and commercial development, whereas others focus solely on lending to individual borrowers that cannot access a traditional mortgage. The types of properties involved could include apartments, condo developments, malls, and other commercial buildings. Each MIC could include mortgages on a vast number of properties, thus providing further diversification within that MIC’s portfolio. When the money is lent out to the borrower (i.e. the developer, or individual) the terms of the lending contract are highly defined, much like all mortgage contracts. The interest payments that are made on

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Bricks & Mortar

that mortgage are then distributed to the investor and that is how the cash flow or income from the MIC is generated. Much like REITs, MICs are offered for investment via two distinct markets: the public market and the private market. When a company offers it’s security for sale in the public markets, this is often considered a positive due to the fact that (among other merits) there is liquidity for the investor.

MICs are typically managed by the best in class asset managers available. Asset Managers on a MIC fund should have a significant amount of insight on the properties and individuals they are lending to, and the due diligence process involved when selecting their borrowers is often very stringent. When an investor makes an investment into a MIC, they are ultimately investing into the knowledge and expertise of the fund’s manager. The investor is banking on the manager to find quality properties and quality developers to invest in and generate a solid consistent return for them.

Now this all sounds great so far right? What are some of the draw backs that investors could experience when investing into a MIC? What if the individual investor wants to participate only in certain properties? What if the client wants some decision making ability in which properties they want to invest in? Unfortunately in this structure, the manager of the MIC selects the properties on their behalf, whereas in syndicate mortgages, investors have the ability to invest into a desired project. This can be considered a strength or weakness of a MIC, depending on how you look at it and who the manager is. One of the main focuses of a MIC is to lend privately,

thus not using conventional metrics to lend funds. Developers or individuals who cannot access bank mortgages often apply for higher rate mortgages via a 3rd party lender or a MIC. This is how the MICs are able to either provide substantial returns (by getting more interest for their loan) or experience higher default rates because they lend to parties that may not always be able to service the mortgage debt. This creates volatility within the MIC. Again, it is all about risk versus reward.

Real Estate Investment Trusts (REITs)

REITS are another form of real estate investing, or are they? Let’s take a closer look. As you may or may not know, REITs are companies that own and typically operate income producing real estate properties such as: commercial real estate, hotels, hospitals, apartment buildings, warehouses and shopping centres. REITs can either be private or public companies. Private REIT companies are similar in nature to public companies. However, they typically either lack liquidity or have provisions surrounding liquidity for the investor. Both public and private REIT companies benefit from low volatility of the underlying asset, real estate. Public REIT companies offer stock for sale to investors in the public stock market. This means that the only way for your clients to purchase these types of investments is to purchase them through an adviser that trades stocks in the public market (or use a discount brokerage). As most REITs are publically traded, this is often considered one of their positive attributes, the convenience factor. It gives the investor liquidity and the ability to ‘get out’ of the investment if they decided that they no longer wish to participate.

Investing in a REIT is much like investing in the equity market, where you purchase shares in a company. However in this case, >

36

Bricks & Mortar Continued

Corporate Finance & Regulatory Services (Emerging Markets) Team

Daniel R. Horner Partner

403.231.8250 d.horner@scottventuro.com

Sarah N. Stevens Associate

403.231.8248 s.stevens@scottventuro.com

Jeffrey A. Coape-Arnold Associate

403.231.8256 j.coapearnold@scottventuro.com

Eau Claire Market, 203, 200 Barclay Parade SW, Calgary, AB T2P 4R5

the driver of returns is the leasing or sale of real estate assets held by the REIT. In the equity market, investors profit from increased corporate revenues, but both are still subject to the emotional market volatility. Finally the disclosure that is available for the clients is very rigorous. Since this is a publicly traded company, there are accounting and financial disclosure rules that the REIT must follow. The client is able to see exactly how much money the REIT has made, lost, as well as all of the operating costs and fees associated with their investment. This is something that most private companies are trending towards as well. The power of full disclosure is crucial to building trust with your client. If you have a client that says they are invested in real estate, make sure that they understand that in the above cases they are actually invested in companies that invest in real estate, they themselves are not directly invested into real estate.

