Summer 2018 by Private Matters Today Inc.

ISSUE 09 . SUMMER 2018

CANADA’S LEADING SOURCE FOR ALTERNATIVE LENDING AND MORTGAGE INVESTING EDUCATION

THE NEW NORM

ALTERNATIVE

OPPORTUNITIES FOR INCOME DIVERSIFICATION

EMERGING TECHNOLOGIES: ARTIFICIAL INTELLIGENCE

MIC’S: BUILDING A STRONG FOUNDATION

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OPPORTUNITIES FOR INCOME DIVERSIFICATION Ron Butler of Butler Mortgage Inc and Nadeem Basaria of Dominion Lending National highlight opportunities for mortgage professionals to diversify their income.

EMERGING TECHNOLOGIES: ARTIFICIAL INTELLIGENCE Finaeo Inc. examines up and coming technologies that have already proven to transform various industries.

MIC’S: BUILDING A STRONG FOUNDATION Susan Han of WeirFoulds LLP provides an overview of the fundamentals and costs associated with building a strong MIC.

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CONTENTS

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EDITOR’S NOTE As expected, 2018 has seen a large growth of originations in the private side. In this issue, we are expanding our focus to the capital raising side of the private lending business.

COVER STORY - WHY ALTERNATIVE INVESTMENTS? Al Bawa of Indigoblue Capital Corporation explains why Alternative Investments should be considered as part of your overall portfolio.

EXEMPT EDGE: INNOVATIVE SOFTWARE TO PROMOTE REGULATORY COMPLIANCE Exempt Edge discusses their innovative software platform focused on empowering users to be compliant while providing for an enhanced user experience.

EDITORIAL

DITOR’S NOTE

2018 has been an interesting year thus far with several significant changes that came into effect. Stress test, syndicated mortgages, and interest rate increases are some of the key changes that have been widely discussed and analyzed. All three have necessitated strategic maneuvering by mortgage originators and mortgage lenders. While some mortgage originators and traditional lenders have experienced a notable slowdown, private mortgage lenders (including MIC’s) and originators have benefited from the shift of business from the traditional side to the private side. We had anticipated such a shift and have previously provided timely information to our readers. In this issue, Private Matters Today has expanded its focus to the capital raising side of the private lending business. The rationale for broadening our scope is quite simple: the private lending market is significantly expanding. Many of our contributors in this edition have provided specific statistics to underscore this point. Previously, the capital raising function and related nuances in the private lending arena have by and large gone unnoticed or received very little attention. As an educational publication, one of our key objectives has been to supply timely information on emerging trends so our readership can benefit and strategize accordingly to further refine its value proposition. To that end, in this issue, we take a deeper dive into the world of alternative investing with a view to demystifying some common misconceptions. We further provide our readers with a chance to get under the hood of emerging alternative investment opportunities such as Artificial Intelligence and Blockchain. Additionally, we explore the possibility of mortgage professionals diversifying their streams of income by embarking on Dealer Representative registrations to be able to raise capital from their client base. As always, we have sourced experienced leaders in their respective fields, who have provided their valuable time in ensuring that capital raising is done within the scope of Securities Laws while avoiding the common pitfalls. This edition also features groundbreaking software technology that assists registrants in dealing with investors professionally and compliantly. As I have maintained in previous notes, private lending as a market will not only flourish but will also gain additional oversight from the regulators. The companies that succeed in the long run will have proactively adjusted their operations and approach to ensure that compliance is an integral part of their playbook.

www.pmtoday.ca Issue 09 . Summer 2018 CONTRIBUTORS EDITORIAL Editor Harry Singh Co-Editor M. Alessandra B. Ocampo ART & PRODUCTION

Al Bawa Ron Butler Nadeem Basaria Aly Dhalla Jonathan Bega Stephen Preston Susan Han

Art Director / Designer Nina Salehpoor

FOR EDITORIAL & ADVERTISING INQUIRIES PLEASE CONTACT: Prakash Bector, VP, Sales & Marketing Tel: +1 416-400-3977 x 20 Tf: +1 800 380 4078 x 20 info@pmtoday.ca Private Matters Today Inc. 135 Queens Plate Dr, Suite 410, Toronto ON M9W 6V1 Private Matters Today Inc. is a national event publishing company. We produce a national print and digital publication as well as events dedicated to providing educational content surrounding the alternatives and lending industry.

Happy reading! Harry Singh

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Copyright is reserved throughout. No part of this publication can be reproduced in whole or part without the express permission of the editor. Contributors are invited, but copies of work should be kept, as the magazine can accept no responsibility for loss.

COVER STORY

HY ALTERNATIVE INVESTMENTS? ADDING ALTERNATIVE INVESTMENTS TO YOUR PORTFOLIO CAN ACTUALLY HELP MITIGATE VOLATILITY AND DIVERSIFY YOUR OVERALL PORTFOLIO Article by Al Bawa, CIO Indigoblue Group of Companies

For decades, the conventional wisdom of investing in stocks, bonds and mutual funds from traditional asset classes has been how most Canadians diversify their portfolios. The idea of investing in private or alternative markets is largely unknown to most investors. However, adding alternative investments to

a portfolio can help increase diversification, improve downside protection and enhance portfolio return. But before we take a closer look at each of these potential benefits, let’s start off by defining what alternative investments are.

