CDNX may lead to unified securities regulations for tech firms
tough enough for Canadian technology companies to raise equity capital and our
system of provincially regulated securities commissions doesn't make it any
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.
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
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.
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
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.
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.
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.