Silicon Valley North #16 Feb'00

The Way I See Itů by Michael Volker

New CDNX may lead to unified securities regulations for tech firms

It's tough enough for Canadian technology companies to raise equity capital and our system of provincially regulated securities commissions doesn't make it any easier.

All companies - public or private - are regulated by provincially run agencies whose main purpose is to ensure that securities laws are not broken and that the investing public is not taken advantage of.

In addition to complying with provincial regulations, those companies which are publicly-traded must also follow the rules and policies of the stock exchange which lists them. The interplay and overlap between securities commissions and stock exchanges can be confusing and is generally not well understood by the public or by technology entrepreneurs. Sometimes it is unclear as to who calls the shots.

In high technology, companies deal with customers on a global basis. Yet, on the investment side of the business, they are severely restricted from doing so. A Canadian company selling its products in the American market, cannot offer its shares to American investors unless it complies with the applicable U.S. securities regulations.

It's just as difficult on a national level. A B.C. company which desires to sell shares to Canadians must comply with different rules and regulations in each province. This means that an offering of shares which is perfectly acceptable in B.C., may be totally unacceptable in Quebec (language requirements aside). Figure that out! Is this the way we, as a country, want to regulate our companies?

There are substantial differences in rules and regulations among securities commissions in our provinces. For example, in B.C. as compared to Ontario, it is easier to raise equity capital for the financing of smaller, early stage, investments.  In B.C., a private company can use the so-called $25K exemption (the term "exemption" means that a company is exempt from having to prepare a prospectus, a detailed legal document which is required when selling securities such as common shares to investors). The entry level for such seed investments is in excess of $100K in other jurisdictions.

The legal bill that goes with a financing, even a simple one which relies on various exemptions, can be very expensive. Because the formalities are independent of the size of deal, a small, under $1 million, financing will command a high overhead cost easily exceeding 10%. Small public offerings require compliance in each province and due to the related costs are often limited to one province.

Our recently-created national stock exchange, the Canadian Venture Exchange (CDNX), holds the promise of unifying the disparate rules, i.e. one set of policies applicable to the exchange and one set of rules applying to the sale of shares. In order to move towards a national financial market, provincial securities commissions will need to cooperate and harmonize their policies through a virtual national agency such as the proposed Canadian Securities Agency (CSA) - just as the regional exchanges agreed to merge into one.

A national organization would have more resources to deal with stock fraud schemes. A recent Wall Street Journal story explained how a couple of students were being prosecuted by the Securities and Exchange Commission (SEC) for manipulating share prices by posting false rumors on hundreds of Internet message boards. This type of questionable activity could make the new CDNX look bad when, in fact, these types of problems should not be under its purview. 

The way I see it, one benefit from the creation of the CDNX, for both public and private companies, is that it will lead us towards a national system for securities regulation. In the process, we have to make sure that we adopt those policies, (e.g. B.C.'s $25K exemption) which favor capital formation, rather than complicate matters.

Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He is a former executive director of the BC Advanced Systems Institute and is chair of the Vancouver Enterprise Forum. He may be reached at

Copyright, 2000.