Exhibit A: Investment Universe

INVESTMENT UNIVERSE

TRADITIONAL ASSETS Cash Government Bonds Corporate Bonds Equities

ALTERNATIVE ASSETS Hedge Funds Managed Futures Private Equity Real Estate

Alternative Investments Defined The alternative investment universe consists of real estate (residential and commercial), hedge funds, liquid & illiquid private equity funds and natural resource partnerships. The Chartered Alternative Investment Analyst Association (CAIA) defines an alternative investment as one that does not have a strong correlation with a traditional investment such as stocks and bonds. As we’ll see later, this idea of low correlation to traditional asset classes is a key advantage for portfolio diversification. Many investors include alternatives in their portfolios to provide income, enhance returns, lower overall portfolio volatility or

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simply provide all of the above. What was once considered a difficult asset class to access, alternative investments have become increasingly popular in recent years as investors demand new sources of return in a low interest rate environment. As a result, alternatives are now considered a key building block in a properly diversified portfolio. Another benefit that is fuelling their popularity is the vast array of alternative investments available in Canada. In addition to those mentioned above, income-oriented options such as a Mortgage Investment Corporations (MICs) and growth-focused options such

as hedge funds, real estate and infrastructure projects also fall into the alternatives category. When you take into account the diversification benefits and the potentially higher risk adjusted return, this investment category is definitely worth a closer look.

Dispelling the Risk and Volatility Myth But aren’t alternative investments more risky than traditional mutual funds? Not necessarily. We hear this all the time from investors and a better understanding of how alternatives operate will help to clear up this common misconception. While alternative investments carry certain liquidity constraints and may also carry considerable risk, the very nature of alternative investments are designed to minimize volatility over the long term. This is especially true when combined to form part of an investors overall asset allocation. It is also important to note that a lack of liquidity can be considered an advantage in certain circumstances. For instance,

if there is a significant downward or upward move in the public markets, some investors act irrationally by selling when the markets are down or buying when the markets are up. The emotions of fear and greed can lead to poor investment decisions and can lower an investor’s overall return. Under the same circumstances, the less liquid private markets don’t always give investors the ability to ‘react’ to external market circumstances. The enforced discipline from lower liquidity can often benefit investors by saving them from emotional buy and sell decisions. But what about volatility? As an investor, it’s important to note that an investment’s ‘risk’ is often measured by its volatility. Interestingly, several studies illustrate alternative investments possess low to moderate correlation of returns to traditional investments. This again reinforces how including alternative investments into a portfolio, may help reduce overall portfolio volatility.

Volatility

Returns

30%

Over the past 15 years, alternatives had returns similar to stock...

...while the majority had significantly lower volatility

20 15 10 5

Real estate

Commodities

Stocks

Managed futures

Long/short fixed income

Long/short equity

Global macro

Bonds

Market neutral

Real estate

Stocks

Long/short fixed income

Long/short equity

Managed futures

Global macro

Bonds

Market neutral

Commodities

Source: Informa investment Solutions. Investing involves rick. Past performance is no guarantee of future results. Asset categories are represented by the following: bonds, Bloomberg Barklays US Aggregate Bond Index; commodities, Bloomberg Commodity Index; managed futures, HFRI Macro: Systematic Diversified Index; long/ short fixed income, HFRI Relative Value Fixed Income Corporate Index; global macro, HFRI Macro Index; long/short equity, HFRI Relative Value Index; market neutral, HFRI Equity Hedge: Equity Market Neutral Index; real estate, NAREIT AII Equity REITs Index; stocks, S&P 500 Index. The performance information above is based on annualized quarterly returns from 2002-2016 Volatility is represented by annualized standard deviation. Use of other beginning or ending points, or of a longer or shorter period, would result in different relative performance among the asset classes. Indices of managed products, and hedge funds in particular, have material inherent limitations and should not be used as a basis for investment decisions. It is not possible to invest directly in an unmanaged index.

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COVER STORY Diversification and the Low Correlation Advantage Correlation is an investment term that measures the degree to which the price of two securities move in relation to each other. The key to achieving portfolio diversification is to include asset classes that have low correlation with each other. This is the

area where alternative assets come in. As you can see from the table chart below, alternatives provide low and often negative correlation to a portfolio of global equities and fixed income.

Correlation Commodities Hedge funds (global) Global infrastructure equity Global private equity Global core real estate Canadian real estate -60%

-40%

-20%

20%

Global Treasuries

40%

60%

80%

100%

Global Equities

Source: BlackRock Long-Term Capital Markets Assumptions Long Term Expected Correlations of alternatives assets with Global Equities and Global Treasuries

Studies show that diversification among several traditional asset classes is not always effective during bear markets as those assets can become highly correlated, more so in fact than they do during bull markets. Also, for over a decade now, traditional assets have become much more correlated, implying traditional diversification is losing its effectiveness.

We also know asset class diversification does not fully guarantee proper diversification. Studies have shown that comparing a traditional 60/40 stock and bonds allocation to that of a portfolio that contains a 20% alternative investment component would reduce overall portfolio risk without sacrificing performance. (Footer Kaplan Schweser 2015, CAIA, Hedge Funds & Managed Futures and core and Integrated topics, page 373)

A ‘Balanced Approach’ using Alternative Investments

Below, we illustrate an example where a traditional balanced portfolio of 60% Equities and 40% Bonds, provides a long term expected return of 4.8% with long term expected volatility of 8.2%. When an alternative asset class such as Private Equity is added to the mix, the portfolio returns are enhanced significantly and are also higher on a risk-adjusted basis. We call it the Enhanced Portfolio.

How might all of this information impact portfolio construction decisions? For starters we know traditional investors prefer not to put all of their ‘eggs in the same basket’ and typically invest into various asset classes with the intention of reducing overall risk.

