An investor advocacy group is raising concerns about the Ontario Securities Commission’s (OSC) plan to introduce a new offering memorandum (OM) exemption.

The Canadian Foundation for Advancement of Investor Rights (FAIR Canada),says that regulatory efforts to expand exempt market offerings for retail investors — such as the OSC’s plans to introduce a new OM exemption, and a crowdfunding exemption — are being driven by industry lobbying and political pressure to expand funding for small business. And, it questions the wisdom of creating new exemptions targeting retail investors, noting that theyare vulnerable to a part of the market that has a history of poor compliance.

“The retail investor portion of the exempt market has an abysmal track record when it comes to compliance and fraud,” it says;noting that “numerous compliance reviews by regulators indicate a high level of non-compliance with the OM exemption”, and it says that “There is widespread fraud and financial loss linked to the OM exemption.”

It also says that it is has “not seen any empirical evidence that the OM exemption will contribute to the fair and efficient functioning of capital markets.” And, it questions whether the OSC has adequate resources to oversee Ontario’s current exempt market, let alone an expanded exempt market.

FAIR Canada “suggests that the OSC focus on improving compliance with the current exempt market requirements before proceeding with an OM exemption that will expose all Ontario investors to unregulated high-risk investments.”

Moreover, it argues that there should be empirical research “to determine the incidence of fraud, misrepresentation, and resulting investor losses through purported reliance upon the OM exemption is necessary prior to enacting any changes.”

At the same time, FAIR says that it supports other options for increasing access to capital for small businesses. “Regulators should prioritize this goal by streamlining the rights offering exemption and consider other exemptions for sales to existing shareholders for listed issuers. Such reforms will help listed [small firms] that are regulated and that have provided proper disclosure and present fewer risks to retail investors,” it says.