Canadian exchanges push to relax private placement rules

By Allison Martell TORONTO (Reuters) - Canada's main stock exchanges are pushing for regulatory changes that could make it easier for retail investors to participate in small financings long deemed too risky for the general public, a move that could help shore up the country's hard-hit junior mining sector. John McCoach, president of market operator TMX Group Ltd's small-cap TSX Venture Exchange, said his organization has asked Canada's securities regulators to consider allowing a public company's existing shareholders to participate in private placements. Private placements are share issues that are offered to select buyers such as institutional investors and wealthy individuals who qualify as "accredited investors," and not to the general public. The TSX Venture Exchange, the main trading venue for hundreds of small Canadian-listed mining and energy companies, wants to expand the qualifying group. Under its proposal, investors who have held stock in the issuer for 60 days or more would qualify to be included in private placements, but their investments would be capped at C$10,000 ($9,800) per company per year. The rules limiting access to the exempt or "closed" market were designed to protect small investors, who may be less sophisticated, from the risks of sinking their savings into stocks that can be highly speculative. McCoach said Canada's securities commissions are considering the proposal. He said he has been informed that regulators in some of the country's provinces have already drafted exemptions, but would not say which provinces are moving on the idea. "It gives listed companies another tool to access capital," McCoach said of the proposal. "But even more importantly, it allows existing shareholders to participate in the growth of the companies they are already shareholders in." The Ontario Securities Commission and the British Columbia Securities Commission, primary regulators for the vast majority of junior mining companies in Canada, declined to comment. But in a progress report in August, the Ontario regulator said it was considering the issue. A source familiar with the matter said the British Columbia Securities Commission is amenable to the idea, and may release a detailed proposal by the end of this year. HELP FOR JUNIOR MINERS A drop in the price of commodities and a spike in costs has drained money from the mining sector, especially Venture Exchange-listed exploration companies that rely on equity financing. Over the past year, dozens of cash-strapped companies have closed tiny private placements at rock-bottom prices, hoping to ride out the tough market. Private placements are a relatively inexpensive way of raising funds, and thus a key source of capital for small companies. Making it easier for investors to participate could boost the funds available to junior miners, buttressing Canada's reputation as a center of mining finance. But changing the rules could take a year or more because of the lengthy comment period required, and may come too late for the most vulnerable juniors. Others would benefit over the medium term. The change would level the playing field for retail investors, who are shut out of private placements that can end up badly diluting their investments in small companies. In theory, just about anyone can invest in a public company by buying shares on an exchange, but in practice many penny stocks are thinly traded. INVESTOR RISK In part, private placement deals have been restricted to sophisticated investors because retail investors may not have as much insight into how a security will trade once it is on the market or its level of liquidity. Private placements are generally done without a prospectus - a document that discloses the risks associated with an investment and gives buyers certain legal rights if they are misled - relying on the fact that "accredited investors" will be aware of the risks. Institutional investors such as banks and pension funds are accredited investors, but few individuals are allowed to buy new securities without a prospectus, and those that are must have financial assets worth more than C$1 million. The Ontario Securities Commission's website explains that "the law assumes that accredited investors do not need the protections offered by a prospectus" because they can get the information they need to evaluate an investment on their own, and can handle losing their entire investment. McCoach said this exempt or "closed" market has worked well, and that it is an efficient way of raising funds, but that it can be expanded. "I think it's an appropriate evolution of how we've managed the closed system in Canada," he said. ($1=$1.03 Canadian) (Additional reporting by Euan Rocha in Toronto; Editing by Jeffrey Hodgson and Peter Galloway)