Modernizing Ontario’s Capital Markets: A Private Markets Focus

By Brian Koscak and David Gilkes PCMA Executive Members


The Ontario Securities Act must be reviewed every five years, however, it was last reviewed over 17 years ago in 2003. Since this review, the global financial system has undergone systemic changes, particularly in response to the 2008 global financial crisis, the crash in oil prices and, most recently, the COVID-19 pandemic.

In February 2020, the Ontario Government established the Capital Markets Modernization Taskforce (the Task=force) to review and modernize Ontario’s capital markets regulation in accordance with section 143 of the Act.

The Taskforce released its Final Report1 on January 22, 2021 that included 74 recommendations intended to modernize Ontario’s capital markets and drive innovation, competition and diversity, resulting in job and wealth creation.

The Final Report covered six main areas:

  1. Improving Regulatory Structure
  2. Regulation as a Competitive Advantage
  3. Ensuring a Level Playing Field
  4. Enhancing Proxy Systems, Corporate Governance and M&A
  5. Fostering Innovation
  6. Modernizing Enforcement and Enhancing Investor Protection

The PCMA submitted a detailed comment letter in response to the Taskforce’s initial draft report and one of the authors (Brian Koscak) was appointed by the Ontario Government as a member of the Expert Advisory Committee to the Taskforce.

This article provides information on the Taskforce’s recommendations with a focus on the private markets and the PCMA’s views on certain matters as reflected in our comment letters.

Rise of the Private Markets

The Final Report discussed the rise of the private markets which included the following:

“Globally in the last decade, private market assets have increased 170% and the number of private equity firms have doubled during the same period.”

“For sophisticated investors, private markets have become an important element of portfolio diversification, given the opportunities to earn higher returns than in the public markets.”

“Over the past decade, private equity has outperformed its public market equivalents by most measures.”

“Apart from the lower cost of accessing private markets, company shareholders with the greatest decision-making powers also elect to remain private to maintain control, maximize returns, or seek exit or cash-out options outside of public markets.”

A. Theme 1 – Improving Regulatory Structure

The Taskforce made various recommendations in the restructuring of the Ontario Securities Commission (the OSC) that included the following:

  1. Introducing the Capital Markets Act in Ontario as a legislative vehicle to implement the Taskforce’s recommendations (R#1).
  2. Expanding the mandate of the OSC to include fostering capital formation and competition in the markets (R#2). See below Implementation.
  3. Introducing a standard of reasonableness to OSC decisions (R#6).
  4. Separating the OSC’s regulatory and adjudicative functions (R#4) – This is a big change which would set-up a policy-making branch and an adjudicative tribunal instead of having both functions performed within the same Commission structure. See below Implementation.
  5. Ensuring the securities regulatory framework and OSC’s regulatory functions are reviewed periodically (R#5).
  6. Reducing the minimum consultation period for rule-making from 90-days to 60-days for both consistency with provisions in other jurisdictions and to reduce delays (R#7).
  7. Transitioning to a Single Self-Regulatory Organization (SRO): In addition to restructuring the OSC, the Taskforce recommends transitioning to an SRO covering all advisory firms, including investment dealers, mutual fund dealers, portfolio managers, exempt market dealers and scholarship plan dealers (R#9).

The PCMA’s comment letter to the Taskforce stated, among other things, the PCMA’s longstanding position that it does not support a self-regulatory organization (SRO) for exempt market dealers in the current regulatory regime. We reiterated our response in our comment letter dated October 23, 2020, to the Canadian Securities Administrators (the “CSA”) in connection with its Request for Comment to CSA Consultation Paper 25-402 Consultation on the Self-Regulatory Organization Framework.3


B. Theme 2 – Regulation as a Competitive Advantage

In terms of regulation as a competitive advantage, the Taskforce’s recommendations included:

  1. Supporting Ontario’s Issuers and Intermediary Market: Mandate that securities issued by a qualified reporting issuer using the accredited investor prospectus exemption should be subject to a reduced hold period of 30 days, and be eliminated in two years (R#12).
  2. Enhancing the OSC’s tools: Provide the OSC with additional tools for continuous disclosure and exemption compliance (R#13).
  3. Creating a “Safe Harbour”: The Taskforce recommends creating a dealer registration “safe harbour” of issuers and their Associated Persons (R#15).
  4. Introducing a Finder Category of Registration: In addition to introducing a finder category of registration, the Taskforce recommends providing the OSC with rulemaking and designation authority to modernize and provide greater certainty regarding application of “promoter” status (R#18). This recommendation contrasts with the Alberta Securities Commission’s proposal to create a Small Business Finder Exemption that the PCMA does not support, as set out in the PCMA’s comment letter to the ASC.4
  5. Transitioning Towards an Access Equals Delivery Model: In light of the world’s adaptation towards a digital-first world, particularly in light of COVID-19, the Taskforce recommends transitioning towards an “access equals delivery” model of disseminating information in the capital markets, along with a focus on the digitization of capital markets more generally (R#20).

C. Theme 3 – Ensuring a Level Playing Field

In terms of ensuring a level playing field, the Taskforce made the following recommendations:

  1. Expanding the Rights of Exempt Market Dealers (EMDs): To open additional channels of financing to issuers (particularly in the venture space), the Taskforce recommends allowing EMDs to participate as selling group members in prospectus offerings and be sponsors of reverse-takeover transactions (R#22). The PCMA supports the Taskforce’s recommendations to allow EMDs to be “selling group members” in the distribution of securities made under a prospectus offering that would include Capital Pool Company (CPC) offerings, both in relation to initial public offerings and prospectus offerings in connection with a qualified transaction. This was permitted under NI 31-103 and we disagreed when the OSC (and other CSA members) removed the ability of EMDs to participate in prospectus offerings in 2014. This could potentially be a game-changer for EMDs.
  2. Expanding Accredited Investor Designation: Introduce additional Accredited Investor categories (R#23). The PCMA supports adding additional categories relative to the approach taken by Albert and Saskatchewan who have recently introduced a Self-Certified Investor Exemption. The PCMA wrote a comment letter in response to Alberta and Saskatchewan’s request for comment on the proposed exemption before it was approved.5
  3. Adjusting Offering Memorandum Prospectus Exemption: Permit proceeds from the disposition to be reinvested above the investment limits maximum under the Offering Memorandum prospectus exemption (R#29).
  4. Expanding Liability for Misrepresentation: Expand the civil liability for offering memorandum misrepresentation to extend to parties other than the issuer (R#30).

D. Theme 4 – Enhancing Proxy Systems, Corporate Governance and M&A

These initiatives focused on the public rather than private markets.

E. Theme 5 – Fostering Innovation

The Taskforce’s recommendations for fostering innovation in the private markets included the following:

  1. Creating an Ontario Regulatory Sandbox and Canadian Super Sandbox: In an effort to spur the growth of start-up businesses, the Taskforce recommends the creation of an Ontario Regulatory Sandbox to benefit entrepreneurs. In the longer term, the development of a Canadian Super Sandbox may be considered (R#49).
  2. Emphasizing Economic Growth and Innovation: The Taskforce recommends that a strategic focus of the OSC’s Office of Economic Growth and Innovation be on facilitating economic growth and innovation, including being an advocate for smaller innovative businesses, and expand the range of the Innovation Office’s services (R#50).
  3. Increasing Access to Capital: The Taskforce recommends allowing greater access to capital for start-up and entrepreneurs (R#52).

F. Theme 6 – Modernizing Enforcement and Enhancing Investor Protection

The Taskforce made the following recommendations in connection with modernizing enforcement and enhancing investor protection:

  1. Increasing the OSC’s Enforcement Powers: To improve the OSC’s ability to collect monetary sanctions, the Taskforce recommends vesting it with more effective powers to freeze, seize or otherwise preserve property, including property transferred to family members or third parties below market value (R#55).
  2. To complement this increased enforcement power, the Taskforce recommends increasing the maximum for administrative monetary penalties to $5 million and the maximum fine for offences to $10 million (R#58).
  3. Increasing Transparency in OSC Investigations: Given stakeholder complaints surrounding the OSC’s unclear process for the adjudication of disagreements arising in the course of investigations and examinations, the Taskforce recommends integrating more transparency into the process as a whole. This includes factors such as:
    • providing notice upon the closing of an investigation;
    • facilitating an examination by providing certain documents in advance to persons served with summons; and
    • coordinating with summons recipients to discuss realistic timelines and production concerns (R#68).
  4. Broadening Confidentiality Exceptions: The Taskforce recommends broadening the confidentiality exceptions available for disclosing an investigation and examination order or a summons (R#69).
  5. Designating Dispute Resolution Services (DRS) Organizations: The Taskforce recommends providing the OSC with the authority to designate a DRS organization that would have the power to issue binding decisions. According to the Taskforce, this would be a significant improvement to the retail investor protection framework (R#71).
    • This recommendation is the greatest concern of all the Taskforce’s recommendations.
    • The PCMA objects to this recommendation for many reasons which we detailed in our Comment Letter to the Taskforce.
    • The PCMA will be publishing a White Paper on this topic in the summer of 2021.

Responses to the Final Report of the Taskforce

The CSA responded to the Taskforce’s recommendations in an open letter.6 The CSA expressed concern about adding competition and capital formation as a mandate under securities law. The PCMA published a response to the CSA and we disagreed with their views.7

The Ontario Government released its budget on March 24, 2021 and stated that it would implement some of the recommendations made by the Taskforce. Specifically, Ontario announcement its introduction of legislative amendments to support:8

  1. expanding the mandate of the OSC to include fostering capital formation and competition in the markets to facilitate economic growth [See R#2 above by Taskforce];
  2. ensuring a clear separation between the regulatory and policy functions of the OSC and its adjudicative function through the establishment of a Capital Markets Tribunal [See R#4 above by Taskforce]; and
  3. moving forward with the separation of the Chair and Chief Executive Officer position into two distinct roles to support stronger corporate governance and effective management of the OSC.

The legislative changes above were passed by the Ontario Government and received Royal Assent on April 27, 2021, in “Securities Commission Act – 2021” (in Schedule 9 of Bill 269 – “Protecting the People of Ontario Act”).

Although the PMCA does not agree with all the Taskforce’s recommendations, the PCMA supports the Ontario Government’s legislative changes, but is desirous of additional changes to support capital formation in the Ontario private markets. Hopefully, more changes are coming and the PCMA shall continue its efforts to support the private capital markets.

An image of David Gilkes

David Gilkes

Director, PCMA

An image of Adam Spence

Brian Koscak

Co-Chair Advisory Committee, Director, PCMA

Source: The Private Investor