In the good old days of Howe Street, venture stock-brokers would act as an intermediary between junior mining companies and investors. This is a somewhat murky ethical practice of the brokers having two masters, both the companies they were helping to get off the ground, and the clients with which they were to serve. Investors tolerated this conflict of interest because they knew what they were getting into, and sometimes, they made a lot of money backing early stage deals.
However, in recent years, large banks have consolidated the brokerage business, now controlling 95% of Canada's wealth, according to some estimates. The banks do not want their brokers and clients to play in speculative securities like junior miners because of the risks and perceived conflicts of interest. Also, the big banks want to earn a management fee on assets over the long term. Short term transactional business, while excellent in boom years, is not a consistent business model for them.
These are not the only challenges facing the capital formation process for junior miners, according to veteran TSXV analyst John Kaiser. High frequency trading, discount brokerages, and declining commodity prices have all but killed the after-market for shares in junior miners. The result is a system that is collapsing on itself.
Kaiser believes the easiest way to bolster the sector, which exists to provide capital to find and develop new mines, is to abolish Accredited Investor Exemption rules that currently restrict non-rich people from giving money directly to the treasuries of these companies. Currently, only Accredited Investors, or those making over $200,000 annually or with more than $1,000,000 in liquid assets, are able to give money directly to companies in exchange for shares, while those earning less than those thresholds are restricted to buying shares in the open market. This is a bit of an oversimplification, and there are some exceptions to this.
"Net worth does not imply sophistication," Kaiser has said, and he believes that eliminating these restrictions will open up an enormous new audience of investors to the sector, which could help get discoveries and development going again, even in a declining commodity price environment.
The existing regulatory and disclosure practices of Canada's junior public companies should be leveraged into a new financing system for junior miners, Kaiser believes. He envisions a web-based system whereby regular, non-Accredited investors with accounts that are 100% their responsibility, with no compensated intermediary, should be able to invest directly in early stage companies. He went as far as to propose a 48 hour "Buyers Remorse" window so investors can back-out of their purchases, in case they drank too much wine or were charmed by promoters into investing in something they're not comfortable with.
"When it closes, the money gets swept to the company, and the certs and warrants get swept into the clients accounts, and a processing fee, maybe .2% or .4% gets charged, rather than the 8%-12% that the conflict of interest soaked trusted intermediaries have been socking the companies with in the private placement mechanism."
Kaiser believes the venture brokerage industry is history.
"The roles that they used to play are no longer viable."
We discussed this in chat.ceo.ca yesterday and a smart aspiring broker, Riley Skinner, provided a quality rebuttal to Kaiser.
"The real money is made on finding good positions for your clients and taking positions with them, maybe even being a part of putting the deals together. It's much more entrepreneurial than the Wealth Management model. Creation, not extraction. - speaking from no experience."
Riley continued, "Not to mention the fact that only a few places "specialize" in it anymore. The margins may be slimmer, but the pie is much greater."
Kaiser was not all doom and gloom during our interview, noting that the degree of professionalism that has entered the mining sector has never been stronger and will not go away.
He made the case for speculative investors to begin paying attention to mining explorers and developers because of the finitude of the upside potential.
"You can quantify the success potential of an exploration play much more effectively than you can some new medical device or new mobile app," Kaiser said. "These things are all benefiting from the giant momentum that's on the upside, this momentum is peaking right now, this will all be descending into the garbage can over the next five years. During this period, people who want to make high risk, high reward bets should be looking at the resource sector."
"If you want to gamble in juniors, you need ten different stocks to diversify that risk. If you think you can pick the one stock that's going to be a home run, I guarantee you will lose."
"I agree there's been a lot of mismanagement, but there's also been excellent management, and we're now seeing a winnowing from the wheat from the chaff."
"When the tide rises, most of the boats are going to be tethered to the dock and are just going to hang there and go nowhere."
It has been a privilege to get to know John through time spent together at Cambridge House conferences, and as a subscriber to his newsletter ($250/90 days here). Consider a subscription as there is no equivalent junior mining research tool.
Enjoy this post? Pass it around!
Think John is off his rocker? Discuss in CEO Chat.
Hi!, Patrons Of CEO.CA Et. Al.:
This is a great article which spells a major difference in investing psychologies, according to my own experiences with the major investing houses for resource stocks. The schism here is that the major investment houses are seemingly dedicated to helping the already rich get richer leaving normal, middle class investors no recourse in promoting their personal ideas regards where to place their funds for investment prospects. That type of bias in my opinion is totally un-American and promotes elitism. Are we to really think that the major investment houses are there to certify their talents towards protecting their clients or otherwise believe that they want only management of huge accounts from those who can afford huge losses without big risks harming the major investment houses in consequence? Mr. Kaiser is a great advocate for Middle Class America isn’t he but he seems to have already incurred the distrust of the establishment majors who have been spoiled for decades without their positions being contested and scrutinized?
He has proposed a great wake-up call to all of US Middle Class Americans who have worn out their hopes and dreams along the lines that Mr. Kaiser represents in this article and it’s a cultural shock to find out that anyone has taken pro active steps to promote equal rights for all traders both large or small. Even in the commitment of traders charts reports we find three classes of traders don’t we: The Commercials; The Large Speculators and The Small Speculators? Isn’t that the proper set-up for the world of speculation in all resource commodities which adds three levels of speculative liquidity to the various resource commodities markets and is there anything WRONG with that type of positioning in the overall resource markets’ formation? Thank you Mr. Kaiser for your wake-up call in this arena of speculation in start-up and other resource markets designed to get the ball rolling faster and sooner towards the finances required to get OUR various resource miners working the way they can when they are well financed from whatever sources available to them in a much more FREE MAKET style environment. You most certainly have my complete vote of confidence!!
RUSS SMITH, CA. (One Of Our Broke, Fiat Money Corrupt States)
resmith1942@gmail.com
Or, just reinstate the Glass-Steagall Act equivalent in Canada, and eliminate banks’ involvement in insurance, brokerage, and investment banking, including the loophole of ownership of stand-alone corporations engaging in such activities. The Four Pillars of society’s economic health have become One, and it’s not going to be pretty: 2008, when all the Canadian banks had to be bailed out (some even by the US Fed) will look like party time when the next Big One hits. And if you don’t think it will hit, I’ve got some Asset Backed Security wallpaper to sell you.
The government is hosting on-line lotteries now, so why not allow on-line ‘investment’/speculation online through private brokerages (brokerages would be easier to regulate rather than certifying each mining company applicant)? At least the odds are better than 14 million to 1. Even the Howe Street boys yielded better returns than the lottery, and the volume of funding would be just a fraction of what’s blown on lotteries every year.
Qualms about truth in advertising are easy to resolve: In mining, you can win or lose and most or all people know this and are familiar with the term ‘moose pasture’. Have you ever seen a government lottery ad where people lose?