10.0% Global priv ate equity

EXPECTED RETURN

8.0%

Global inf rastructure equity Global ex- Canada large cap

6.0%

Enhanced (40/35/25)

Balanced (60/40)

4.0%

Canada large cap

Canadian real estate Commodities

Global corporate bonds

2.0%

EM equity

Hedge f unds (global) Canadian bond aggregate Cash

EXPECTED VOLITALITY 0.0% 0.0%

5.0%

10.0%

15.0%

20.0%

Source: BlackRock Long-Term Capital Markets Assumptions . Long Term Expected Return and Long Term Expected Volatility Balanced portfolio consists of 60% Global Large Cap Equities and 40% Global Treasuries . Enhanced portfolio consists of 40% Global Large Cap Equities and 35% Global Treasures and 25% Global Private Equity

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Enhanced Portfolio Construction with Alternatives We know that traditional asset classes form the core building blocks of a well-diversified portfolio. Indeed, our goal is not to dismiss these investments for their obvious benefits. Nor are we suggesting building a portfolio that solely contains alternative investments. We believe that the optimal approach for investors is to incorporate an approach that includes both traditional and non-traditional investment categories working unison. When investing, it’s important to fully understand both the associated risks of a product as well as its growth or income potential. With this in mind, the benefits of low correlation, reduced volatility, broader diversification and a higher risk adjusted return available through alternative investments shouldn’t be ignored. When the topic of alternative investments comes up in your client conversations, ask them if they are aware of these benefits. Clients may be interested in learning more about options to help enhance their growth or income.

Al Bawa Chief Investment Officer Indigoblue Group of Companies

Al has been involved in the Financial services industry for over 20 years and has held progressively senior level roles throughout his career. Al began his career as an Investment Advisor with RBC Dominion Securities prior to moving into a Financial Advisor role with CIBC. He subsequently transitioned to leading large advisory teams in the GTA before taking on the role of national director with CIBC’s national sales and service team. Al then took on the role of Vice President, Retail Distribution and Small Business Banking where he led teams in both Alberta and Ontario. Al has been recognized as a top performer nationally with CIBC by being awarded the prestigious annual achiever award and has also been recognized as a top Vice President across Canada (top 10%). Al holds a Bachelor of Arts degree from Wilfrid Laurier University majoring in Economics and has successfully completed two coveted leadership programs at the University of Western Ontario & Cornell University in New York City.

PRIVATE MATTERS TODAY • WWW.PMTODAY.CA . 11

Indigoblue Group of Companies is pleased to announce the launch of Indigoblue Capital Corporation. Indigoblue Capital Corporation will engage in raising capital as a registered Exempt Market Dealer in the provinces of Ontario, Alberta and British Columbia, through a network of licensed Dealing Representatives.

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FEATURE

PORTUNITIES P FOR INCOME DIVERSIFICATION COULD CAPITAL RAISING BE THE ANSWER TO INCOME DIVERSIFICATION? Q & A by Ron Butler, Butler Mortgage Inc and Nadeem Basaria, Dominion Lending Centres National

In a year where monoline prime lenders and mortgage brokers alike have seen a predictable decline in mortgage volumes, it is only natural for both to seek ways to make up for lost revenue. The latest round of B20 changes that brought about a contract rate plus 2% stress test requirement for conventional mortgages in conjunction with other policy changes was targeted at slowing down the real estate markets have started to significantly affect real estate activity. According to Toronto Real Estate Board Market Watch report, sales activity in May was down 28.5% year over year. Many monolines have launched alternative lines to take advantage of the opportunity alternative lending presents to mitigate the lost revenue on the prime lending side. Private Matters Today reached out to Ron Butler of Butler Mortgages Inc. and Nadeem Basaria of DLC National, two mortgage industry veterans, to get their perspective on the impact the changes have made to mortgage brokers and what actions they are taking to deal with the slowdown in real estate and mortgage markets:

PMT: What headwinds lie ahead for mortgage brokers who overwhelmingly rely on commission income from mortgage originations? Ron: Many things are happening at once. 15 different forms of governmental rule changes in the last 3 years have finally started to crash mortgage origination of all types. Upward rate movement has choked off the refinance market: who would want to do a debt consolidation that took them from a 2.79% rate to a 3.49% rate? Purchase unit volume has stalled for a host of reasons and in 2019 mortgage brokers will see the introduction of numerous restrictions on the marketing of private mortgages if more than one investor is required. Nadeem: As the mortgage regulations continue to be enforced, it becomes increasingly challenging for mortgage deals to be approved. The mortgage industry has become a very competitive area; however, brokers are not the only ones who are competing

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for the business, the partners that work with the brokers and agents, namely the lenders continue to compete for the business. As more and more regulations come into play, refinancing can become a more unattractive option and borrowers will revert to renewing their mortgage with their financial institution. This will provide a challenge to those who are dependent on commissions.

PMT: In todayâ&#x20AC;&#x2122;s climate, should mortgage agents be more persistent in looking for alternative sources of income? Ron: Attention must be paid to non-prime lending because it is a growing space that should be exclusively controlled by brokers. The other two product lines that are natural fits to the mortgage industry are home insurance and life insurance. Nadeem: Absolutely! However, having said this, I always believe that mortgage agents and brokers are not just agents and brokers but professionals. I have always believed in focusing on providing financing options for borrowers. Working within the broker industry provides that opportunity to assist clients with many options available to them. At present, brokers can provide solutions with the many financial institutions available to them for most deals. As the market has grown over the years, options have become available for alternative sources of income which I believe mortgage professionals can provide to their clients. The network that the mortgage professional has developed and will demonstrate that they have the expertise to offer innovative solutions to borrowers and even investors.

PMT: What additional revenue streams have you added to your business other than straight mortgage originations? Ron: Our focus is developing both insurance elements in 2018 and 2019. We are also sharpening our focus on B lending in the coming months.

Nadeem: Having been in the mortgage industry for many years, I take pride in being a specialist in this area. With this knowledge base and with decades of industry experience, I have personally been investing in second mortgages within my own portfolio to create a supplementary income for myself. This has led me to seek out opportunities to work in the area of alternative investments.

There are so many options available to earn additional revenues, but I have always believed in working for the long run. I have always believed that you are only as good as your last deal.

PMT: What advice would you give mortgage agents looking for additional avenues to diversify their revenue?

Ron: Big education curve, likely an expensive venture to bring full EMD status to every brokerage so the likely alternative may be to seek out partners with the established facilities to provide those services.

Ron: Focus on all of your efforts on the mortgage side first, it is never a brilliant strategy when our main business is in a downturn to suddenly jump into new ventures. Double down on mortgages strategically and once that has gone as far as it can, bring on the other revenue sources in tandem. Nadeem: So long as you can provide honest and ethical solutions to your clients, I would highly encourage diversifying revenue.

Ron Butler Seasoned Mortgage Broker, Butler Mortgage Inc.

Ron Butler is a veteran mortgage broker. In his multi-decade career he has worked in almost every facet of the broker channel from alternative lending to online rate discounting. His eponymous brokerage: Butler Mortgage Inc. is a family business founded by his wife and their sons. Each son is a massively successful mortgage broker entirely in their own rights. After all these years Ron is still a student of the business, fascinated how technology will completely remake this business model in the next 10 years. Born in the Lower Mainland and having worked in most of the major cities in Canada Ron now calls Toronto home.

PMT: What are your thoughts on mortgage agents and brokers becoming licensed as dealer representatives to be able to raise capital for exempt products?

Nadeem: I think this is a good idea. The key word here is being licensed. So long as you work within the guidelines set forth, work within the ethics of the industry, I believe that mortgage agents and brokers will be regarded more and more as mortgage professionals.

Nadeem Basaria Dominion Lending Centres National.

Nadeem has been working within the banking and finance area since 1992, starting as a client service representative with Canada Trust while attending the University of Toronto. Over the years, he has held progressive roles acquiring knowledge and experience in financial strategy and products such as bank accounts, term deposits, RRSPâ&#x20AC;&#x2122;s, RRIFâ&#x20AC;&#x2122;s, Mutual Funds, Credit Cards, Loans, Lines of Credit, Home Equity Lines of Credit and Mortgage products. Nadeem graduated from the Seneca College Financial Service Underwriting program in 2009, with honours. Today, he is a highly successful Mortgage Advisor with Dominion Lending Centers and has generated over 600 mortgages and secured lines of credit throughout his lending career, for his clients across the GTA and at a national level.

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FEATURE

ERGING M TECHNOLOGIES: ARTIFICIAL INTELLIGENCE “THE FOURTH INDUSTRIAL REVOLUTION IS STILL IN ITS NASCENT STATE. BUT WITH THE SWIFT PACE OF CHANGE AND DISRUPTION TO BUSINESS AND SOCIETY, THE TIME TO JOIN IN IS NOW.” Gary Coleman, Global Industry and Senior Client Advisor, Deloitte Consulting Article by Aly Dhalla, CEO and Co-Founder, Finaeo & Jonathan Bega, Head of Growth and Founding Team Member, Finaeo

Have you ever heard of the Fourth Industrial Revolution? If your answer is no, don’t feel bad. The Fourth Industrial Revolution is a topic that, while a common source of conversation in the tech world, has seemingly gone unnoticed by the same people and industries that it’s in the process of transforming. At Finaeo, we are a young tech company that is built around the technologies and principles that are driving this revolution. As such, we thought it was worth defining the Fourth Industrial Revolution and discussing two of the most interesting upcoming technological innovations that have hit the mainstream in the last few years: blockchain and AI. When we talk about the Fourth Industrial Revolution, people don’t always grasp the magnitude of change. But, consider this, 52% of Fortune 500 companies have either gone bankrupt, been acquired or ceased to exist” since 2000.1 Companies such as Sears and Kodak, founded in the late 1800s, were helpless to defend against the Amazons and Apples of the world who ate them alive. Cab companies all over the world have been driven to the ground by Uber, while hotels struggle to defend against AirBNB. And we’re just at the beginning. But let’s take a step back and define what the Fourth Industrial Revolution is. The term was first coined by Klaus Schwab, the Executive Chairman of the World Economic Forum. Like other industrial revolutions, the Fourth Industrial Revolution focuses around how new technologies will unlock a new level of human productivity and, hopefully, flourish. Whereas the Third Industrial Revolution was the digital revolution that started with the microprocessor and led to the Internet and mobile phones, the Fourth Industrial Revolution will create 16 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

an even more fundamental shift in how we interact with our technology. To quote Wikipedia: “ The Fourth Industrial Revolution builds on the Digital Revolution, representing new ways in which technology becomes embedded within societies and even the human body. The Fourth Industrial Revolution is marked by emerging technology breakthroughs in a number of fields, including robotics, artificial intelligence, nanotechnology, biotechnology, Internet of Things, 3D printing and autonomous vehicles.” More concretely, the Fourth Industrial Revolution is marked by significant technologically guided events such as the autonomous truck just made its first delivery.2 It is Elon Musk’s prediction that your car is going to make you money through ride-sharing one day on its own.3 It’s the magic behind Nest’s $3.2B valuation4, Google’s new Duplex AI Assistant, and the recent study where a machine algorithm significantly outperformed dermatologists in predicting skin cancer in patients.5

