Investor advocates, al-ready worried that a proposed new regulatory regime for venture-exchange issuers could harm retail investors, have not changed their minds amid the recent surge in concern about emerging-market issuers.
When the idea of adopting a new regulatory regime targeted at VE issuers was first put forward in a consultation paper last year, the reaction from investor advocates was largely negative. These groups expressed concern that easing the regulatory burden on VE issuers by doing away with certain filing requirements — such as three- and nine-month quarterly reports and business acquisition reports — and revising governance standards would compromise inves-tor protection and harm the reputation of Canada’s capital markets. Not surprising, recent events have done little to ease those concerns.
Although China-based Sino-Forest Corp., which is facing allegations of major disclosure deficiencies by the Ontario Securities Commission, is no longer a VE issuer, the company got its start that way, gaining access to Canada’s capital markets via a reverse takeover in 1994. And the recent allegations against Sino-Forest have touched off regulatory concerns about emerging-market issuers in general, prompting the OSC to review the disclosure by 24 emerging-market issuers.
Not surprising, the OSC review is also reinforcing criticism of the Canadian Securities Administrators’ proposed new regime for VE issuers, which was published in July. Instead of lowering the disclosure requirements on VE issuers, as proposed, critics say the regulation of VE issuers has to be toughened in order to restore investor confidence and improve investor protection in the wake of these allegations against Sino-Forest.
In its comment on the proposed rule, Toronto-based investor advocacy group Canadian Foundation for Advancement of Investor Rights (FAIR Canada) says the revelation of significant issues at several VE issuers “call[s] into question the appropriateness of this CSA initiative. Recent scandals suggest we may need tighter, more effective regulation of [VE] issuers in order to better protect investors and restore investor confidence.”
FAIR Canada is not alone in its skepticism. The OSC’s inves-tor advisory panel also has weighed in against the proposals. The IAP’s comment says that lowering disclosure requirements for VE issuers would not be in the interests of small, retail investors who make up the bulk of the investor base for VE issuers.
The IAP submission on the proposed rule notes that these VE companies typically suffer from a lack of analyst attention, so investors rely more heavily on the companies themselves for information than they do with senior issuers. As the IAP submission says, “We believe that a reduction in issuers’ disclosure obligations would exacerbate this problem.” If anything, the submission suggests, investors need more information from these companies, not less.
Indeed, both FAIR Canada’s and the IAP’s comments indicate that these bodies support the idea of reducing the regulatory burden on VE issuers — just not at the expense of inves-tor insight into these companies. Furthermore, regulators should have to demonstrate empirically that the proposed new requirements would, in fact, be more cost-effective for issuers than the existing regime.
“We believe that capital formation and cost-effective regulation should be encouraged,” the IAP comment says. “However, it may be possible to further these goals while also maintaining adequate standards of good governance and transparency in keeping with the OSC’s investor protection mandate.”
FAIR Canada’s comment also suggests that regulators could reduce the compliance bur-den by consolidating the requirements for VE issuers into a single manual and could consolidate disclosure in a single report without lowering disclosure requirements. Moreover, it recommends that regulators address the long-standing conflict between the exchanges’ listing and regulatory functions.
Finally, in light of the concerns regarding VE issuers based in emerging markets, FAIR Canada recommends that issuers must be incorporated in a jurisdiction with laws that meet minimum corporate governance standards. IE