Close Talkers

 

I was watching a Seinfeld the other day. If there’s been a funnier show on TV, I can’t think of one. One of my favorite episodes is the one where Elaine starts dating a “close talker”. It’s a riot.

Thinking about the #1 benefit of the exempt market, I can say, without a doubt, that the industry is full of close talkers. Almost all investments in the exempt market have close talkers.

Does that mean that they all talk awkwardly close to you and invade your private space? No. I’ve met a lot of industry participants and I can assure you that most of them give you enough space to talk.

What I mean is that the people that ultimately make decisions about how your money is invested, are very close to you. Most issuers allow you as the investor to talk to the CEO, managing director, president, etc. about decisions that will impact your money.

Let me give you an example. William Santor is President and CEO of Productivity Media (disclosure: He signs my pay cheque). His fund provides senior loans to the media industry. The fund collects investment capital from institutions and retail clients in the exempt market.

Will leads the loan origination process and ultimately decides which project to provide financing for and which to decline. He has a number of partners and advisors who will provide advice on loan selection as well. As an investor, you may have questions about why a decision is made to finance a project. No problem. You can easily speak to Will about it. In fact, some investors have.

Now by contrast, try to do that with your mutual funds. You will need to speak to your financial rep, who talks to the mutual fund wholesaler, who speaks to the mutual fund head office, who speaks to the head advisor, who speaks to the sub advisor, who speaks to the analyst who ultimately did the research to determine that stock was the one they should buy. Reminds me of the elementary school game where students pass along a set message through the whole class.

Along with losing the message in translation, the costs of those layers add up. In fact, the Ontario Securities Commission has put out a study to analyze the mutual fund fees in Canada. We all know whose pocket those fees come out of.

So along with all the strengths of the industry, I think one most pronounced is being able to be closer to your money. I like what Jason Fried said:

“The closer you are to your money, the better off you’ll be.”

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. To contact Marty, please email marty (at) idealeader.ca

Making the Exempt Market Better

When a professional serves me, I’m thankful for the training that she has gone through.  Whether she is a fire fighter, doctor, professor, accountant or in another profession, it is critical that she learns as much as she can before applying her craft in real life.

That’s why I’m ecstatic that the Exempt Market Dealers Associations (EMDA) has taken the initiative to make the exempt market products course even more applicable and relevant.  It is a requirement for anyone interested in selling deals to the public.

In many ways, educating the people who are recommending to you specific investment strategies is helping to protect your money.  At the risk of sounding obvious, the more experienced and educated the financial advisor community is, the better advice they will likely give.

I believe the test also provides a filter for would be advisors who really want to dedicate themselves to the industry.  I’ve been involved in training many advisors and can tell you first hand the amount of work it takes to pass the industry exam.

Once again I’m proud to be involved with the EMDA.  We see education as critical to the industry.  Not only does the EMDA clearly outline it’s values, it also puts them into action.

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. To contact Marty, please email marty (at) idealeader.ca

Saving Tax in the Exempt Market

As a former financial advisor, I tried to curtail the mad rush of RSP contributions in February. Many investors feel the only way to save money on their taxes is to make a sizable contribution to their RSPs before the deadline.

In fact, the Exempt Market has a number of ways to allow you to save tax, but many of the activities require action before the year-end, NOT before RSP season ends. Here are a few ways that the Exempt Market provides solutions to lower your tax bill:

  • Flow Through Shares:

Investing in flow through shares allows the investor to claim additional tax deductions. A flow through share itself carries with it expenses for exploring and operating a company that is in the mining, oil/gas or alternative energy sector. These expenses “flow through” to the investor and could give her the ability to deduct the expenses personally.

  • Principal re-payment:

Many offerings give the investor the opportunity to receive back their own money instead of distributions, thus deferring any tax consequences until the investment comes to fruition.

  • Business losses

An offering that is in a limited partnership structure may be able to flow through business expenses to the investor. Many investors have been able to deduct these business expenses from their income in the year the expenses were spent.

 

As always, I recommend seeking professional tax advice. As the exempt market continues to grow in prominence, more and more accountants will start to seek alternative ways to bring their clients tax bill down by investing in the exempt market.

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. To contact Marty, please email marty (at) idealeader.ca

Why I Chose the EMDA?

