Lawyer blames securities commission for reduced exploration.

Lawyer blames securities commission for reduced exploration

The Ontario Securities Commission (OSC) is partly to blame for the current downturn in mining exploration activity, says Toronto lawyer Steven Vaughan.

Vaughan was a member of the Thompson Committee which, in 1987, recommended changes to the Securities Act concerning the financing of exploration work done by junior mining firms. He says the securities commission took the committee's recommendations too far.

"People in the government only want to write a perfect law. They don't care about the effects it will have on the industry," charges Vaughan.

According to the lawyer, the Thompson Committee recommended that 45 cents of every dollar raised by a stock promoter must be spent on property development, with the balance going to the promoter to cover his costs.

In 1988 the OSC ruled that 65 cents of every dollar raised must be spent on property development.

"We (the committee) felt that the dealer should at least be able to break even. There has to be something in the deal for the promoter," Vaughan says. "Now the dealers don't want to finance any mining deals. Nobody wants to do the deals."

Ironically, the changes to the act were designed to make investing in exploration more attractive by increasing the level of security. It was intended to draw business away from the Vancouver Stock Exchange (VSE) which has a reputation for high-risk or speculative mining operations.

"The OSC wanted to bring the exploration activity back to Toronto," recalls a source in the securities industry.

The source claims that unlisted securities dealers raised approximately $180 million for junior mining operations in the year prior to the adoption of the OSC regulation. The figure plummeted to zero in 1990.

"It (investment) just dried up," he says. "They changed the rules in such a way that the rules are so complicated that the deals can't go through."

The source claims that there had been as many as 150 broker/dealers involved in financing junior mining firms in the 1950s. The number is now between six and eight.

"The number just dwindled down as the government made the rules more stringent," he claims.

The source claims that only three stock promotions took place last year - and none of them involved Canadian properties.

"It's very hard to raise money because of the Securities Act," comments George Babcock, the owner of several Hawk Junction-based exploration firms.

Babcock says he has resorted to equity financing to fund his latest ventures. It is a move he dislikes because he has to give up control of his operations to stock holders.

"It's not the same as grassroots financing," he says.

Equity financing through public stock offerings is now one of the few ways to raise funds to cover capital costs. However, the rules for this method of financing are even more stringent.

To list stock on the Toronto Stock Exchange a mining company must have a satisfactory program of exploration or proven reserves to provide for a mine life of three years or more.

The company is also required to have adequate working capital to carry on business and to display satisfactory evidence of a reasonable likelihood for future profitability.

In addition, the minimum requirement for working capital, depending on company reserves and pre-tax cash flow levels, could be as much as $500,000.

QUALITY CONTROL

The 1988 changes to the Securities Act also included a provision requiring the promoter to invest $60,000 of his own funds into the property being explored. This provision was intended to improve the quality of the properties being offered to investors.

"There were some properties which were being offered that didn't have any type of outcropping. They were just a swamp," recalls Vaughan. "The money was raised and the promoter left."

Fenton Scott, president of the Prospectors and Developers Association of Canada (PDAC), says the PDAC was anxious at that time to ensure that promoters could not abuse the system.

"There weren't really any abuses. It was more the potential for abuse that we were concerned about," Scott recalls.

Media reports at the time the final recommendations were made to the OSC indicated that promoters were taking upwards of 70 per cent of the money they raised to cover their personal expenses.

"It was very speculative, but it was a better gamble than buying a lottery ticket," recalls Scott. "While a lot of people lost their shirts, on the average people made a lot of money."

OTHER FACTORS

Vaughan says there are additional reasons why the province's junior mining firms are having difficulty raising investment capital.

The reasons include the death of the flow-through share investment incentive program, the lack of other tax incentives, the general economic climate and strict environmental regulations.

"All these factors combined have killed exploration," Vaughan says.

"It was a double whammy in that the market went down and tax incentives (such as a 15-per-cent depreciation allowance) were taken away at about the same time," adds Fenton Scott, president of the Prospectors and Developers Association of Canada (PDAC).

Scott also cites the loss of flow-through shares as a factor in the decline in exploration activity.