November 23, 2010
Rotary Club, Kelowna
Thank you for inviting me to Kelowna to speak to you.
I’ll bet most of you have little to do with securities regulators on a day‐to‐day basis. You must be wondering – and I’m hoping you are at least curious – what on earth a
securities regulator would have to say that would hold your interest?
You will be relieved to know that I am not going to talk to you about rules and regulations. What I do hope you will find of interest is how small businesses raise
capital, and how the British Columbia Securities Commission regulates this activity so that small businesses can grow.
Before I do that, I’d like to take a minute to talk about something that we at the British Columbia Securities Commission think is one of our most important investor education initiatives – the teaching of financial literacy to high school students.
It might interest you to know that British Columbia is the only province in Canada where financial life skills training is a mandatory course in high school. The Ministry of
Education introduced a new a financial life skills course for Grade 10 students in 2004, and we supported that initiative by developing and producing a teacher resource – a resource now recognized by most teachers as the best available.
We have been working with the educational community ever since, training teachers and promoting the importance of teaching this subject. Some of you may know Mike Darnbrough, who is here today. He has done a tremendous job helping us with our province‐wide teacher‐training program.
And we are working with the Central Okanagan School District on research with high school graduates to determine if this course has succeeded in preparing them to
manage their finances.
Just thought you’d like to know that your community is leading British Columbia, and Canada, towards a future where young people graduate from high school with the skills necessary to manage their finances.
Turning to my subject for today, I’ll begin by talking about the vital role that small and medium sized businesses play in British Columbia’s economy and how those businesses raise capital.
British Columbia is often called the start‐up capital of Canada ‐ let’s take a look at our small‐business dominated economy.
Of the 168,000 employers in British Columbia that have employees, only 7,000 have 50 or more employees. There are thousands more companies that don’t have any
employees at all.
That means 98% of British Columbia’s businesses are small – small meaning less than 50 employees. I’ll say that again – 98% of British Columbia’s businesses have less than 50 employees.
Yet our small businesses generate about 1/3 of the province’s gross domestic product. And they are responsible for more than 40% of the total value of goods exported from the province.
This sector is growing fast and a lot of that growth is centered here in the Okanagan. 4,400 new businesses were created in this region between 2007 and 2009. That’s a 9% increase over the previous period – higher than anywhere else in the province.
We recently co‐sponsored, with the Alberta Securities Commission, a conference about the challenges of raising capital for small businesses, both public and private. We have a long history of working with Alberta on various regulatory initiatives to foster access to capital for small business because we have similar challenges and similar needs. Jock Finlayson, well known BC economist and Executive VP of the Business Council of BC, led off the conference.
He noted that western Canada small businesses lead the country in both contribution to GDP and employment. GDP contribution by small businesses in the west and their percentage of employment is higher than the national average.
Although most small businesses don’t grow – their employment levels are more or less static – there are a few critical superstars that create wealth and new jobs, typically by focusing on growth, the export market, research, and product development.
It turns out, according to Finlayson, that British Columbia is a hotbed for these types of firms. They are responsible for more than 100% of this province’s net private sector job growth. More than 100% of net job creation means, in effect, they not only create jobs at a rate equal to total new job creation, they create them at a rate that significantly offsets job losses in other areas of the private sector. No other province in Canada has numbers like this for these types of firms.
So, lest there is any doubt, small businesses are enormously important to British Columbia’s economy and, as I will mention in a moment, to Canada’s.
So how do we do in British Columbia in providing venture capital for these businesses? The conclusion from the Conference, and from other sources, is that we punch above our weight in British Columbia when it comes to financing small businesses, both private and public. I think this is for three reasons.
First, we are the undisputed world capital when it comes to financing for junior mining companies. No other jurisdiction comes close to matching the funds raised annually through British Columbia markets for mining exploration and development. And from a broader western Canada perspective, you can say similar things about financing done in Alberta for the oil and gas business.
Second, we have the world’s most successful public venture market in British Columbia – the TSX Venture Exchange. This is not just my opinion – respected international institutions have said so publicly. Numerous exchanges around the world admire what we have and would love to have a similar reputable and liquid market for early stage companies.
Since its inception in 1999, companies listed on the Venture Exchange have raised over $52 billion. It had 250 new listings this year – up 87% over the same period last year. About half of its 2,000 or so listed companies are from the west.
The Exchange’s importance to the Canadian economy is, I fear, not well understood. Consider this: Over the past 10 years, over 475 companies have graduated from the Venture Exchange to the Toronto Stock Exchange, and another 90 or so were merged with or acquired by TSX‐listed companies. Today, 1 in 5 companies in the S&P TSX Index are graduates of the Venture Exchange.
In other words, a significant number of Canada’s good big companies come from good small ones started up and financed here in the west.
The third factor we think contributes to the success of venture capital raising in British Columbia is our regulatory regime for companies who are not yet big enough to go public and need to raise capital through the so‐called “exempt market”. This is a system that allows start‐up and nascent businesses to raise funds from investors under exemptions from the usual prospectus requirements.
At the conference I mentioned a moment ago, panellists commented on how venture capital was much harder to find since the 2008 market crash. Institutional and
individual investors alike, but especially institutions, are investing less, and are more risk‐averse. One panellist said the net amount of fresh capital that is available today is one quarter of what it was just a few years ago.
Yet companies are still finding money. Oil and gas financing in Alberta and mining financing here is relatively active. Although technology and biotechnology companies are struggling to find funding, they are having some success through the exempt market.