Syndicate Mortgages

In a Syndicate Mortgage, clients can invest into real estate by providing direct debt financing on an asset, and the only way for investors to access this type of investment is through a registered dealing representative in the exempt market. A syndicate mortgage investment structure is a rather simple one. Just like a traditional mortgage, where you put down a certain amount of collateral like 20% and the bank lends you the remaining amount to acquire your home. A syndicate mortgage moves and acts very much the same way. In a syndicate mortgage, investors

become the lender to a developer to build their desired project. It could be a high rise condo, low rise single family development or a commercial complex.

There are several unique features that a syndicate mortgage possesses. First, a syndicate mortgage allows investors to select which projects they wish to invest in (one of the key differences between

MICs and Syndicate Mortgages). If the investor feels more comfortable with commercial properties over residential properties, then the client has the ability to select this. Another unique feature of Syndicate Mortgages is that it provides the individual investor with direct security by having their name registered on title as a charge holder against the property. This feature gives the investor security to their investment. Syndicate mortgages allow for the same fall-back scenario if a debtor neglects to service the debt.

A number of risks are associated with syndicate mortgages, the first of which is common amongst other real estate investment types: liquidity. Since you are the lender in a mortgage, you have a contract between yourself and the borrower. Typically the borrower will agree to pay you a steady interest rate and repay the full amount of the loan borrowed on a specific date. There are other risks associated with these types of development investments. What if the project runs out of funds and cannot service the debt load? What if

“Another unique feature of Syndicate Mortgages is that it provides the individual investor with direct security by having their name registered on title as a charge holder against the property. ”

Bricks & Mortar Continued

37

the project does not get its required permits or zoning? What if the end result of the built project does not meet expectations financially? This is where you can act on your legal right as a charge holder against the land. If the borrower does not meet the terms agreed upon in the mortgage contract you can force them into foreclosure and sell the property to recover your capital. This is where the loan to value (LTV) ratio is critical. You have to make sure that there is enough equity provided by the developer so that if you were to push them into foreclosure there is enough room there to recoup your capital. Regaining full capital is not always the case; however having your name registered on title gives you security by providing you with ownership at the end of the day if the project doesn’t go as planned. When looking at investing into a syndicate mortgage, there are a few things that you will want to look for in the investment:

Who is the builder/developer that is acting as the borrower? (This is who you are ultimately investing in).

What is the borrower’s track record like? Have they experienced defaults?

Diversity. Do they operate in multiple markets? (i.e. city, regions)

Do they offer a product mix? (Commercial, residential, low rise, high rise etc.)

When you have a client that wants to invest in real estate, make sure that you understand the differences between the many options available in the market place. And of course, if you have an investor that wants to invest directly into real estate financing, be sure to introduce them to Syndicate Mortgages.

Quality of client and advisor support. Do they provide you with the tools you need to make an informed decision?

As the Senior Vice President of Marketing and Communications with Fortress Real Developments Josh is spearheading growth and new investment product design. Both mortgage and securities licensed, Josh handles many of the public speaking engagements on behalf of the Fortress executive team. He communicates regularly with the media, clients, development partners and advisors and was most recently quoted heavily in Mortgage Broker news in a feature about syndicate mortgages.

Bricks & Mortar Continued

38

Securities legislation currently requires exempt issuers to

include audited financial statements, prepared in accordance with International Financial Reporting Standards (IFRS), with their initial and ongoing offering memorandum (OM). Although there may be very little or no financial activity in the initial stages of operations, the requirement for an audit remains unchanged. Contrastingly, there is currently no securities regulation which requires an exempt issuer to provide ongoing financial reporting results subsequent to closing their OM even though significant financial transactions may continue to occur. Legislation within the Alberta, British Columbia, and Saskatchewan Business Corporations Acts provides the right to investors to dispense with the audit which is otherwise required annually. Within the Alberta, British Columbia, and Saskatchewan Partnership Acts, investors have the right to make inquiries into the books and records of the issuer. However, irrespective

of this legislation all too often issuers do not provide annual financial reporting as securities regulators are not requesting it nor is it required to be made publicly available on SEDAR.

initial or opening balance Sheet financial StatementS

Often a new issuer will include financial statements as at the date of the inception of the entity with its initial OM. In most cases a new issuer’s initial financial statements include an opening balance sheet which discloses the issuance of the initial share capital, the cash received for same and notes to the statements describing accounting policies.