I’m proud to be part of the Exempt Market Dealers Association as their newest board member. The current board members have a strong passion to see the exempt market industry flourish while ensuring that the industry continues to be responsible to its key stake holders – the investors.

To be part of this group of exempt market advocates is a tremendous honour for me. This group includes people in all facets of the exempt market, from service providers like legal professionals and compliance consultants, to exempt market dealer participants such as dealing representative and head office executives.

I believe it’s important to have a national activist group that advocates on the industry’s behalf. There are many issues that require national thinking such as the adoption of the offering memorandum across Canada. Restricting a certain portion of the Canadian population from participating in exempt market offerings based on where they live is not in the interest of bringing the country together. A national organization is best positioned to influence policy change.

The EMDA is passionate about education. They sponsor such events as the CFO Education Series put on by MNP. This certificate program outlines regulatory issues that all head office executive at EMD’s should understand. This will, no doubt, bring a higher understanding of key components of operating an EMD. I’m sure the EMDA will be featuring further educational initiatives in the near future.

I’m thankful there are a number of voices in the exempt market. From what I see most, if not all, of the mandated positions of these groups on important issues are similar. If we can affect change by approaching the issues from different angles, we will be better off as an industry.

If you would like further information on the EMDA or inquire about how to join the organization, please email me at: mgunderson (at) emdacanada.com

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. To contact Marty, please email marty (at) idealeader.ca

 

Raising RSP Capital for Your Business

Registered Retirement Savings Plans – The Basics
In 1957, the Canadian government created a program structured in such a way as to give Canadians the incentive to save for their own retirement, and the Registered Retirement Savings Plan (RRSP) industry was born.

The RRSP program allows savings for retirement to grow tax free in a special savings plan registered by the Canada Revenue Agency.

The main advantage of an RRSP is that contributions to the RRSP are 100% tax deductible against any other source of income in the contribution year. In addition, every Canadian that files a tax return creates RRSP “room”, and currently the amount of room created is equal to 18% of earned income, to a certain maximum every year (i.e. based on rate of inflation). The good news is that even if an individual does not contribute their maximum in a given year, the amount left over can be carried forward for use in future years.

RRSPs Are Under Utilized
The RRSP industry is large in dollar terms. Canadians currently hold more than $590 billion in their RRSPs, but billions more of contribution room has not yet been utilized. Further, only four in ten Canadians, or 38 per cent of us contributed to an RRSP in 2011, according to BMO’s Annual Post-RRSP Deadline Study.

Let Compounding Change Your Net Worth
An RRSP has a significant benefit that is often under- appreciated; tax-free compounding growth! Tax-free compounding because you do not pay tax on gains or income until money is withdrawn, whether prior to retirement or after retirement. Therefore, your money can compound faster in an RRSP.

Will Your RRSP Deliver Retirement Lifestyle Choices?
Let’s get straight to the point. At an annual contribution rate of $4,670 (average contributions in 2011 according to BMO’s study) over a period of 30 years, you will have contributed $140,100 to your RRSP. Now let’s assume that over this 30- year time period you earn a 5% compounded rate of return and the annual inflation rate is a flat 2%, you would end up with a real return of $237,688. This may sound like a lot of money, but is it really?

Let’s consider a common expenditure goal of Canadians at retirement; a motorhome. The average price for a motorhome in 1982 was $24,500 and today’s average price is $128,000, that’s a whopping $103,500 or 400% jump in price over 30 years! What if today’s average motorhome price jumps from $128,000 to $520,000, a 400% increase over the next 30 years? With only $237,688 in your RRSP, or with $500,000 saved, what kind of motorhome and/or retirement lifestyle have you planned for yourself? The solution starts today, and all we need to consider are these two questions: 1) Are we willing to contribute more money annually to our RRSP?; and 2) Are we ensuring our RRSP is earning a maximum risk-adjusted return?

No Kidding – An RRSP is Not an Investment
Many Canadians still think an RRSP is an investment onto itself, but it is not! Once you make a contribution to your RRSP, it is essential to invest and manage the money wisely to maximize annual growth.

Common RRSP Investment Choices
Many Canadians are unaware there is a wide range of investments that can be purchased within an RRSP. The BMO study found that in 2011, the investment choice for Canadians, with 59% of us investing in them, were mutual funds. For the rest of us, 25% chose GICs, 22% chose equities, 12% chose bonds and 6% chose ETFs.