This market accounts for a surprising level of capital‐raising. In the first nine months of this year, BC companies raised $6.1 billion and Alberta companies raised $7 billion. In British Columbia, almost $5.3 billion came from wealthy accredited investors – a significant number given the marked drop‐off in institutional interest.
These numbers confirm just how important the exempt market is to British Columbia small businesses seeking capital.
So what’s the role of the British Columbia Securities Commission in all of this? For starters, no market is of any long‐term benefit to businesses if it is not seen as
reputable. The great majority of businesses seeking financing in our markets are legitimate. Some, though, are scams operated by scoundrels.
So part of our job is to make sure that when investors put their money into small businesses, whether through the Venture Exchange or in the exempt market, that they
have to worry only about the business risks, not about whether some crook is going to steal their money.
One of the ways we achieve this is through regulatory oversight of the Venture Exchange, which we do in partnership with the Alberta Securities Commission. Both
regulators, and the Exchange itself, have a common goal when it comes to market integrity, and the reputation the Exchange enjoys I think shows that the two regulators and the Exchange are doing the right things in this area.
Ensuring market integrity in the exempt market is more challenging. It is a mosaic of thousands of businesses and thousands of investors. By its nature, there is no central entity that oversees it. There is no real time trade reporting as is the case with exchange listed stocks. And, there are few disclosure requirements. We work at protecting investors in this market in three ways.
First, we review filings to look for red flags. When we find them, we follow up. Sometimes this leads to educating businesses about how to use the rules properly;
other times it leads to suspension of their financing activities until they fix a few things. Second, when we find out about people who are breaking the rules, we take
enforcement action and publicize the results.
Third, we spend a lot of time and resources on investor education talking to people about the risks of investing in private companies. Most private company investments are higher‐risk. In most cases, investors can’t get their money out unless the company goes public or is sold.
Our website InvestRight.org and our province‐wide seminars emphasize the importance of understanding risk in the private markets. We explain, for example, that there is a lot less disclosure to investors, particularly after they have made their investment.
We can’t, however, do it all alone. I encourage you, if you ever hear of an investment that seems suspicious, to call our inquiries line (the number’s on our website) and let us know so that we can act on it as quickly as possible.
Investor protection cannot be considered in isolation. This has implications for the role of the regulator. For example, the BC Securities Commission mission statement says our mission is to foster both fair markets and “a dynamic and competitive securities industry”.
In fact, there is little that we can do in a proactive sense to foster competitiveness in the securities industry but, if we are not careful, there is much we could do to hinder it.
To our way of thinking, the primary means through which regulators successfully foster dynamic and competitive markets is to intrude into the operation of the market only where demonstrably necessary, and keep down the costs of regulation, both direct and indirect.
Guessing wrong – intruding when not necessary, and imposing costly and cumbersome requirements – is especially damaging to junior markets. Senior markets full of players with large compliance budgets can absorb all but the most ill advised instances of regulatory overkill, but players in the junior markets can’t. Regulatory missteps can easily cause serious and lasting damage to these markets
This demands a lot of regulators. It takes experience to know when to intervene and when not to, or at least to wait. It takes discipline not just to dash off new rules at the first sign of trouble, before one understands exactly what the problem is, whether the regulator can even fix it, and if so, how to do so.
We believe that over the years we, and our colleagues at the Alberta Securities Commission, have developed the expertise to know when and how to intervene in the
venture capital raising arena so that investors are protected while capital flows smoothly, and at relatively low cost, from investors to small businesses. And to the
extent, we have been successful in doing that, we have established a regime that investors can trust and that allows small business to raise capital efficiently.
What are the implications of the formation of a national securities regulator on all of this?
Our government has said that it supports the development of a national regulator on the basis that it could give Canada a competitive advantage at the international leveland it could potentially strengthen enforcement across Canada. Many think both of these outcomes would be positive developments for Canadian capital markets, although others, including Alberta, Quebec and Manitoba, remain firmly opposed to the idea of a national regulator.
Our government has asked us to work closely with the federal government to develop a plan for a national regulator.
One thing we are looking at closely is the likely impact of that regime on all that I’ve been talking about today. I have made the point that the care and feeding of small
business is of extraordinary significance not only to British Columbia, but to Canada as a whole.
We doubt that any national regulator would intentionally put any of this at risk. However, a national regulator is going to have its hands full on issues affecting primarily
senior markets and participants in those markets. Things like working with other regulators internationally to deal with systemic risk. Things like writing new rules for
over‐the‐counter derivatives trading, for regulating credit rating agencies, and for a host of other issues that have captured international attention in the wake of the 2008 market crash.
These are the things that the media writes about, and that catch the attention of politicians.
The risk is that a national regulator will focus on these issues to the detriment of paying attention to responsible regulation of junior markets, both public and private.
The other risk is that the local expertise in regulating the junior markets may be lost, or not heeded, in an organization mostly dealing with new rule initiatives directed at senior markets.
If these risks materialize, Canada’s ability to finance small business, the lifeblood of economic growth and employment, will be put in serious jeopardy. It won’t matter then whether it happened through benign neglect, through well‐intentioned but misguided intervention, or through the friendly fire of new initiatives aimed at senior markets.
Of course that doesn’t have to happen. We are watching to make sure that the new regulator is structured to ensure the continued success of Canada’s venture markets in raising capital for small businesses. It’s far too important to our future economic wellbeing to let it slip away.