The internet changed everything when it was first introduced but it has not been until now that Broker Dealers, Exempt Market Dealers (EMD) are playing catch up to what clients expect from them.

Investor want this today:

They ask for all this because in other parts of their daily lives they are doing their tasks from the comfort of their home.

For Broker Dealers, EMD’s it’s important to not overlook what clients want from a financial services company in today’s market.

Hiring a new employee can be challenging in any environment, but it’s even harder in the securities industry.  Employee not only have to be the right choice for the firm, but they must also pass muster with the securities regulators who approve registration. In reviewing an application for registration, the regulators focus on three key aspects: proficiency, integrity and solvency.

PROFICIENCY

Securities legislation requires applicants to have the proper education, training and experience in the particular category in which they are applying. Dealing Representatives (DRs) of an Exempt Market Dealer (EMD) must have completed either the Canadian Securities Course (CSC) or the Exempt Markets Products Exam (EMP). There is no requirement to have any previous work experience, just the course completion. If registering through a Portfolio Manager (PM), Associate Advising Representatives (AARs) must have or complete:

•    CIM or CFA designations; or
•    CFA’s Level I Exam and 24 months of Relevant Investment Management Experience (RIME)

Advising Representatives (ARs) must have either the CIM and 48 months of experience, or the CFA and 12 months of experience. The course requirements are straightforward in that you either have them or you don’t; interpretation comes into play when examining a prospective employee’s work experience to determine whether she has the relevant experience.

RIME

Relevant work experience is composed of the ability to perform research and analysis, and apply it to portfolio selection. The firm must evaluate a potential applicant’s experience in light of the regulations. Here are some tips for applicants.

•    There’s a difference between industry experience and RIME. Having worked in corporate finance or as an analyst does not necessarily mean the candidate meets the requirements. For someone like this, regulators may only approve the applicant as an AAR until she gathers the necessary portfolio selection experience.
•    Letters of recommendation are required from previous jobs. Regulators require letters of confirmation from former supervisors to back up any claims the candidate makes about past experience. This ensures whatever information is filed on the National Registration Database (NRD) is verifiable.
•    Candidates must apply for registration within 36 months of having taken the necessary courses from when they were last registered in a relevant category, or have 12 months of relevant experience within the last 36 months to maintain the validity of their courses.
•    There are exceptions. Regulators may entertain exemption applications if the applicant’s industry background does not meet the rules as they are written. But, while many years of relevant experience may make up for a lack of courses, no amount of extra book knowledge can make up for a lack of work experience.

INTEGRITY

Regulators expect that a registrant will act fairly, honestly and in the best interests of their clients—so they must assess the integrity of applicants. This means asking whether the person has ever been investigated by any regulatory body, or been subject to any public proceedings. They also want to know whether she has been involved in any criminal or civil proceedings.

All this information is reviewed in light of assessing the applicant’s character. Further, applicants must disclose whether any non-securities regulators, such as FSCO for insurance and mortgage brokers, regulate them.

This forms part of an applicant’s disclosure about her outside business activities, which may impact how she deals with her clients and the investment recommendations she makes. This includes if she serves on the board of directors of any company, or if she has any other type of relationship with an affiliate.

SOLVENCY

Applicants must reveal on NRD whether they have ever declared bankruptcy, insolvency or are subject to garnishment.

Regulators use this information to assess an applicant’s financial condition. This forms part of the overall process to assess an individual’s suitability for registration, as someone who has had financial problems may not be suitable for registration. Having had this occur does not automatically disqualify someone from being registered—regulators understand that personal events, such as divorce, may lead to bankruptcy. It may simply mean that an individual may be approved but require closer supervision by compliance.

When hiring, a firm obviously wants to employ individuals who will be a good fit, do their job effectively and help the company succeed. However, compliance should be involved in the process by conducting background checks and reviewing an applicant’s education, experience and overall fitness for registration. A firm doesn’t want regulators to unearth problems in the applicant’s past, so make the decision as straightforward as possible.

Securities legislation is quite clear on what courses and designations you need in order to register in the various categories, but what relevant experience is sufficient is less clear cut. No matter the category you are applying under, the regulators must determine than individual is fit for registration. They look at the proficiency of the individual based on their education, training and whether they have the requisite experience to meet the requirements of the particular category of registration. They also look at an individual’s integrity regarding outside business activities, potential for conflicts of interest – anything which may impact an individual’s ability to deal in the best interests of their client. They also look at the solvency of prospective registrants; a bankruptcy does not automatically disqualify you, but it could.