Overlooked – Private Company Investments
The vast majority of today’s successful public companies were first a private company. Picking the right private companies for investment requires as much attention as picking a good publicly traded company. It is worth the effort since many private companies offer compelling capital gain opportunities. For income-orientated investors, many pay attractive dividends or high yields on their debenture/bonds. Finding private company investments that are eligible for your RRSP is no easy task either.

Private Company Investing & Exempt Market Dealers
Do not expect your stockbroker to introduce you to eligible private company investment opportunities for your RRSP. In Canada, Exempt Market Dealers are well known for their access to private company investments. To find out more about Exempt Market Dealers, go to the Exempt Market Dealer Association of Canada at www.emdacanada.com.

Private Company RRSP Service Providers
Knightswood Financial Corp. provides private companies with a simple solution that enables private companies to issue RRSP eligible debenture/bond products to investors. Knightswood has facilitated over 20 offerings totaling more than $260 Million.

Western Pacific Trust Company offers Self-Administered Registered Plans (RRSP, LIRA) and Tax Free Savings Accounts (TFSAs) to investors. Eligible private company investments are accepted for both RRSP and TFSAs.

 Additional Source of Capital
Across all industries, there are private Canadian companies looking for effective financing solutions. Some of those companies have turned to Knightswood for an effective debenture offering solutions to successfully raise capital. Knightswood assists its Clients’ debenture financing activities by making their debentures eligible for their Canadian investors’ registered plans (e.g. RSPs, pension plans, etc). This, of course, opens up a vast amount of capital that would otherwise not be available to our Clients’ debenture offerings.

By working with Knightswood, the Clients’ investors will have two options to choose from:

  1. Investor can purchase the debenture with their cash and subsequently contribute the debenture to their registered plan and, if applicable, receive a tax deduction.
  2. The investor can use cash in their registered plan to finance the purchase of the debenture investment. This cash can come in the form of a new contribution or a transfer from an existing registered plan.

How Does It Work?

 

  1. Knightswood incorporates a subsidiary company (“Subco”) and subscribes for a nominal amount of share capital ($100 in common shares)
  2. Directors of the Subco are nominated by PrivateCo (or the General Partner, in the case of a limited partnership structure) and approved by Knightswood. Subco arranges for debenture financing from PrivateCo’s outside investors. The debentures are considered to be qualified investments for registered retirement savings plans and other deferred plans under the Income Tax Act (Canada). Knightswood provides Client with a registered plan eligibility letter.
  3. Knightswood and Subco enter into an Administrative Services Agreement documenting the fees, services covenants, warranties and other contractual arrangements that have been agreed between the parties. Knightswood is not involved day-to-day operations of Subco and does not participate in its profits or losses. As a result, there is no requirement for Subco to be audited or consolidated into the financial statements of Knightswood.
  4. Subco loans the net proceeds raised through its debenture offering to PrivateCo.
  5. Knightswood, Subco and PrivateCo enter into a Put/Call option agreement exercisable at any time during the term of the agreement. Upon the occurrence of certain events, PrivateCo has the option to purchase (or “call”) the shares of Subco from Knightswood at pre-specified price. Alternatively, upon the occurrence of certain events by Subco, Knightswood has the right to sell (or “put”) the shares of Subco to PrivateCo at the pre-specified price.

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca

Wedding Crashers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

I was at the Hotel MacDonald last week on their patio. The view of the river valley was absolutely stunning. Edmonton in the fall is a gorgeous time of the year.

When I walked through the hotel to leave, I noticed a room full of laughs and people enjoying themselves. My initial response was how do I get into that party? Maybe I pull a Vince Vaughn from the Wedding Crashers?

Alas, I walked past it, kind of saddened by the fact that I was missing a good time.

The party at the exempt market has some very restrictive rules surrounding who can be approached (or solicited) to purchase private investments. Who can be involved in this party has a lot to do with who you are and where you live. The key factors that will determine if you are able to participate in these offerings are:

  • What jurisdiction (province or territory) you live in
  • How much money you make
  • What your net worth statement looks like
  • How big of cheque you can write

Jurisdiction

Where you live, will determine the set of rules you are obligated to follow. In most provinces, you are able to purchase an exempt market offering with an offering memorandum (OM) if you are an eligible investor. The glaring exception to that rule is Ontario, where the OM exemption is not available. Thankfully, the good folks at EMDA and WEMA are lobbying the Ontario Securities Commissions to allow eligible investors to participate in exempt market offerings.