Arguably, the information provided in the initial financial statements provides little, if any, value to a potential investor. However, having these statements audited may result in fees ranging from $5,000 to $10,000. In addition to monetary cost, there may also be costs associated with the delay of bringing the issuer to market because of the time it takes to perform audit procedures and issue the audit opinion. In cases where

the opening balance sheet provides a minimum amount of information (i.e. share capital and cash) the cost of having the information audited is inconsistent with the value provided to a potential investor.

It is understood that regulators require the initial audit in order to provide as-surance over and disclosure of the capi-tal structure, loans outstanding, contin-gent liabilities, material commitments and related party transactions. Howev-er, this information should be disclosed in the body of the OM itself. One poten-tial benefit of the initial audit would be to uncover undisclosed or concealed information related to these disclo-sures; however, auditing these areas relies fundamentally on the integrity of management. In cases where man-agement is intentionally obfuscating commitments or contingent liabilities, and not disclosing the same in its OM, it is unlikely that the audit would uncover the necessary information to complete the required disclosure.

In order to align audit costs and

the audit

By James Dahl

dilemmaare current regulationS meeting the needS of inveStorS?

39

benefits for both issuers and investors, it would be beneficial for the regulators to implement a financial threshold, such as a total asset test, which would differentiate the level of assurance required to be performed on the financial statements. The asset threshold test could relieve the issuer from providing financial statements and allow full disclosure within the body of the OM.

proviSion of financial information SubSequent to the cloSing of an offering memorandum

There is currently no requirement by the provincial securities commissions for the provision of audited statements to investors at such time as the issuer is no longer issuing securities under an OM. Once the entity ceases offering its securities to investors it effectively falls outside of the oversight of securities regulators. Currently there appears to be a wide spectrum of post OM finan-cial disclosure provided to investors ranging from the continued provision of audited statements to the provision of internally generated financial state-ments. Having said that, all too often, issuers, without the consent of their investors, stop providing continuous financial disclosure of any form to their investors.

In practice, post OM disclosure is often the most important. It is at this point in the life cycle of an issuer that there is the greatest opportunity for mismanagement and misappropriation of the assets of the entity. Examples of this include the use of the resources

of the issuer for investments and expenses not contemplated in the OM, lending funds to other related issuers or the inappropriate removal of resources by management. It is important for investors to have confidence that the financial resources of the entity are being expended appropriately and within the guidelines described in the OM.

In practice, the currently regulated disclosure requirements do not appear to best meet an investor’s needs. It is counterintuitive that regulations require the audit of the initial financial statements, which arguably provide little, if any, useful information to investors, when investors would receive considerably more benefit from the assurance and disclosures that accompany audited financial statements issued subsequent to the closure of the OM. Audited financial statements should provide investors much needed insight into how their investment is performing. This information is fundamental for investors in the exempt market where stock performance and financial results are not readily available.

Each of the Alberta Business Corporations Act, British Columbia Business Corporations Act and Saskatchewan Business Corpo-rations Act require an annual unanimous shareholder resolution to dispense with the audit. Many issuers in the exempt market, including partnership and trusts, are not formed under a provincial business corpora-tions act. Other corporate issuers are mak-ing the decision to waive the audit without

meeting the requirement under the applicable business corporations act to acquire unanimous shareholder consent. However, it appears many in-vestors are unaware of this right. The quantity of issuers in the exempt mar-ket would make enforcement difficult, if not impossible.

The Alberta, British Columbia and Sas-katchewan Part-nership Acts do not contain pro-visions requiring the presentation of audited finan-cial statements to unit holders. They do, however, pro-vide a partner the right to inspect and take extracts from the partnership’s

books, and to demand full information of all things affecting the partnership. Where reasonable, the limited partner has the right to a formal account of the partnership’s affairs.

