Proposed securities regulations would obstruct global capital flows, firms say

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Some of Canada's largest institutional investors are protesting new regulations that would govern how companies can raise money outside of Canada, arguing the standards would impose unnecessary new costs and reduce access to capital.

The group – which includes Alberta Investment Management Corp., Ontario Teachers' Pension Plan, RBC Global Asset Management Inc. and three major U.S.-based brokerage firms – is taking aim at proposed regulations published by Canada's new federal-provincial securities regulator.

The investors say proposed rules for selling securities outside of Canada "would act as an obstacle to cross-border capital flows" by requiring companies to prepare Canadian regulatory filings for all public securities offerings, or meet all Canadian standards for private placements, even if securities are not sold to anyone in Canada.

Companies based in Ontario currently have to meet securities rules in the foreign jurisdiction – such as preparing a U.S. prospectus for a U.S. share offering – but do not have to also prepare Ontario filings if securities are not being sold in Canada. Among the changes, Canadian companies would have to ensure U.S. investors qualify under both U.S. and Canadian rules for buying private placements in the exempt market.

"We respectfully submit that would not protect investors from unfair, improper or fraudulent practices, but only serve to make the capital markets less efficient by imposing duplicative regulatory requirements," the group said in a letter submitted to the new Cooperative Capital Markets Regulatory System.

The investor group also said the regulations are an "inappropriate extraterritorial application" of the proposed Capital Markets Act, expanding its reach to foreign investors in other countries who are already protected by their own regulators.

The letter was filed with the CCMR in December after the regulator asked for public comment on the proposed Capital Markets Act and related regulations that would be adopted by six participating provinces and territories, replacing their individual securities acts and rules.

Ontario, British Columbia, Saskatchewan, New Brunswick, Prince Edward Island and Yukon have signed on so far to join the new regulator, while Alberta and Quebec are the largest provinces that are not joining.

The new regulations would particularly affect smaller companies – many in the technology sector – which opt to go public only on the U.S.-based Nasdaq exchange without listing their shares on the Toronto Stock Exchange.

Toronto securities lawyer David Wilson of Davies Ward Phillips & Vineberg LLP, who specializes in advising companies on cross-border securities offerings, said some companies may be deterred from moving into the U.S. market until they are large enough to absorb the additional costs of dual regulation.

"It means that when I'm looking at my alternatives, I could choose to be a domestic company for longer without doing a cross-listing," he said. "I need to factor in the cost and the potential headaches of having to comply with both sets of rules. It just has numerous unintended consequences."

The new regulations are similar to rules already in place in British Columbia, but Mr. Wilson said B.C.'s requirements are complex and unwieldy. He said flaws with the B.C. system will be amplified when the rules are expanded nationally because Ontario companies do more major U.S. securities issues.

In commentary published with the new regulations, the CCMR said it concluded it should have jurisdiction over all securities originating from its regions, no matter where they are destined to be sold.

"As a public interest regulator, this is important for the Authority from both reputational and accountability standpoints," the CCMR said.

The regulator also said it has tried to "anticipate the impact" of the change in Ontario, and wants to hear comments "on how to minimize the disruption or unintended consequences to capital-raising or investing activities."

Lawyer Glen Johnson of Torys LLP, who works on domestic and cross-border securities offerings, said investors in the United States are already protected by their own regulations, so nothing is gained from dual Canadian oversight.

"A quality issuer that has resources and has demand or interest from a U.S. big-name underwriter, they will find a way through this and they will manage," Mr. Johnson said. "But it's a question of whether we have really designed the best regulatory model we can, or have we just put something together without having taken a step back and fully canvassing what the options are."