As for the proficiency requirements, to be a Dealing Representative of an Exempt Market Dealer, you must have completed the Exempt Markets Products Course or the Canadian Securities Course; there is no experience component required. The requirements to be the Chief Compliance Officer have become more stringent, along the lines of other categories of registration. The CCO must now have 12 months of relevant securities experience which includes the training and experience to perform the tasks required of a CCO, such as implementing and maintaining an effective compliance system.

There are only three categories of registration for individuals of a Portfolio Manager: Associate Advising Representative (AAR), Advising Representative (AR) and the CCO. To register as an AAR, you need to have completed either the first level of the CFA program or have achieved the CIM designation and have 24 months of Relevant Investment Management Experience (RIME). AAR’s can meet with clients and can make specific investment recommendations to clients but must be supervised by an AR. The most common qualifications for an AR are the CFA Charter and 12 months of RIME or the CIM designation and 48 months of RIME. The CCO must qualify as an AR and have completed either the PDO Course or Chief Compliance Officers Qualifying Exam.

Where things become less clear relates to exactly what can be considered Relevant Investment Management Experience; this is open to interpretation. Typically, it is made up of the ability to conduct research and analysis of securities in the context of portfolio selection and the ability to manage investment portfolios on a discretionary basis. Just because you have worked in the financial industry does not mean that all your experience is pertinent. You would need to show that you can conduct independent analysis of securities and then be able to create a portfolio according to clients’ needs.

There are many instances where individuals do not qualify, such as someone who works in corporate finance performing take-over bids and mergers and acquisitions. Their ability to conduct securities analysis may not be questioned, but the ability to apply it to portfolio selection is difficult to prove. Registered Representatives of IIROC firms do not typically qualify because although they do make specific investment recommendations and do construct client portfolios, many are limited by their firms to specific model portfolios, which may not involve the in-depth analysis the regulators require. MFDA Representatives also usually do not qualify because they are selling pre-packed products which do not involve the necessary analysis. However, each application is reviewed according to the information provided by the applicant so it is important to highlight relevant experience showing your activities in this field.

For those individuals that do not have the necessary courses to neatly fit into the requirements, there is the possibility of filing an exemption application. However, you would have to have many years of relevant experience to make up for the lack of book knowledge. A simple rule of thumb is that enough experience can make up for a lack of courses, but no amount of courses can make up for a lack of experience. In applying to be registered under a Portfolio Manager, the regulators do ask for letters from former supervisors attesting to your past activities and should match what you have put in your application, so always leave your past employers on good terms because you will need their support when seeking registration.

Dealing Representatives are only allowed to sell products that have been approved by the Chief Compliance Officer (CCO) — and only after they’ve been trained on a product features, risks and costs. Depending on your firm’s size, product due diligence may be performed by the CCO herself, or by a dedicated corporate finance team.

Here’s how you can supplement your firm’s process.

1. STICK TO WHAT YOU KNOW

It makes sense to only look at opportunities that fit in with your expertise. If you are expert in mining, it is unlikely that you would be in a position to effectively evaluate the future prospects of a technology firm. If the investor in interested in a product that you don’t understand, you have a responsibility to turn them away or refer them to a qualified colleague.

2. ASK WHO’S BEHIND THE PRODUCT

A product is only as good as the guiding minds behind it. Research who they are, where they’ve worked and how their experience applies to this venture. You want to do business with a management team that has the necessary expertise and a proven track record.

Also, look for potential conflicts of interest. For instance, if you’re vetting an exempt product, you may want to avoid a car part manufacturer that receives services from a related company (i.e., both companies are owned by the same people). That manufacturer may not look for the best deal on services if management receives compensation on both sides of the deal.

3. SCRUTINIZE THE PRODUCT ITSELF

Examine the investment’s features to determine whether the product’s structure is overly complex and whether there is sufficient transparency in the product’s disclosures. What are the expected returns and do they make sense given the risks?

You’ll also need to determine the risks to a profitable outcome. This is particularly important when examining an illiquid product, which will offer few opportunities for selling if the investment does not perform as expected.