Issuers are required to disclose within the OM their reporting obligations, as required by corporate legislation or their organization documents. If no on-going reporting is required, this fact is to be disclosed to potential investors in bold print. It appears as the industry matures, several exempt market dealers are requiring the issuers they work with to provide annual disclosures to investors in the form of audited or reviewed financial statements. It should be considered best practice that continuous financial disclosure is provided in the absence of a >

“It is counterintuitive that regulations require the audit of the initial financial statements, which arguably provide little, if any, useful information to investors, when investors would receive considerably more benefit from the assurance and disclosures that accompany audited financial statements issued subsequent to the closure of the OM.”

40

The Audit Dilemma Continued

regulatory requirement to provide same.

alternativeS

There are various levels of assurance available to issuers subsequent to the OM closing. The level of assurance which should be considered best practice will very much depend on the operations of the entity and the provisions, if they apply, of the ABCA (or similar).

The lowest level of assurance is a compilation (or Notice to Reader) engagement which provides no assurance to users. The financial results are compiled into financial statements with limited or no note disclosure. This would most often not be an appropriate level of accountant involvement as there is no additional assurance provided to investors. This engagement is most useful when the users of the statements are limited or when statements are being generated solely for tax reporting purposes.

A review engagement requires that procedures are performed consisting primarily of inquiry, analytical procedures and discussion regarding the financial accounts and other information provided by the issuer. This is the middle level of assurance which may be considerably more economical than an audit. The accountant will not express an audit opinion but instead reports that nothing has come to their attention that would lead them to believe the financial statements are not in all material respects in accordance with Canadian generally accepted accounting principles (“GAAP”) utilizing the appropriate accounting framework. This level of assurance

may be appropriate in the case where the operations of the entity are consistent from year to year, such as an entity which holds land for future development opportunities. It is considerably less financially onerous than an audit but still may provide an appropriate level of assurance to the users of the financial statements.

The highest level of assurance is an audit engagement, in which the independent auditors’ procedures involve tests of details in addition to inquiry and analysis. An audit opinion indicates that the financial statements present fairly, in all material respects, the financial position, results of operations and cash flows in accordance with Canadian GAAP utilizing the appropriate accounting framework. Audits would be considered best practice in the case where the entity has significant operations, where the results vary from year to year or where the entity is undertaking large transactions such as the acquisition or disposition of assets.

accounting frameworkS

The regulations currently require that financial statements be prepared in accordance with IFRS. These standards were implemented with the expectation that the international business community, especially those entities listed on exchanges, would benefit from conformity across financial markets and that investors would benefit from substantially increased disclosure. These standards require a considerable amount of additional disclosure which may be onerous for a small issuer.

The Canadian Accounting Standards Board recognized that these standards may be onerous for non-publically traded entities and has given those entities the option to elect to use a more simplified version of the standards called Accounting Standards for

Private Entities (“ASPE”). Unfortunately as the regulations currently require reporting under the IFRS framework smaller issuers cannot elect to implement the ASPE framework.

cloSing

Within the exempt market, there is currently little consistency in the provision of ongoing financial disclosure from one investment opportunity to the next. The decision to provide ongoing financial reporting is subject to differing factors such as type of entity, decisions made during formation, requirements put in place by the exempt market dealer, and decisions made by the principals of the entity, with or without input from investors. In the absence of regulations continuous financial disclosure with an appropriate level of assurance should be considered a best practice by the industry.

To protect investor needs and provide more transparency within the exempt market space, it is important that the regulators revisit the current financial reporting requirements. They should consider implementing an asset test for new issuers allowing them to include the applicable financial information inside the OM to avoid the cost of an initial balance sheet audit. Regulations should require ongoing financial disclosure with a minimum of a review level of assurance. Regulators should also contemplate whether IFRS is meeting the needs of the issuers and investors as an accounting framework.