Your Income

If you are in a jurisdiction that allows the OM exemption (ie. most of Canada, outside of ON), you may be able to participate as a eligible investor. Your net income before taxes needs to be at least $75K individually or $125K household total, in each of the last two years.

In Ontario, you need to qualify as an accredited investor where the bar is significantly higher. An accredited investor makes over $200K individually and/or $300K as a household total, in the last two years.

Your Net Worth

In provinces that allow the OM exemption, eligible investors are those whose net assets are higher than $400K, thus these people may be able to participate. Without the OM exemption, accredited investors are those who have more than $1MM in net financial assets or $5MM in net assets.

Transaction Size

Another exemption that investors may use is the aptly named $150K exemption, where if you invest more than, you guessed it, $150K, you may invest in the exempt market.

 

Please note that this is not an extensive list of ways to qualify.  For accredited investors, the OSC has put a list of ways to qualify.  If you are looking for ways to qualify as an eligible investor, please view the page done by Venture Law Firm.   I don’t want to try to justify these rules, but just to make you aware of the rules. There is a lot of discussion from key stakeholders about whether these exemptions are appropriate.

Please bear in mind that these are only guidelines. A registered exempt market dealing representative should look over your whole situation to determine if investing in a specific security is suitable for you.

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca

Do What I Say, Not What I Do.

 

When institutional fund managers, portfolio managers to high net worth clients, and pension funds want to decrease the market volatility and increase their investment return, what do they do? They move money out of the stock market and into private (or exempt) investments.

 

A great piece in the Investment Executive talks about the shift to assets that are not tied to the stock market. One quote basically sums it all up:

“(Institutional funds) are increasingly looking to the alternatives asset class for long-term assets that are better matched to their liabilities, and less tied to the swings of the stock markets”

When YOUR financial advisor, who may be working for one of these financial institutions, wants to decrease market volatility and increase YOUR investment return, what does he do? I contend that the simple “solution” of transitioning funds to another set of correlated funds that have may have performed better in the short term, is just plain poor advice.

If your financial advisor had an upgraded toolbox, she could reach into it and provide some investments that do NOT mimic the performance of the stock market. Doesn’t that sound like you are taking advantage of all the tools that you have available to you?

Calvin’s Dad: The world isn’t fair, Calvin.
Calvin: I know, but why isn’t it ever unfair in my favor?
– Calvin and Hobbes

The exempt market does not have the marketing power of mutual funds, nor does it have 50,000 sales agents who go out and advise clients to purchase funds. If you are interested in getting in front of qualified advisors who can offer this expanded toolbox of exempt market investments, seek out qualified dealing representatives who work with strong exempt market dealers.  A search tool to find all the exempt market dealers in Canada, can be found here.

 

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca

Flow Through Shares

Back in the 50’s, about the same time the Leafs won their last Stanley Cup, an initiative was written up by the politicians of the day to spur on investment in Canadian resources.

The initiative, called Flow Through Shares, allowed companies to issue a special class of shares that carry with it some significant tax benefits for the investors. An investor may deduct the amount that they have invested from their income, hence saving some tax right off the bat.

Upon exit or sale, the same investor would receive a capital gain equal to the amount of the sale price. The reason for this is because the cost of the share, or ACB (Adjusted Cost Base) is zero.

This reminds me of the mechanic in the Fram Filter commercial. Pay me now, or pay me later, but you are going to pay me. The taxman will receive his share of tax upon sale, while giving up some deductions at the front end.

There are two basic structures when looking at flow through shares; single company shares and limited partnerships. The obvious strength of the limited partnership is that it has multiple shares in the portfolio, thus theoretically bringing down the overall risk.

Whether we are looking at mining, oil and gas, or alternative energy, there is volatility in the resource sector. Besides having a professional portfolio manager looking after your basket of flow through shares, another way to manage the risk is to have an ongoing and consistent investment strategy. One such strategy is to purchase a flow through share offering on a yearly basis. After a number of years, and various ebbs and flows, the portfolio will even out. If you are fortunate, you will even start to use the tax savings from previous years as your investment.

As always, a qualified exempt market professional should review any exempt market offering you are considering.

To check out a video on the topic, please click on the image below:

Marty Gunderson is an expert who helps companies navigate through the Exempt Market. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca