One of the strongest arguments against a common securities regulator, the latest model for uniform securities regulation being championed by Ottawa, is the significant blow that will be felt by regional venture markets. The concern is that provincial securities commissions, which have been in the vanguard of innovative financing reforms, will disappear; and with them, critical expertise and innovation. But this exaggerates the roles of the commissions in promoting these reforms.
True, venture markets have benefited enormously from leading-edge regulatory innovation created in Western Canada, then embraced across the country. This innovation has been a catalyst for incubating small business growth in regional markets. But the regulators were not the driving force behind these innovations – regional businesses and dealers were. Now, venture markets face new challenges that call for new approaches.
Unquestionably, small listed companies in the 1990s benefited from reforms in Canadian venture markets. That includes the move from 12-month to four-month hold periods for private placements, the reverse-takeover mechanism to fund takeovers of existing listed corporate shell companies and junior capital pools.
Individual dealers created these innovations to improve access to capital for small companies and boost the liquidity of private-placement shares. The ideas were crystallized into stock exchange rules for the Vancouver Stock Exchange and the defunct Alberta Stock Exchange. But that was because the dealers had an incentive to improve the financing process and share liquidity for their clients, as well as raise trading volumes on these stock exchanges. (The western provincial commissions do deserve credit for approving these proposals, unorthodox at the time, in the face of initial opposition from other commissions.)
The pace of innovation continued in the past decade, when the regional stock exchanges merged and de-mutualized into the CDNX stock exchange and, eventually, the TSX Venture Exchange. Participating dealers still had an incentive to improve timely access to capital, boost the liquidity of venture shares and streamline disclosure costs for listed companies. For example, a key innovation was the Short Form Offering Document, which provides expedited access to public markets for small companies.
In light of the Maple Group Acquisition Corp./TMX Group Inc. deal, it will be interesting to see how responsive to change the TSX Venture Stock Exchange will continue to be now that it has been integrated within the TMX Group.
Market needs have changed when it comes to regulation. The venture markets recently have fallen on tough times. Small-business financings and initial public offerings are down by roughly 50% from pre-crash levels, and share trading is down by 48%. Investors have become extremely risk-averse, reluctant to purchase shares in early-stage companies with market capitalizations of less than $100 million. Further, the possibility of unintended consequences from new regulations risk aggravating the financing and liquidity problems for venture shares.
The regulatory priority in today’s environment is not so much to find innovative financing mechanisms to enhance timely access to capital; the priority is to ensure that extensive regulatory reforms aimed at strengthening investor protection and market confidence are properly targeted and cost-efficient for market participants, and that unintended consequences from the rules and regulations are identified and minimized to avoid interfering with the capital-raising process and trading activity.
What venture markets need now is regulatory efficiency – and a common commission would be best able to provide that. A common commission will have the resources needed to provide the hard analysis essential to rigorous cost/benefit analysis and ongoing review of new rules.
The common securities regulator being proposed by Finance Minister Jim Flaherty, which has garnered cautious support from most provinces (unlike previous models), would be composed of business leaders from across the country and elected federal and provincial officials from an overseeing Council of Ministers. It would include a formal and public accountability process. This will discipline rule-making and encourage flexible and efficient dealer compliance.
What’s more, a common regulator will address a problem that has emerged over the past decade or so, as capital raising by small and mid-sized business has transformed from local and regional sources to national markets. Differing rules governing financing activity across the country have added to the complexity and cost.
The existing system has proved incapable of achieving uniformity, notably in the standards for prospectus-exempt financing in the provinces, and won’t be able to co-ordinate the analysis needed for efficient implementation of common rules.
A common regulator would have the advantage of implementing one set of rules for small businesses across the country, and the resources to carry out the analysis to ensure the rules’ efficiency. Unquestionably, small businesses’ access to capital and trading efficiency would improve.
Ian Russell is CEO of the Investment Industry Association of Canada (IIAC).
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