James Dahl, CA, a Senior Manager of Buchanan Barry LLP Chartered Accountants, provides accounting, audit, tax and business advisory services to clients in a wide variety of industries including real estate, oil and gas, manufacturing and distributing, hospitality, agriculture, professional services firms, charities and non-profit organizations. James has seven years experience working with companies in the exempt market in the capacity of either an internal or external financial reporting advisor.

The Audit Dilemma Continued

41

We align with investor goals and carry products based on merit and that are backed by our extensive due diligence process. We strive to be an industry leader in compliance and place priority on accountability and investor-focused opportunities.

How is Raintree Financial Solutions different from other Exempt Market Dealers?

There are many questions aboutExempt Market investing.

We’re here to provide the answers.

Raintree Financial Solutions is dedicated to helping investors build their wealth responsibly through a variety of alternative investment opportunities. With Dealing Representatives in British Columbia, Alberta, Saskatchewan, Manitoba and Ontario, we are able to service clients across Western Canada.

Visit raintreeEMD.com today to learn about how our differences make all the difference.

P 780.443.0340TF 1.855.443.0340E admin@raintreeEMD.com

Westgate Business Park 10243-178 StreetEdmonton, AlbertaT5S 1M3

Innovation of Education & Training in the Exempt Market:Raintree University as a Case Example

To keep up with our current pace and growth, the exempt market

has to be committed to education and professional development, especially for our Dealing Representatives (DRs), as they advise investors directly. Raintree Financial Solutions is one of Canada’s largest exempt market dealerships (EMDs) and is one of the leaders in advisor training in the exempt market. They have an ongoing corporate training initiative that is much needed in the Financial Services industry. I recently attended their Dealing Representative training program in Edmonton Alberta, called Raintree University. Their philosophy is that to have an educated and engaged investor, you need an educated and engaged advisor. The training was three days in Edmonton, where their head office is located. I participated for the three full days like any other trainee going through their program, and received a wealth of information about the industry, their product shelf and their processes. I was graciously welcomed into their program, and got to see their internal process firsthand.

When invited to join this training session, I did not know what to expect. I have been in financial services for ten years, and have been through, and facilitated, my fair share of training. I was pleasantly surprised, and have a new appreciation for the efforts that an EMD goes through to prepare an advisor to be compliant and truly good at their role as a DR and advisor in the exempt market. As an exempt market EMD, Raintree offers their DRs: marketing support, compliance

support, product selection and product education. During my time in this training, all the owners participated, and there was an opportunity to meet all of their staff. The company culture is very open, unpretentious, and friendly. It was clear

throughout the whole training that the EMD staff had a deep understanding of the products on their shelf, and had very close business relationships with the issuers. DRs were encouraged to contact the portfolio managers and principles directly if they had a question about the offering, or needed support for their clients.

The training itself was three intensive days of compliance, operations, product knowledge and advisory training. The training revolved around several integral themes. The first was called alignment, an adaptation of the MBA concept of triple win, where business decisions are based on client, employee and corporate success. Raintree’s core business value is reaching alignment. Alignment is a driving force in their EMD and was the main theme throughout the training. They see their business operations as a three legged stool, comprised of DRs, the EMD, and the issuers. Each leg is vital to the support of the stool. The client (investor) sits on the stool, so each independent business unit

supports the activities and prosperity of the client. The three pillars work together; it is a partnership where the activities of all three parties are given equal importance. “The Dealing Representative’s role is to work with their clients to solve certain needs of the portfolio, as we are not product promoters, we are suitability advisors,” stated Adam Derges, one of the founders of Raintree.

A second major theme of the training was know your product. There was intensive product training, as this EMD currently offers seventeen investments on their shelf. Since inception, they have looked at approximately 250 potential products, and have 2-3 new offers to examine weekly from issuers. The product selection was detailed at the training. Out of all the business cases presented to Raintree, management stated that about 85% of the offerings are based on sound business ideas. With the majority having great business ideas, the determining factors to in product selection for this EMD’s Management is the investment structures and whether or not the clauses in the OM align with investor interests. “We have seen a lot of investments where the investors are hurt first and rewarded last; we want to flip that so that investors are rewarded first and hurt last,” explained Adam Derges. Issuers working with this EMD need to prove investor alignment (in structure and compensation) as well as minimal conflict of interest.

The product training focused on investor alignment and how to

“Canadian investors have been taught to behave with complacency, and to expect mediocrity, with their investment returns. Our industry can counter this status quo.”

43

Innovation of Education

By Cora Pettipas

communicate the vast details of the products in a digestible way for clients. Prism, Walton, Centurion, Westpoint, Crossroads DMD, Jaymor, Pavilion Solar Income Fund, Pennant, and Newport all presented at this training. This gave the trainee a good breath of their product offering, as these presentations represented almost half of their product shelf. The presenters were all key persons in their representative companies, and all gave the impression of an open door policy to the advisors. Another emphasis was that an advisor is expected to constantly upgrade product knowledge, and constantly be engaged in product education support. This is done through three key education pieces at Raintree: the Call in to Kyle with Kyle Jacober weekly, as well as Nick’s Notes by Nick Fournier and the Brodeur’s Bulletin developed by Dan Brodeur. Since there are approximately 100 advisors are spread out nationally in five provinces, these initiatives are a key focus by management to keep advisors engaged and a part of the company’s culture and community. The last major theme through the training was know your client. It was emphasized through the compliance, process, and investor pieces that one needs to know their client well and their motivations and background. Raintree encourages their advisors to be educators on the product, and experts on the client. It was stressed repeatedly that not every investment is good for every client. When making product and portfolio recommendations to the client, it was emphasized to: keep it simple, to make sure the client has all the relevant product knowledge and knows about the OM clauses, and to make sure it is suitable for that client, and to ensure diversification

of products/strategies and sectors. In terms of the third point, suitability, the training focused on four key areas: client objectives, risk tolerance, personal experience, and tax consequences. “Clients need to have a firm grasp of risk and it needs to be captured on the KYC,” stated Kyle Jacober, another founder of Raintree in his presentation, “clients need to understand their investments, and where they can potentially go wrong.” The Raintree University exemplifies what are best practices in the exempt market for training and commitment to profes-sional development. It provided a very enriching experience from the knowl-edge acquired and the discussions with DRs, issuers, and the EMD. It is heartening to see this leadership initiative for a cul-ture of transparency and client engage-ment. Through EMDs and their advisors, clients are encouraged to be active par-ticipants in their investments and wealth accumulation, as opposed to being en-couraged to passively invest in prod-ucts they do not understand, as often happens in the public markets. Canadian inves-tors have been taught to behave with compla-cency, and to expect mediocrity, with their investment returns. Our industry can counter this status quo. The investments in the exempt market need a more engaged investor, and more sophisticated and skilled ad-visor, fortunately investors now have this resource.

Cora Pettipas, M.Sc, FCSI, CFP, CIM is currently the Vice President of Member Services, at WEMA. Prior to this, Cora was a Professor at Mount Royal Uni-versity 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.

44

Innovation of Education Continued

Q&AOlympia Trust Founder Rick Skauge

I think that the EMD’s are a positive step both from an investor protection initiative and providing a facility for small business to raise money.

“”

1What was your background before starting Olympia Trust Company?

Before starting Olympia I was involved in raising drilling money for small oil and gas companies that I started. I started 30 private oil and gas companies. Each of the companies only raised about $500,000. After I had raised the money for 10 of the companies some of my investors were reluctant to invest more unless I had a liquidity option. To that end I formed my first public company that was used to provide liquidity to the private companies.

2When did you start Olympia Trust Company and why did you start it?

Olympia received its letters patent from the Alberta government in September, 1996. It then took about 5 months to raise $2,300,000 from 50 investors plus employees and in March 1997 Olympia commenced business.

At the same time I was in the oil and gas business, I owned a mutual fund dealer and we managed our own self-directed RRSP accounts, as agent for various trust companies. All the trust companies went broke because they were in the lending business. Finally, B2B Trust took over the accounts from a now defunct North American Trust Company and when we asked to continue our agency agreement to operate self-directed accounts, they refused. Well I knew then that I was in trouble. We were selling flow through shares in start-up oil and gas companies and then having our customers contribute them to their RRSP’s before we spent any drilling money. The thought of having to explain this to someone in Toronto prompted me to start my own trust company.