To do so, look at internal and external factors: if the CEO dies, are their qualified people to take over? If the first product prototype fails, does the company have enough cash to try again? If the Canadian dollar goes up, how would that impact the firm’s operating costs? If you recommend this product to a client, could they lose the full investment?

You also have to look at where the product is situated within its industry. Does the firm have something to offer that no one else does? Why would you choose this investment and not another one? You also have to ensure that the product issuers are abiding by their regulatory obligations regarding appropriate disclosure in their offering documents. Depending on the nature of the product, they may need to produce audited financial statements, file exempt distribution reports on a timely basis and have their marketing material conform to securities legislation. The type of product and how it is distributed will determine what sort of filings have to be done and whether or not they’re public. However, as part of the due diligence process, the issuer must be willing to share whatever information is necessary for you to make an informed opinion on the suitability of the investment.

4. PUSH FOR BETTER ADVISOR TRAINING

Your firm should be able to provide detailed information to prospective clients about the product and teach you to do a suitability analysis. The training should include specific information about the features, risks, and costs associated with the investment. It should also explain what differentiates this product from others available. The compliance department must document who has attended the training and when, and include copies of the presentations in those people’s training files.

Having a compliance platform in place to manage both KYP and KYC, as offered by KoreConX, will help you to manage your due diligence process. All firms inherently do due diligence as part of their business activities, but one must be able to document each step in the process to show why one particular investment was favoured over another.

Those that can remember the wild wild west of crowdfunding back in 2010-2011 will have a feeling of dejavu seeing the 2017 ICO market take off.  Not that crowdfunding ever saw the numbers that we are seeing in the ICO market, but that is because the securities regulators stepped in early when crowdfunding launched in order to protect the market.

What ICO’s are demonstrating, that crowdfunding never had the chance to, is the global willingness of investors from a variety of countries to invest in all sorts of early stage companies.  The main reason here why ICO’s are having success where crowdfunding did not comes down to the underlying technology, namely “Blockchain”.

ICO’s have demonstrated that investors are willing to invest in companies anywhere in the world.  Traditionally, it was believed that investors like to only invest locally.  This local investing premise has been the driving force behind the success of Silicon Valley and other hot spots where companies and local investors meet.  

So what is different with ICO’s?  It is mainly due to the underlying Blockchain technology that brings TRUST to investors/contributors who immediately get a token in exchange for their contribution.  

According to the cryptocurrency statistics website Coinschedule, a total of 235 ICO’s have raised over $3.7 billion in 2017.  There does not appear to be any slow down in this market as this seems to be the new flavour for companies raising money.

Going forward what does it mean for investors and issuers alike who are preparing for the opportunity of utilizing an ICO as a way of accessing capital in 2018?

The wild wild west of ICO’s is now done and the days of fluff whitepapers, will not be enough to get your ICO off the ground.  Going forward companies will need to comply with full disclosures, managing, directors, agreements, compensation, financial statements, etc

So where to start:

I won’t go into the merits of which type of token you want to offer: utility or security.  This article will be solely based on Regulated ICO, Security Token, or TAO (Token Asset Offering) in the USA and Canada for companies, investors and platform operators.  But I strongly believe that most global regulators (as we are seeing more and more) will be regulating ICO’s as securities.

What is a Security Token, Regulated Token, or TAO?

The main characteristic of all of these that is important to understand is that they are subject to securities laws.  The token has to be sold through a securities exemption to allow the investor to purchase and sell the token in a secondary exchange.

It’s very important to understand the exemptions you will use to sell your Security Token as each one will have different qualifications and rights to the investor who is purchasing your token.  This is outside of the workings of your token, these exemptions must and should be applied using a smart contract to protect the company, investor and platform who are all part of the crowd sale for the Security Token.

For the pre-sale stage of your Security Token companies are opting for issuing a Simple Agreement For Future Tokens (“SAFT”) to investors, this allows the company the time to build out its protocol and issue the token to the general public under the securities exemptions they will use.  The SAFT was created by one of the leading authorities in the USA Marco Santori at Cooley LLP.  

What is a SAFT?  Simple Agreement for Future Tokens

As outlined in the article, SAFTs are designed to be sold to accredited investors as a means of funding development in a way similar to the way equity changes hands in traditional venture capital. In a SAFT sale, no coins are ever offered, sold or exchanged, rather, money is exchanged for traditional paper documents that promise access to future tokens.

Now we have the framework so let’s look at how investors, companies and platforms operated by dealer can participate in these Security Tokens.

USA Investors, Issuers & Platforms

USA has two main exemptions that investors must fall under in order to invest:  

• Accredited Investor (AI) 506(c) Reg D

Any accredited investor (AI) who qualifies under the regulations can invest any amount and purchase Security Tokens from any qualified issuer.  The AI will have the ability to also sell and exchange their security token in a secondary security exchange like Overstock Tzero.  Filecoin raised US$150M utilizing this exemption with a SAFT.

2. Non accredited Investors RegA+

This is for everyone else over the age of 18 who can now invest in companies and also have the ability to purchase Security Tokens.  For companies who have used this exemption it has allowed investors after a 4 month hold to sell their securities in public stock exchanges.  For the same to occur in token’s a new exchange will be required to able to sell or purchase these tokens.  

For companies based in the USA you have two exemptions under which you can sell your Security Tokens.  For non USA based companies you can only used the AI exemption unless you are a Canadian based company in which case you are allowed to use the RegA+.

Canadian Issuers & Platforms

Canada is similar to the USA in that it has two exemptions that can be utilized by investors:

• Accredited Investor Exemption

Similar to that of the US, and many global jurisdictions, AI’s can invest in private companies.  Any issuer, Canadian or not, can use this exemption to raise money from AI’s in Canada.

2. Non Accredited Offering Memorandum (OM) Exemption

Canada offers two types of non-accredited investors under the (OM exemption).  Anyone over the age of 18 (with limits) can invest and purchase securities and Security tokens but they are not able to resell them on any secondary exchange.  

Any issuer, Canadian or not, can use this exemption to raise money in Canada.  Issuers can use the OM to sell their tokens to investors which allows you to reach everyone over the age of 18 who can invest as low as $100.  So this exemption gives you the ability to reach the masses.  Any investor who purchased a token under this exemption there is no liquidity, you cannot take his token to an exchange to trade.

Summary

For issuers you need to understand the exemptions that you can use and how it will impact your investors.  For companies based in the US and Canada, you must follow these exemptions to make sure you are not offside with securities regulators.

For issuers from outside of USA and Canada, you need to understand what investors you might be able to sell to and what your regulatory requirements are for accepting that investment in your Security Token.

The best exemption at the moment in both countries and globally is the AI (accredited Investor) exemption. This exemption allows the AI to take their token to a secondary exchange and sell it to another AI.

2018 first company to announce a Security Token is KodakCoin who has also made a follow on announcement that it will list its coins on TZeros secondary exchange for Security Tokens.  

As you can see the emergence of Security Token is already happening so it is time to get your company ready for the new wave – Security Tokens ( #TAO ).

I know what you are thinking, why on earth do a blog regarding a hashtag.  Clearly everyone knows what Investor Relations (IR) is and how to find it.

I felt that it was time to launch a new tool to find information about private companies online for 2018.

Like any good article I wanted to make sure it had the two elements:

The Problem
Yes it’s true globally we all know the term Investor Relations (IR).  Most companies hire an IR professional internally or externally to perform investor relations functions.  The problem is when you go online and start searching on google, twitter, facebook, and LinkedIn and you search for IR, all you get is IR for public listed companies.  The hashtags they have are all about public listed companies.

2nd part to our problem.  
With the emergence of online investing also known as “Equity Crowdfunding and ICO’s” these private companies conduct themselves like public companies

Although these companies are still private, the tools and strategy that you would apply to public listed company does not work with private companies.

Private companies have one great advantage over public listed companies and that is they know all their shareholders.  Each shareholder is directly connected to their company unlike listed companies.

The industry is maturing and more companies are understanding the value of having the appropriate strategy, resources and tools for performing their IR strategy.

We are also seeing a convergence of IR professionals leaving the public listed companies to take their experience and apply it to private companies.

More investors today are investing in private companies and private companies need the guidance, strategy, resources, experts and tools to be able to deliver.

The Solution
The private companies need a way to be seen and filtered separately from the publicly listed companies.  The introduction of this new hashtag will help the industry, media, journalists, investors and market at large.