1- https://www.capgemini.com/consulting/wp-content/uploads/sites/30/2017/07/ digital_disruption_1.pdf 2- https://www.wired.com/2016/10/ubers-self-driving-truck-makes-firstdelivery-50000-beers/ 3- https://electrek.co/2016/10/19/teslas-new-self-driving-car-can-only-make-youmoney-on-the-ride-sharing-tesla-network-not-uber-or-lyft/ 4- http://blog.nextmarket.co/post/73320622998/breaking-down-the-valuationfor-nests-32 5- https://www.cbsnews.com/news/ai-better-than-dermatologists-at-detectingskin-cancer-study-finds/

The insurance and the financial services industry have been latecomers to the party. However, while a touch delayed, these changes are inevitable. For example, a recent survey6, targeting executives at a global financial services companies, asked what percentage of their business they believed was at risk from standalone fintech start-ups. The average response was 23% executives believed almost one quarter of their businesses were at risk. And this is likely to be a severe underestimate. Incumbents tend not to see innovative killers until it’s all over. Blockbuster couldn’t even understand the threat of Netflix’s streaming and recommendation service. It thought the solution to its problems lay in doubling down on the best retail locations.

The Fourth Industrial Revolution, then, has one lesson for businesses: adapt or die. The pace of change of the last 20 years is not slowing down. In fact, it’s speeding up. Customer needs are evolving and changing. Companies that can use technology to better service these needs are seeing enormous returns. Companies that are mired in what we call the triple legacy problem - legacy software, legacy processes, and legacy people risk obsolescence and bankruptcy. As such, we believe that savvy business people need to know what’s coming. The purpose of this article, then, is to give you a 30,000-foot view of two major trends that are transforming the business world today: the blockchain and machine learning.

On Blockchains and Decentralized Trust Now, everyone reading this article has undoubtedly heard of at least one blockchain technology before - Bitcoin. And if you’re really in the know, maybe you’ve also heard of other cryptocurrencies such as Ethereum and Ripple. The blockchain is the structure behind almost all cryptocurrencies. So, what exactly is it?

Well, simply put, the blockchain is a chain of, well, blocks. Seriously, the blockchain is just a set of digital blocks that are connected. Block 2 comes after block 1. Block 3 comes after block 2. Within each block, there are a series of transactions. The blockchain, ultimately, is little more than a public ledger. It tells you the order of the blocks (1 2 3) and the transactions that took place in each block (1 Sally sent Bob 2 bitcoins, Jon sent Steven 1.5 bitcoins, etc.; 2 Bob sent Roy 1 bitcoin, etc.). In that sense, it’s not much different than the ledger an accountant might keep on her desk. So, what’s the big deal? Well, because blockchains solve the problem of a decentralized trust. Consider how your credit card works. You go to a store and present the vendor with a Visa. The vendor doesn’t know who you are but trusts Visa as a centralized middleman whose word is good. If Visa says that your credit is good, the vendor can accept it. Internally, Visa has a private ledger of all its customers and their balances. If you try to overdraw, the system rejects it and tells the vendor that your card was declined. Otherwise, the transaction goes through and Visa updates its ledger with your new, post-purchase balance. 6- http://www.businessinsider.com/fintech-briefing-financial-services-firms-fearfintech-koreas-deregulation-plans-crowdfunding-platform-partners-lse-2016-3

What blockchain technology does is remove the need for a Visatype middleman. It allows vendors to accept a digital currency without worrying about a trusted third party to verify that your transaction is legitimate. When you send a bitcoin out, you are essentially paying in virtual cash. Nobody must verify that you’re good for your money. If you have it, it’s yours. In the financial services space, payments have been the first true use-case of blockchain technologies. For the first time, people are buying and selling hundreds of millions of dollars worth of digital money every single day. Blockchain technology is opening the door to true internet cash, with no reliance on a large centralized middleman who can get hacked. It will also open the door to business cases surrounding microtransactions. Instead of using a

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E MERGING TECHNOLOGIES: ARTIFICIAL INTELLIGENCE

paywall, the New York Times may instead charge you $0.10 per article and your online wallet would automatically pay it if you agreed to it with minimal processing fees.

that can pass the Turing test? That would certainly be interesting and is undoubtedly the dream of most technological futurists. However, it is also outside the scope for this discussion.

Cross-border payments and remittances have also been major pain-points that blockchain technologies are seeking to solve. Ripple, for example, is helping dethrone SWIFT as the way for banks to quickly send money across borders - it costs 60% less and is almost instantaneous compared to the 3-5 business days currently required.

Instead, when we refer to AI, we are thinking about more simplistic intelligences - computers that can take in enormous amounts of data and make predictions. The fundamental technology underlying this is something called machine learning. When you log onto Netflix and it gives you a list of recommendations, it is using a machine learning algorithm to do so. By monitoring all the television shows and movies you watch and comparing your likes and dislikes to millions of other users with similar tastes, it can tell you that you’re going to love Black Mirror but hate Scandal, or vice versa.