3Olympia Trust started as what would be known today as an Exempt Market security. Even though

it’s now publicly traded, what would return profile look like for one of your original investors that still holds their shares?

Well, they’ve done pretty well. We started paying dividends around 2001. Since then we have increased the dividend every year so that now we are paying out $2.80/year in dividends. Not a bad annul return on a stock you paid $2 for. The market value of the $50,000 initial investment….not counting dividends….is about $1,000,000 today!

4Why after starting out private did you decide to become listed on the TSX-V?

Before we became a listed company, we took an unsuccessful public oil and gas company that I had started and used it to takeover Olympia Trust. In the process, this made the company a reporting issuer and all the shareholders now had free trading shares even though they were not listed on an exchange. This at least gave those that wanted out a way to exit.

In Olympia’s original offering memorandum, I had been granted some performance stock options. I didn’t want to build a successful company and then lose control. The options were for 4 sets of $125,000 worth of shares that I could purchase for a nominal amount. I could purchase my first set of options when Olympia made 50 cents per share of pre-tax profits, another ¼ when the company earned 75 cents per share pre-tax profits, another ¼ when the company earned $1.00 per share of pre-tax profits and the balance when the company earned $2.00 per share. So the last option was only exercisable when the company earned pre-tax profits per share equal to the investors’ initial investment. Needless to say the stock exchange was not going to list the company with these options outstanding and I was not about to give up the options. After 10 years of work, all my options were vested and the company was listed. It came out in May of 2007 at $17/share.

5How do you feel about the exempt market now that it’s much more tightly regulated with

implementation of 31-103?

I think that the EMD’s are a positive step both from an investor protection initiative and providing a facility for small business to raise money.

6What changes do you see coming for the exempt market in the future?

We expect it to continue to grow. Hopefully with the formation of WEMA, the government agencies and advisors can make headway at creating a less adversarial climate in which both groups can work together to provide better investor protection without unnecessary regulation and examination. For our part, we have designed a new structure that will allow an issuer to use Olympia as subscription >

Q & A with Rick Skauge

46

agent, transfer agent, custodian and distribution agent. With this design, investors can avail themselves to many different kinds of issuers but the issuer will never be in position to use the funds other than as provided for in the Offering document. This has been a problem in the past and we believe this is an affordable and effective solution to the problems the pre 31-103 exempt market has faced.

7If you could change one thing in the exempt market today what would it be?

I would eliminate the need for an audited financial statement for new issuers who have insignificant amounts of capital. The new system of requiring audits on all new issuers, regardless of size, is a huge deterrent for young entrepreneurs wishing to use the OM exemption. It adds 4 to 6 weeks delay in the process, it adds at least $5,000 to the cost of raising money, and it accomplishes nothing in terms of investor protection.

8Anything else?

The rules governing this market as set out in 31-103 were put in place when the industry did not have an organization to dialogue with the securities commissions.

The idea of a KYC is fine at the time of purchase of an exempt product however updating it when there aren’t any transac-tions really shouldn’t be necessary.

Ongoing KYCs are invasive and ineffective in the exempt market. If a Dealing Rep does an ongoing review of a previous purchaser and finds out their situation has changed, there is nothing that can be done anyway. As stated in the Offering Memorandum…there is no market for these kinds of securities...there is no way out, so who cares if the investor’s circumstance has changed.

The KYC rules were put in place to try and create a level playing field with IIROC and MFDA registrants but they completely ignore the inability of an investor in exempt products to sell their investment and reposition. Ongoing KYC’s in the exempt market should be eliminated because it creates a

huge amount of work and anxiety on representatives and exempt market dealers and produces no value.

9For those that don’t know you, what do you like to do for fun?

I am an avid downhill skier, an avid scuba diver, a boater, a hunter, a golfer and a great dad for my kids to have fun with.

