BC’s Capital Markets: A Major Engine of Growth for Canada’s Economy

November 15, 2011
Brenda Leong
Hong Kong Business Association

Speech Summary:

Good afternoon.  Thank you for giving me the opportunity to speak to you today.

The governments of British Columbia and Canada believe that strong trading relationships with Hong Kong and other countries in Asia present significant opportunities for economic growth.   

As I speak, our Premier is leading a business delegation to China and India, and this delegation follows many previous ones that have successfully opened up business opportunities between BC and countries in that part of the world.

And just yesterday the Federal Minister of Finance joined the TMX Group to formally open a representative office in Beijing. TMX Group’s efforts in China will focus primarily on advancing Canada’s capital markets and the business of our Canadian equity exchanges.

The minister, who spoke at the launch, called it an “important bridge between our respective capital markets.”

The Toronto Stock Exchange and TSX Venture Exchange already have 55 Chinese companies listed between them, most of those on the TSX Venture Exchange, with five of those listings from this year alone.

Indeed British Columbia has much to offer to businesses abroad.  One of our greatest strengths is a healthy and vibrant venture capital market – viewed by many in the international community as the best of its kind in the world.

It has a proven track record of successfully raising money to support the kind of businesses that create wealth and new jobs.

In fact, BC has become the undisputed global capital of junior mining company finance, and is often called the start-up capital of Canada. 

Part of the reason this market is so successful is the regulatory framework in which it operates, so I am going to talk to you today about the BC Securities Commission’s role in regulating BC’s capital markets and how we strive to make BC a good place for investment and investors alike.

We believe we have the right regulatory environment to allow early stage companies to raise capital.

Let me begin with an overview of the size of our capital markets.

Last year, BC companies raised $23.2 billion dollars. Of this, about one half came from the public market and investment funds.  The other half came from the private placement market.

You may be surprised to hear that Vancouver, not Toronto or Calgary has the most head offices of publicly traded companies in Canada – these companies are listed on the TSX-Venture Exchange. Most of these are small, early stage companies, 65% of which have market capitalization of less than $25 million.

We are also the centre of financing for the mining industry.  We are home to a large number of junior mining companies, and we lead the country in financing mining exploration and development.

The mining industry is a significant player in Canada’s capital markets – in fact, 42% of Canada’s public companies are mining companies.

We also have the world’s most successful public venture market, the TSX – Venture Exchange.  This is not just our opinion, respected international institutions have said so publicly.

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 is a vital engine of Canada’s economic growth. 

Consider this:  Over the past ten 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 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 Western Canada.

Another factor we think contributes to the success of raising money in British Columbia is our regulatory regime for companies who are not big enough to go public and need to raise capital through the so-called private placement market. 

This is a system that allows start-up and nascent businesses to raise funds from investors under exemptions from the usual prospectus requirements, which is particularly important to BC’s economy.

Why?  Because BC is often called the start-up capital of Canada.  98% of the businesses here are small – small meaning less than 50 employees.  Yet this sector generates about one third of the province’s gross domestic product and is responsible for more than 40% of the goods exported from the province.

In order for these businesses to grow, they need capital to develop new products and an export market for them. B.C. is Canada's gateway to Asia, with the closest ports to Asia in North America. This makes it easy to ship products to China.

Chinese investment in Canada increased by 9.3 percent to $14 billion in 2010, with British Columbia being one of the growing destinations for that investment. However at a conference we hosted last year, 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 much more risk-adverse. Some suggested that the amount of fresh capital is one quarter of what it was a few years ago.

Yet, companies are still finding money by using the private placement market, which is raising a surprising amount of money -- $10.8 billion last year. 

So what’s the role of the BC Securities Commission in all of this?

For starters, no market is of any long-term benefit for businesses if it is not seen as reputable.  The great majority of businesses seeking financing in our markets are legitimate. Some, though, are not.

So part of our job is to make sure that when investors put their money in businesses, whether through the public or the private market, they only have to worry about legitimate business risks and not about whether the investment is fraudulent.

One of the ways we do this is through regulatory oversight of the Venture Exchange. 

The reputation of the Exchange that I spoke about earlier shows, in my opinion, that we are doing the right things in this area.

In addition to our role of regulating the venture exchange, we are the experts in regulating the mining and exploration sector.

We recently worked closely with our colleagues across the country to update the standard disclosure for mining.  It is a rule that is regarded internationally as essential to maintaining the integrity of this sector. We have geologists and mining experts on staff who oversee this part our mandate.

Ensuring market integrity in the private placement market is more challenging.  It is a mosaic of thousands of business and thousands of investors.  Currently, BC is doing more than other jurisdiction in Canada to improve investor protection in this market.

This fall we introduced a new disclosure form to provide investors with more information about directors and officers, purchasers and salespersons – for example, whether they are insiders and promoters.

We have a dedicated Corporate Finance compliance team focusing on this market and we continue to provide investor education to give people the information they require to decide if investing in private companies is the right decision for them.

This fall, we launched a “Be Fraud Aware” campaign, initially focusing on the Chinese and South Asian communities, who represent 40% and 26% respectively, of BC’s visible minority populations.

They have very low awareness of the Commission and our research shows that they may be particularly vulnerable to something we call “affinity fraud” because they tend to rely on investment advice from friends and relatives, as opposed to an advisor.

You can find the campaign in several languages at InvestRight.org, our consumer website.

Simply put, our goal is provide the best balance between investor protection and market efficiency.

And while there is little we can do to improve competitiveness in the markets, there is, if we are not careful, much we could do to harm it.

To our way of thinking and this is our philosophy here in BC, the primary way we successfully regulate the markets is to intrude only where it is demonstrably necessary. 

We want to keep down the costs of regulation, both direct and indirect, so we don’t burden business with unnecessary costs.

Guessing wrong – intruding when not necessary – is especially damaging to junior markets.  Senior markets full of large players with big budgets can absorb all but the most ill advised instances of regulatory overkill, but players in the junior markets can’t.

This demands a lot of regulators. 

It takes experience to know when to intervene and when not to, or at least when to wait. It takes discipline not just to dash off new rules at the first sign of trouble before we understand exactly what the problem is or whether we can fix it and if so how to do so.

We believe that over the years we have developed the expertise to know when and how to intervene in the venture capital raising arena so that investors are protected when capital flows smoothly and at relatively low cost, from investors to small businesses.

And the extent to which we have achieved that, we have established a regime that investors can trust and that allows small business to raise capital efficiently.

In closing, I hope that my remarks today have helped you understand the importance of BC’s capital markets to businesses here and elsewhere, and to Canada’s economy and to help you better understand the Commission’s role in protecting investors and the integrity of those markets.

Thank you.