Today private companies, professionals, service providers, etc.. can use the hashtag  #IRPrivate

Looking forward to seeing the activity of private companies using the hashtag and those who are engaged in providing services, tools, etc to private companies.

Happy Investor Relations #IRPrivate

2018 The year that Private Companies enhance their Investor Relations (IR) efforts.

Think of yourself standing in front of a room full of strangers, about to give a speech on particle physics.  You don’t know if they are experts on the topic, or know nothing at all.  You don’t know what their interests are, what they think you’re going to tell them, what they want to hear about, or even what language they speak.  What if, on top of that, there were rules about how and when you could speak to them.  How would you make your case?  What would you say?  How would you make sure you’re understood? Would you try and say anything at all?

This is the issue most companies face when it comes to shareholder communications. When I began researching this article, it initially seemed that discussions about shareholder communications and tactics only happened during proxy season, or the time of year when most companies hold their annual shareholder meetings.   There’s volumes of material analyzing proxy season trends, pointing to spikes in engagement at that time.

But even these discussions recognize that the shareholder relationships are evolving, becoming more involved.   Increasingly, the powers that be in many organizations are beginning to appreciate the need for proactive shareholder communication, and directly engaging year-round.  If communications are reactive only, then boards and management are opening themselves up to risk.  Shareholders are interested in transparency and being actively engaged by the companies they have invested in.  56% of S&P 500 companies disclosed engaging with investors in 2015.  This is up from a mere 6% in 2010.

Larger companies establish strict parameters for information flow, drafting Shareholder Communication Engagement Policies detailing who, what, when, where, how, and why.  The goal of such policies is to ensure transparent, accurate, and open communications that lead to good governance, and they reveal a slowly shifting perspective on proper governance, and what it means to be a good corporate citizen.  They’re often publicly available to review, and easily searched.

Investors are wary of engagement for engagement’s sake alone, but the fact remains that transparency, quality of communications, and building in mechanisms to keep shareholders in the loop are measures essential to not only reducing the chances of shareholder activism and risk, but also improving overall relations, and creating good will.

Case in point, there are volumes of conversation around what best practices in Investor Relations are.  Under some definitions, these are practices most widely adopted because they minimize possible legal compliance issues, and are standard practice, but investor relations is multifaceted, as is the related discussion.

When Vanguard announced it would urge the boards of companies it’s invested in to  found a Shareholder Liaison Committee in December of 2014, it sparked a conversation about shareholder-director communications, and the idea that directors can and should be shareholder advocates, according to Edelman.  It marks a departure from the, at times cozy, relationship boards have had with management in the past that has left shareholders in the dark, and out of the conversation.  Often the purview of management alone, boards have been hesitant at times to add their voices to the conversation for fear of creating a conflict, but how can they be effective spokespeople for their shareholders if not involved in the dialogue?

What is obvious is that in the age of information gluttony, engagement is unavoidable, and when done right, extremely beneficial.  Over the course of this series on Shareholder Communications, we’ll dive in depth into best practices, dos and don’ts, regulations, trends, and pitfalls of silence.

Compliance Review

Compliance reviews by regulators follow a prescribed format depending on what has triggered the visit, whether a full compliance review, targeted review or a for-cause review based on information that has come to their attention. But, during any type of review, there are certain deficiencies that are more significant than others. Here’s what regulators look for.

1. STRENGTH OF COMPLIANCE SYSTEMS

Many firms go through the whole registration process, and still don’t have a solid compliance system in place. This includes: detailed written policies and procedures that actually reflect what the firm does and how it operates; and all staff having ready access to it. Firms must devote sufficient resources to compliance based on their size, complexity and potential for associated risks. Firms can’t expect advisors to do the right thing without giving them specific written rules. These should include how to gather KYC information, explain the products available, what documentation is required, marketing rules and general employee conduct. The Chief Compliance Officer must, on an annual basis, also produce an annual report to the board assessing how the firm is complying with securities legislation, including any deficiencies and how they’re being addressed. Regulators will read this report to get an idea of how seriously the firm takes its compliance responsibilities.

2. DEALING WITH CLIENTS IN OTHER JURISDICTIONS

Advisors cannot deal with clients in other provinces unless they’re registered there. If your client moves to another province, then the mobility exemption will allow you to continue dealing only with those types of clients, with certain restrictions.

