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Securities Regulation Creates Unfairness in Canadian Capital Markets

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Release Date: March 7, 2002

Retail investors face varying levels of access to capital markets depending on where they live, according to an article Investors Sanctioned for Living in PEI: Why Retail Investors Should Care About the Debate on the Future of Canadian Securities Regulation published in the March 2002 issue of Fraser Forum.

"While all market participants must share the costs of an inefficient regulatory framework, retail investors face an additional burden--limitations on their access to new offers of securities from public companies," says Neil Mohindra, senior economist, Financial Sector Regulation at the Fraser Institute and author of the article.

The article reviews recent patterns in rights offerings to illustrate how the current regulatory framework hurts investors. Under a rights offering, shareholders of a public company are granted the right to purchase additional securities. Evidence from regulatory filings shows that investors who live in smaller provinces and territories are excluded from the majority of offers filed through a disclosure document that regulators refer to as a "rights offering circular."

"One of the objectives of securities regulation is to foster fairness in capital markets, but in some cases it does exactly the opposite," says Mohindra. "Investors that live in ineligible provinces and territories are denied the opportunity to protect their investments from the watering down of their ownership interests."

The data reveals that the pattern of excluding investors in smaller provinces and territories continues despite the implementation of harmonized rules across Canada in mid-2001. Although the rules have been harmonized, a public company must obtain regulatory approval to raise capital through an offering circular in each province and territory in which the offer is made.

The evidence on rights offerings illustrates a wider problem. The regulatory framework creates an incentive to limit other types of public offers of securities to just some provinces. For investors in companies listed on the Canadian Venture Exchange, access to new issues of securities is even more limited.

Most of the new capital raised by companies on this exchange is through private offers. These offers are restricted to wealthy individuals and large institutional investors such as insurance companies and pension funds.

"As retail investors become more active in the stock market, they need a regulatory system that improves their access to new offers of securities," concludes Mohindra. "Securities regulation should facilitate access to capital for Canadian companies, not serve as a barrier to retail investors."