Outside of payments, blockchain technology offers a few key value propositions. First, it’s transparent, so you can always see what’s going on. Second, it’s immutable, so once a block is stored, it can never be changed. Third, it’s decentralized, so you can cut out profit-taking. With insurance, there are multiple use cases we can foresee. The most extreme would be not-for-profit insurance organizations that were completely setup through blockchain - actuarial tables would be generated, people would purchase a policy from a collective pool, and that pool would automatically be held in escrow and payout upon a purchaser’s death. It would be like how insurance was done in the very early days of it. Meanwhile, existing insurance companies could see gains by storing policies on the blockchain. The immutability would mean a policyholder would never worry about a company losing her policy, and the transparency would allow beneficiaries to easily have access to information about the deceased’s plan. Such a system would replace the need for endless filing cabinets.

Machine Learning and the Rise of Machines The second major technological trend that we’d like to discuss is machine learning and the rise of artificial intelligence. If there’s any technology that we believe will fundamentally drive the Fourth Industrial Revolution, it is AI. Now, that’s a nebulous term. When we say AI, are we referring to HAL 9000 or a computer 18 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

And machine learning is truly a radical shift in, well, just about everything. It is outperforming doctors in diagnosing, the basis behind Siri’s ability to understand voice commands, and the reason Wall Street keeps hiring more and more data scientists. Simply put, in any situation where data is plentiful, and the issue is drawing meaningful inferences from it, machine learning algorithms can significantly outperform humans. What’s even more fascinating is that it does this in a black box. We often don’t know why it’s reaching the conclusions it does, but they seem to work. The important thing about AI is that while it will transform the nature of work, it won’t replace people - instead, we believe it will empower them. It will allow people to focus on what they’re good at while minimizing the work that could be better done by a smart machine. IBM’s Watson may help a doctor better diagnose you, but most patients will still want the doctor to explain their diagnoses. AI, for all its qualities, still hasn’t developed proper bedside manner (though, in fairness, neither have many doctors). In insurance, AI will lead to a revolution in risk pricing, fraud detection, and product selection. Smart algorithms will be able to determine more precise premium rates for any given client,

instead of using today’s generic actuarial tables (though societies may wish to block this - take it too far and you start pricing people who most need insurance completely out of the market). Likewise, as much as AI is at the core of IT security today, we believe they will become key to detecting insurance fraud. At Finaeo, our primary interest in machine learning is what it can do for financial advisors and their clients. We focus on product selection, using data to help match the right clients with the right products at the right time. For advisors, this means an algorithm pushing them towards selling and cross-selling specific products to their clients. For clients, it means receiving the coverage that is best suited to keep them safe from financial

risk. Our goal is to transform the financial advisor from a product expert to a financial coach. Product selection, we believe, will rest solely in the domain of smart machines, able to scan through huge quantities of client information. Financial coaching, on the other hand, will require the human touch. We are in the business of creating the world’s first bionic advisors - advisors who focus on the relationship while computers focus on everything else. So that’s it. If you’ve enjoyed this article and want to learn more, we intend to follow this up with a more in-depth look at both blockchain technology and machine learning, what they mean to the financial services industry, and what they mean to you. Stay tuned!

Aly Dhalla

Jonathan Bega

CEO and Co-Founder, Finaeo

Aly Dhalla is the CEO/Co-founder of Finaeo, a venture-backed InsurTech startup that is reimagining insurance distribution to help independent advisors thrive in a digital era. Finaeo provides advisors with a digital tool-kit, paired with an on-demand concierge back-office, to enable advisors to create the future of advice: the “Bionic Advisor”. Aly spent his early career as a banker before leaving to join a startup as their first employee, which was acquired by Benefits by Design, a national Third Party Administrative company, where he served as Managing Partner before launching Finaeo. Aly also Co-Founded TriCelerate, a not-for-profit tech incubator to help youth go from idea-to-product.

Head of Growth / Founding Team Member Finaeo

Jonathan Bega is the Head of Growth and a Co-Founding Team Member at Finaeo, a venture-backed InsurTech startup that is re-imagining insurance distribution to help independent advisors thrive in a digital era. Finaeo provides advisors with a digital tool-kit, paired with an on-demand concierge back-office, to enable advisors to create the future of advice: the “Bionic Advisor”. Prior to Finaeo, Jonathan spent time on the other side of the startup industry, working as an Associate at Golden Ventures. He also spent time at O’Leary Ventures, the Boston Consulting Group, and a bioinformatics startup called Cyclica.

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EXEMPT EDGE: INNOVATIVE SOFTWARE TO PROMOTE REGULATORY COMPLIANCE

EMPT X EDGE

EXEMPT EDGE: PROVIDING TECHNOLOGICAL SOLUTIONS TO PARTICIPANTS OF THE PRIVATE CAPITAL MARKETS OF CANADA. TECH SOLUTIONS BUILT FOR THE EXEMPT MARKET BY THE EXEMPT MARKET. Article by Stephen Preston, Co-Founder and Vice-President, Exempt Edge

Sales & Practice Management Related Questions: 1. As co-founder, what led you to build this technology for the private capital markets? Having been involved in the industry for over 5 years, the lack of good technology was always a hot topic. After watching several companies try to morph their mutual fund software to fit into the private markets and fail - we decided to that the time was right for us to build it ourselves.

20 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

2. What processes does Exempt Edge have to help dealing representatives streamline? A lot is expected from dealing representatives in terms of compliance and we make it easier for them to get a better picture of a clients potential suitability and current financial position. Just having charts and graphs organized in a single place within the clients’ profile can give DRs some powerful tools in seeing a more complete view of their client.

