How About Uniformity in Securities Rules?

On June 22, 2009, Canada’s federal government announced that a team led by the chair of the B.C. Securities Commission, Doug Hyndman, will lead the transition to a new national securities regulator. Mr. Hyndman will be responsible for negotiating with the provinces—each of which currently has its own securities regulator—as well as developing the legislation that outlines the new national regulator’s mandate. A report is due in a year, with an implementation target of three years.

Goodness knows, this is long overdue. In the absence of a single national securities regulator, efforts have been underway for many years to harmonize capital raising regulation among provinces. These efforts have made some progress, but it is still unclear why there are substantial differences among provinces for regulations that one would reasonably expect to be uniform.

For example, exemptions from the prospectus requirements are enumerated in Canadian Securities Administrators’ National Instrument 45-106 [PDF] (“NI 45-106”). One might expect that the same types of protections that are applied to potential investors in say, Saskatchewan, should be equally applied to potential investors in New Brunswick. Aren’t all the potential investors in those provinces entitled to similar types of safeguards? Under the current regime, apparently not.

NI 45-106 provides that in British Columbia, New Brunswick, Nova Scotia and Newfoundland and Labrador, an issuer can issue securities to an investor if the issuer delivers an offering memorandum before the investor signs an agreement to purchase. Yet in Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Québec and Saskatchewan, this exemption is only available if the maximum investment is under $10,000. And in Ontario, this exemption is not available at all. How are these differences justifiable?

Take another example: while in most provinces securities can be issued to friends, family and business associates of an issuer and its directors, that exemption from prospectus requirements does not exist in the same form under the laws of Canada’s most populous province, Ontario.

These are just two of the differences in capital raising rules among provinces. One would think from all this diversity that regulators in various provinces consider their residents in need of different securities protection than residents of other provinces. But do they? Hardly. The differences make no sense.

For that matter, if we’re going to do away with provincially-based distinctions, why stop there? Why not look at national borders as well? In Canada, securities can be issued under NI 45-106 to “accredited investors”. One criterion for an individual to qualify as an accredited investor is that the person has $1,000,000 in financial assets (i.e. stocks or bonds; owning an apartment block does not count). The term “accredited investor” came from regulation in the United States, as did most of the qualifications to be considered one. However, the United States’ definition of “accredited investor” includes a person who has $1,000,000 in assets, not strictly “financial” assets. (Vive la petite différence!) As such, the word “financial” in NI 45-106 probably precludes tens of thousands of Canadians who would qualify as “accredited” if they lived in the United States. How is this distinction justified?

Let’s bring uniformity and reason to the capital raising process. Sophisticated people should be able to invest where and when they feel it right, as should wealthy people and certain others who have sufficient knowledge of the players, the project, or the industry. Whether the investor resides in Korea or Belgium, capital should flow from investors who want to invest in a project or company to the projects or companies that need capital. Standard prospectus and registration exemptions, carefully drafted under an international general agreement on securities regulation, would help the free flow of capital in the same way that GATT helps the free flow of goods. And they’re long overdue.