Editorial: New Thompson proposal an improvement

Who gets what. It is the basis of every business transaction. It has also been the key issue at the recent Ontario Securities Commission hearings into the Thompson Committee report on junior financing in the province. The issue at hand is the financial considerations which a brokerage firm would receive when underwriting a junior exploration company. The committee wants them as high as possible to give Bay Street some incentive to underwrite these issues, the majority of which are now done in British Columbia, Alberta and Quebec. The OSC wants them as low as possible so that more money goes into the ground and the investor gets a better shake.

The roots of this argument go back a long way, and are essentially based on the OSC’s distrust of junior companies. With little regard to the economic benefits of a healthy junior exploration industry in Ontario, the commission would rather see the money raised in other provinces. Essentially, it doesn’t want to deal with the juniors. One of the roles of the Thompson Committee was to recommend a set of guidelines to get it going again, and this past summer it came out with a number of recommendations. One of them, in the section entitled Dealer Compensation, is that, on issues under $1.30 per share, the dealer receive up to 50% of the issue price as commission. In addition the dealer would receive bonus shares of up to 15% of the total underwritten, as well as share options up to 10% of the total shares issued. Calling this “unconscionable,” the OSC staff countered by saying it would not be satisfied with commissions of more than 15% (up to 25% when proceeds would be applied to exploration in northern Ontario), the elimination of bonus shares and an option on up to 25% of the distribution.

The committee recommendations are similar to the current practice in Ontario, while the OSC numbers correspond very closely to those in practice in British Columbia. Quebec has the lowest in the country while Alberta’s fall somewhere between the Ontario and B.C. maximums.

Realizing it was going to have a problem pushing its recommended rates past the OSC, especially when a number of powerful brokerage firms came out against the proposal, the Thompson committee pared down its rates significantly as the hearing drew to a close. It new proposal was for a 20% cash commission along with another 15% in bonus shares upon completion of the issue for a total 35% commission.

This issue boils down to this: What will it take to prod Bay Street into financing junior exploration issues. We think the current regulations give too much to the underwriter. When the maximum commissions are paid, it is almost exclusively for offerings underwritten by the hard-sell broker-dealers. One of the main problems with them is that they usually control the after-market, which can make it tough for the investor to sell the shares once they were purchased. On the other side, the underwritings with lower commissions are hard to come by. A firm would only talk to a company if the promoter was willing to find most of the buyers ahead of time (in other words, do the work for them). This is the usual practice in B.C. and Quebec, where it is easier to get a prospectus past the regulatory authorities.

There is no way to predict what commission rates would attract the optimum interest in junior issues in Ontario. We have no quarrel with the 20% cash commission recommended by the Thompson Committee — Toronto has to go one better than Vancouver to attract the business. We do, however, have trouble with the 15% bonus shares, because if these are sold by the brokerage firms into the after-market they will likely have a serious downside impact on the share prices. The alternative is to offer healthy share options to the underwriter. That way, everybody makes some money if the issue does well, and it will do little to affect the aftermarket. The 25% recommended by the OSC seems reasonable enough. The two sides are not that far apart on the matter, and we think they should get on with it and iron out their differences as soon as possible.

One last word: none of this is going to work if the OSC doesn’t begin to take the importance of junior issues more seriously. While we like to see that the investors are well protected, the Commission has in the past tied up too many issues in red tape. Whatever the regulations, it is easier in any other province to get a prospectus approved. If the OSC continues to make it hard on junior companies, which don’t have the staff or money of larger issuers, none of this is going to work, regardless of the regulations.