Q & A with Rick Skauge Continued

47

FOUNDING MEMBERS

WEMA provides value for its members in a variety of ways, including:

· A collective voice that keep an open dialogue with the regulatory and governing bodies of the exempt market industry

· Industry networking events

· Legal, accounting, and tax information resources

· Educating the general public about exempt market securities

· Discounts from various industry related service providers

· Hard Copies of Exempt Edge quarterly magazine

JOIN ONLINE TODAY!

www.WEMAonline.ca

The Western Exempt Market Association (WEMA) was founded in 2011 by a group of dealers, issuers, and service providers who are involved in the exempt market securities industry in Western Canada. The founders of WEMA recognized an ongoing need to collaborate, evaluate, and communicate regarding the effects of some of the ideas brought forth by our industry’s regulatory and governing bodies.

wemawestern exempt market association

Your Industry, Your Voice, Your Future

WEMA EDUCATION FORUM 2012 RECAP

thank-you to our sponsors for contributing to the success of the exempt market education forum

bob watt acted as mc during the day and kept things moving smoothly

wema directors marcin drozdz and darren smits in deep discussion between speakers

many new relationships were formed during the day

bob watt of the business career college addresses a crowd of 300 financial professionals interested in learning about

the exempt market

wema vice president cora pettipas taking the stage in between one of the many great presentations

rod burylo of axcess capital advisors provides clarity to an enquiring mind

jay modi of omniarch capital corporation explains his firm’s products to an interested advisor

“Coming together is a beginning; keeping together is progress; working together is success.” -Henry Ford

www.WEMAonline.ca/apply

This advertisement does not constitute a solicitation or offer to purchase securities. There are a number of risks associated with this investment, any one of which could adversely affect an investor’s return on investment in these securities. These risks are set out in the Offering Memorandum of the Issuer relating to this investment opportunity. Investors should review these risks with their legal and financial advisors.

51

The Lighter Side

- Artist Unknown

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PILLARS OF STRENGTH STRONG MANAGEMENT STRONG INDUSTRY STRONG INVESTMENT VEHICLE STRONG TRACK RECORD

13.8% Average Annual Return (Also provided 5.70% tax deduction)As demand for Fossil Fuels such as Oil and Natural Gas increases globally, and supply inevitably decreases; a significant widening of the demand and supply gap is more and more apparent, causing value correction in the pricing of such commodities. These sectors are poised to generate significant profits for those whom have participated and invested, the question is….

“Will you be one of them?”CONTACT YOUR FINANCIAL PLANNER TO GET STARTED

The Project Offers:• Preferred 12% annual return subordination provision.• Quarterly income distribution• RRSP, TFSA, LIRA, RIFF, RESP eligible funds.• Direct participation in oil & gas revenues.• Redeemable & transferable.• Only onshore, producing projects, no exploration.

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N.A. ENERGY RESOURCES

All distributed products through N.A Energy Resources Corporation are accompanied by an Offering Memorandum, which should be read carefully before investing. Please contact your Financial Advisor or Energy Resources to receive a copy of this document. This investment is limited to Canadian Residents of the following provinces: Alberta, British Columbia, Manitoba, Saskatchewan & Ontario.

EnErgy for Tomorrow

EXEMPT EDGE QUARTERLY

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Please contact Cora Pettipas at cora@wemaonline.ca if you wish to place your company’s ad within Exempt Edge

2012/13 RSP Season Tips forOur Valued Clients2012/13 RSP Season Tips forOur Valued Clients

The deadline to make a contribution for the 2012 tax year is Friday March 1, 2013 Cheques cannot be postdated past the deadline in order to receive a tax receipt for the 2012 tax year For the 2012 tax year the maximum contribution limit is 18% of the previous years earned income to a maximum of $22,970 RSP loans for exempt market products in Olympia Trust accounts can be arranged through BMO Bank of Montreal (see their ad in this magazine) RSP unused contribution room can be found on your client’s Notice of Assessment (NOA). If a client cannot find their most recent NOA call CRA at 1-800-959-8281

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