3. Do dealer representatives using your software experience increased time efficiencies and reduced error rates? Absolutely. We are the first platform to standardize digital signatures allowing for a paperless purchase experience for clients. Pre-fillable forms ensure clients details only need to be manually entered into the system once thus drastically reducing data redundancy errors.

4. Does your technology enable DR’s to manage a sales pipeline and keep charting notes up to date for all client interactions? We try to focus on our core business which is helping EMDs, Issuers, MICS and Advisors streamline their processes to make their business more efficient. The software industry is saturated with sales and marketing CRMS so we don’t have a lot of interest in re-inventing the wheel. We are much more active in exploring integrations and partnerships with leading marketing software, for example, to allow our clients as much of an “all in one system” as possible. Bouncing around between multiple pieces of software and having to enter data in multiple systems is no fun for anyone and that’s a definite problem we are actively working on solving.

Client Experience 1. Does this technology enable clients access ‘real time’ investment information including transactions?

statements, trade confirmations, see distributions and important documents all in one place.

2. How has Exempt Edge increase overall client experience? We are constantly building out a knowledge base of “how to’s” and tutorials for our clients. We feel like we can add a lot of value to those we work with in multiple ways beyond just providing software solutions.

3. Many clients choose to participate in dividend reinvestment plans. How does Exempt Edge capture a client’s real rate of return with a DRIP in place? Our system is built out to accurately track and calculate DRIPS right within the system. Consolidated statements with performance reports can be provided to clients as often as the DR wishes, thus allowing the client to really see growth of their investment.

4. Does Exempt Edge produce monthly investment statements for clients in electronic format? Tax statements? Clients are able to receive their statements via email or regular mail. More and more though the trend is towards digitizing the entire experience which reduces costs for DRs and enhances the client experience. Clients who opt to receive their statements via email can login to their client portal at any time and see not only their most current statement but an entire history.

Getting clients on demand access to their transaction details is paramount to a good client experience. Our clients have white labelled portals where their investors can login and access

PRIVATE MATTERS TODAY • WWW.PMTODAY.CA . 21

EXEMPT EDGE: INNOVATIVE SOFTWARE TO PROMOTE REGULATORY COMPLIANCE

5. With multiple investments in place, does Exempt Edge provide a personal rate of return based on the clients’ holdings?

4. Client privacy is a cornerstone of compliance – what safeguards does Exempt Edge have in place to protect client information?

At this time the performance is broken down and reported on an individual product basis. Clients can see which of their investments are performing and which ones aren’t all in one consolidated statement.

Security and protection of our client’s data is our number one priority. We routinely and actively take steps to ensure we remain at the forefront of the ever-changing cybersecurity landscape.

Compliance

Stephen’s Bio for footer of article:

1. Does your technology enable a full review of a client’s total investment holdings so that ‘concentration’ can be assessed? Absolutely. A DR can set a default concentration limit in aggregate, by sector and by issuer and based on the transactional data in the system, the DR can see if a client is over the threshold currently, or be flagged if a new transaction would put the client over the limit in any area.

2. Can you elaborate on what makes your technology CRM compliant? We have a very good securities lawyer as part of our team that has built out a phenomenal framework to make CRM2 reporting quick and easy. The tools are there for our clients to provide CRM2 compliant statements, however, the onus is ultimately on the DR to ensure their data is accurate. We can never promise someone they are being compliant - what we do is give the tools to make the process easier.

3. Are all required disclosures and account opening documentation available via one portal? Any documents that the DR needs can be uploaded to the system where they can be accessed in one place allowing for a robust document vault.

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Stephen Preston Co-Founder and Vice-President, Exempt Edge.

Stephen is an entrepreneur and alternative Investor who has spearheaded multiple start-ups and international real estate projects. He joined the Olympia Financial Group in 2013 as Business Development Manager, overseeing a portfolio of 400+ advisors across Canada. In 2016, he co-founded Exempt Edge Inc., a division of the Olympia Financial Group, which creates software for the Private Capital Markets. In less then one year, Exempt Edge has emerged as the fastest growing software solution for Exempt Market Dealers and Issuers in Canada. Stephen earned a BBA with a Financial Services concentration from Mount Royal University. He is a bestselling author who has been featured in Canadian Wealth Magazine, The Private Investor and Wealth Professional. Stephen is the Chair of the Fintech and Innovation Committee for the Private Capital Markets Association of Canada.

DEALER DEALER EDGE EDGE Digital Signatures ARE HERE! Your Dealing Representatives and Clients are going to love Digital Signatures AREyou HERE! Dealing and Clients going to love you. Let us show how Your Dealer Edge Representatives can take your business to theare next level. you. Let us show you how Dealer Edge can take your business to the next level.

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FEATURE

I C’S: BUILDING A STRONG FOUNDATION SOME THINGS TO CONSIDER IN STARTING A MORTGAGE INVESTMENT CORPORATION Article by Susan Han, Partner and Co-Chair, WeirFoulds LLP