For those clients who live outside of Canada, you have to ensure you meet the registration requirements of the foreign jurisdiction. The rules vary greatly from country to country, and regulators will expect you to have taken steps to confirm you’re not contravening foreign regulations. Their view is that if you contravening the regulations of another jurisdiction, then you are not taking your compliance responsibilities seriously.

3. OUTSIDE BUSINESS ACTIVITIES

Advisors must disclose all OBAs on the National Registration Database (NRD) and detail what policies are in place to mitigate the potential for conflicts of interest. This disclosure includes items such as: if you’re licensed to sell insurance; have a holding company; coach junior hockey; and are involved in a charity or a religious organization. It’s best to over-disclose to ensure you’re not accused of hiding anything.

Regulators will review OBAs to determine whether you’re using your position unfairly and to the detriment of the client. This is particularly important when you are promoting a product from a related issuer as many EMDs do. You have to be extremely careful to show that, even though you have a vested interest in promoting a particular issuer, you are still acting in the best interests of the client. A fulsome suitability review and backup notes must explain why the investment was appropriate for the client. This includes a detailed KYC form containing information about the client’s current financial position, their objectives, investment knowledge and risk tolerance. In recommending a particular product, advisors need to explain in writing what makes this investment appropriate, as opposed to similar products. Simply ticking the boxes on the KYC form does not demonstrate that you have had a meaningful discussion with a client.

4. DELEGATING KYC AND SUITABILITY TO A THIRD PARTY

In some firms, relationship managers, account executives or other third parties fill out KYC forms. Regulators have repeatedly stated this does not conform to registration requirements, nor does it ensure that an advisor will deal fairly, honestly and in good faith with a client. The view is that these third parties are not qualified to have the type of meaningful conversation that a registered individual needs to have to determine the client’s financial needs. Further, it doesn’t give the advisor an opportunity to explain the firm’s investment strategies and what the client can expect. This leads to client confusion about who is actually managing her account, and leaves an advisor open to claims that certain investments were inappropriate if the KYC is deficient. So, you must make every effort to meet clients face-to-face. If that’s not possible, at least speak to each client via phone or email. And ensure compliance doesn’t sign off on an application until they’re confident the client information is accurate and investments are suitable.

5. SELLING SECURITIES TO NON-QUALIFIED INVESTORS

The current rules surrounding distributing prospectus-exempt products can be confusing and don’t easily apply to clients’ real-life situations. However, if an advisor cannot clearly show that a client qualifies as an accredited investor, and that the investment is suitable, compliance has a duty to reject the trade. You need to ask detailed questions and take copious notes to explain the client’s financial position, and why you’re recommending a particular investment over another. The sale of securities to non-qualified investors is a serious breach of securities legislation, and can lead to having your registration terminated, the trade being unwound and even the firm’s registration being suspended.

A compliance review can be a useful tool to determine how effective you are in adhering to securities legislation. Perform an internal review, which includes an annual review of your policies and procedures manual, all NRD profiles, and a random sample of client accounts. Having a compliance platform in place to manage both KYP and KYC, as offered by KoreConX, goes a long way to preparing your firm in case the Regulators come knocking.

The All-in-ONE platform

The promise land of technology since the early days (going back to the 80’s) was to have one platform to make us more efficient, bring us online to collaborate and connect to a variety of other technology services like Fintech, InsurTech, LegalTech, RegTech, etc.

The internet changed a lot for businesses and how companies operate.  The emergence of online applications became the way for most of us to manage our business with such companies as Quickbooks, FreshBooks, Zero that provide you online accounting; Hubspot, SalesForce, Agile that provide you CRM online; and the list goes on and on in an attempt to automate different departmental functions of your businesses.

The challenge most companies are now having is how to manage all these applications which are all standalone online.  First came NetSuite, the perfect platform to manage the daily operations of a company (Accounting, Sales, HelpDesk, etc..).

What NetSuite has done for the day to day operations of a business, KoreConX is doing for companies corporate, boardroom and investment activities.  The KoreConX all-in-one platform helps companies manage their non day to day operations such as: BoardRoom, Cap Table, Shareholders (all securities holders), DealRoom, Portfolio (Investments), Investor Relations and so much more…

The 21st Century is about ONE login ONE Platform                          KoreConX