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
"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
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
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
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."