The Bank of Canada in its most recent Financial System Review released June 8, finds that the volume of private lending has been relatively stable, at a little more than $2 billion per quarter. However, other sources of lending have declined, and the market share of private lending has therefore climbed to nearly 8 per cent of new mortgages in the GTA. This increase in market share is visible in the rate at which new mortgage investment entities are being formed. Private lending in the residential mortgage market can mean many things, but one popular vehicle is something known as a “mortgage investment corporation” or MIC. Encouraging and facilitating the building of homes and home ownership has long been a policy goal of governments. In order to further that goal, Canada has long permitted the formation of investment vehicles known as “mortgage investment corporations”. MICs differ from ordinary Canadian corporations in that if a corporation qualifies as a MIC, it is able to flow through income so that any tax is paid at the level of the shareholder and not at the level of the corporation. When an ordinary corporation earns income, it may be liable to pay tax on such income. The corporation can distribute the remaining income by way of dividends, and the tax system has a gross up mechanism to take into account the tax already paid. But the mechanism is imperfect. A MIC allows net interest income that it earns to be paid to shareholders without any tax being deducted, so it’s a more efficient transmission of income. The original idea behind MICs was a recognition that certain geographical areas and certain segments of the population have a more difficult time accessing mortgage financing through the conventional mortgage market. By allowing private lenders to band together, and thereby reduce the risk associated with exposure to a single credit, borrowers who may otherwise be shut out are able to become or remain homeowners. In order for a corporation to qualify as a MIC, it must comply with all of the rules relating to MICs as set out in the Income Tax Act. The rules are quite lengthy and complicated. Some of the more important ones are that the MIC must have at least 24 • PRIVATE MATTERS TODAY • WWW.PMTODAY.CA

20 shareholders and no one shareholder, together with related persons, is allowed to hold more than 25% of the issued shares of any class or series. The Tax Act contains extensive definitions that set out how to count shareholder for purposes of these tests. For example spouses are considered to be related to one another and generally count as a single shareholder. Another key feature is that if a corporation qualifies as a MIC, the shares are eligible to be placed in registered plans such as RSPs and TFSAs. You don’t have to meet all of the qualifications the moment you open for business. The Tax Act actually gives you a year to get on side all the rules. MICs are to be distinguished from “mortgage investment entities”, or MIEs. This latter term is used by securities regulators to refer to investment vehicles with certain characteristics.

What Does it Cost to Set Up Compared to many other types of investment vehicles, the cost for formation of a MIC can be modest. For example, to qualify an investment fund under a prospectus for distribution to the public is likely to cost somewhere in the six figures. The establishment of a MIC is not itself difficult. By definition, MICs are corporations. They are formed under the corporate statutes of a province or under the federal Canadian business corporations law. You can’t do the incorporation on line by yourself, as you need to consider the share provisions. You will need a lawyer to help you prepare the share provisions. And remember that the MIC is a MIC by virtue of the Income Tax Act. So you cannot contemplate setting up the MIC without having expert, experienced tax advisors on hand. That tax advice will have a cost. You should not begin the process of setting up a MIC without consulting a lawyer and an accountant to get a good idea of what the set up cost will be and how long you can expect to take to recover your initial outlay.

Once the MIC is Set Up, How Do I Attract Investors A MIC is an “issuer” in securities regulatory language. Every issuer has to follow securities rules when it issues its shares. Very often companies issue securities and transact in securities unaware that legislation applies. Mostly that is fine, because people end up not breaching the law.

first 20 shareholders. You need to have a plan for distributing your shares. You should have a cash flow projection so you can plan out how things can be expected to go during your first few months and years. Operating a MIC can be time consuming and there’s a steep learning curve to climb at first. But it may also end up being rewarding and satisfying in ways that will be discovered only after the journey is underway.

But if you are distributing the shares of a MIC, it is virtually certain that being unaware of securities laws will result in grief. The most fundamental rule with respect to distributing securities (i.e. selling shares in the MIC to investors) is that in order to do so, you either need to have prepared and filed a prospectus, or have an exemption from the prospectus requirement. There are whole volumes written about exemptions from the prospectus requirement, and how they can be used or misused. It’s not just a matter of having one or another exemption to use, it’s following all the rules so that the exemption is properly used. For example if the MIC is relying on the accredited investor exemption, there will be different forms to complete depending on whether the accredited investor is an individual or an entity such as a corporation. The other pillar of securities regulation is called the registration requirement. That’s the rule providing that people or companies who distribute or trade in securities, including individuals or companies that sell shares of MICs, must be licensed to do so. Mostly the dealers who distribute shares of MICs are exempt market dealers, or EMDs. They are a kind of restricted dealer specializing in selling non-prospectuses products.

What Else Should I Know Like all new business ventures, you need to do your homework before embarking. You should have a business plan that addresses all of the things discussed above, plus many more. You need to know where your initial capital is coming from. You need to know that you will have supporters who will become your

SUSAN HAN Partner and Co-Chair, Investment Funds Group, WeirFoulds LLP

Susan Han is a partner and Co-Chair of the Investment Funds Group at WeirFoulds LLP. Her practice is primarily transaction-oriented securities work, with an emphasis on formation of public and privately offered investment vehicles (investment funds and non-investment funds) for senior as well as mid-market sponsors. Susan also advises portfolio managers, investment advisers, exempt market dealers and other financial services providers on their regulatory obligations, including securities compliance and registration matters. Susan is active in industry groups: a past director of the Investment Funds Institute of Canada (IFIC), she currently works with the Private Capital Markets Association (PMAC), and particularly on issues affecting mortgage investment entities. She is a frequent speaker at professional development programs and seminars, including speaking to industry groups on directors and officers liability and on corporate, fund and pension governance matters. Susan received her J.D. from the University of Toronto and was called to the Ontario Bar in 1988. Susan can be reached at shan@weirfoulds.com or by telephone at 416-947-5014.

PRIVATE MATTERS TODAY • WWW.PMTODAY.CA . 25

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Community Trust Company does not provide investment advice and does not endorse or promote any investment products. Investors are encouraged to seek independent financial and legal advice before making any investment decisions.