The Way I See It… by Michael C. Volker
New
securities regulations will improve access to capital
I felt a
breath of fresh air recently as I listed to securities regulators at the B.C.
Securities Commission talk about substantial rule changes. Even more
encouraging is the fact that the B.C. and Alberta Securities Commissions have
jointly agreed on the new rules.
As most
technology entrepreneurs know, raising money can be challenging. The difficulty
they face in attracting capital is further exacerbated by the regulatory regime
that imposes some serious limitations on just who can or who cannot invest in a
company.
Securities
commissions have jurisdiction over all companies – public and private corporations. I’m often surprised at how
many startup teams don’t know how restricted they really are. Because they are
small private companies, they often mistakenly believe that the rules apply
only to public companies.
The challenge
for regulators has been to strike the right balance between protecting the
investing public and facilitating capital formation for companies. In the past,
the emphasis has clearly been on protecting investors, e.g. keeping widows and
orphans from getting fleeced by ruthless scam artists (many of which almost
caused the demise of the Vancouver Stock Exchange, just before it merged with
the Alberta Exchange to form the CDNX in 1999). In an attempt to keep the
hustlers at bay, new policies and rules were invoked – making it almost
impossible for legitimate companies to sell their shares.
In B.C., the
governmental reporting structure had the Commission reporting to the Minister
of Finance. Collecting fees and fines and serving as a watchdog was its
emphasis. The new B.C. Liberal government’s promise to cut government red tape
and create a pro-business climate was, I’m sure, behind the announcement that
the Commission would now fall under the new B.C. Ministry of Competition,
Science and Enterprise (love that name!).
Clearly, the
new initiatives that were announced are a positive move towards that end.
Indeed, I commend the commissioners for their consultative process with
business in formulating the new rules.
If a company –
public or private – wants to sell shares to the general public, it can only do
this through a prospectus offering. A prospectus is similar to a business plan
but far more onerous and legalistic – so much so that most people don’t bother
to read them and when they do, they don’t understand them. One of the promised
changes is to simplify this process.
Most equity
capital raised by companies – again public or private firms – does not come
from the public at large. It comes from family, friends, angels, seed funds,
venture capitalists, and institutional investors. It is in this area were the
regulations have caused headaches. For example, it is illegal for any company to sell its shares to anyone unless it produces a prospectus or relies on an
“exemption” to the prospectus requirement. There are numerous such exemptions.
For example, companies can sell their shares to company insiders and friends
thereof without any hassle. However, outsiders cannot easily invest unless they
invest a minimum of $25,000 (much higher in Ontario) and meet certain criteria.
Under the new
rules, expected to be in effect next Spring, angel investors, for example, will
be able to invest any amount with almost no red tape. This is just one example
of the many positive changes. Complete details can be found at the Commission’s
web site at www.bcsc.bc.ca.
There’s still
one big problem, though. B.C. and Alberta are small markets. For that matter,
Canada is a small market and yet from a financing perspective we’ve chopped it
up into inconsistent little pieces. A
B.C. startup, even under the new rules, will still be faced with many
restrictions when accessing capital in Ontario!
We should even
go further. Not only do we need to get our “act” (i.e. a national securities
Act) together here, we should also attempt to align it with U.S. rules. The
holy grail for tech companies is the Nasdaq and since many Canadian companies
aspire to be listed there and attract U.S. capital, a more unified North
American market would be welcomed.
The way I see
it, for the time being at least, tech companies in B.C. and Alberta have a
distinct advantage over their eastern cousins. The implementation of such rules
on a national basis is what’s really needed to give all of our tech companies
better access to capital.
Michael Volker is a high technology entrepreneur and director of Simon Fraser U's University/Industry Liaison Office. He oversees Vancouver’s Angel Technology Network and is a director of the BC Advanced Systems Institute and the Vancouver Enterprise Forum. He may be reached at mike@volker.org.