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Richard Carleton: We’re trying to level the capital market playing field

Current securities regulations discourage successful companies from remaining on emerging stock exchanges over the long term

Richard Carleton, PCMA Director

As in any industry, increased competition in the provision of stock exchange services in Canada has been positive and healthy. The Canadian Securities Exchange, where I’m CEO, provides a good example. The CSE was launched 18 years ago with a mission to provide public issuers with a streamlined, lower-cost alternative to the Toronto Stock Exchange and TSX Venture Exchange. We succeeded: today, the CSE is home to more than 700 active listings.

That said, there is plenty of room for the competitive environment in this industry to improve. I want to highlight a specific barrier to better competition that is embedded in current securities regulations. It discourages successful companies from remaining on emerging stock exchanges such as the CSE over the long term, putting these companies and our exchange at an unfair disadvantage.

Let me start with some background.

Public companies in Canada are currently classified in one of two ways under securities law: as “Issuers” or “Venture Issuers.” Issuers have a more rigorous set of disclosure and governance requirements than Venture Issuers, which have traditionally been much smaller firms. This makes perfect sense. Small companies with few assets and employees should have less demanding compliance requirements.

The problem is in the definition of who is a Venture Issuer. Instead of identifying such companies based on logical measures like market capitalization, revenue, or assets, they are classified as Venture Issuers strictly by virtue of listing on either the TSX Venture Exchange or the Canadian Securities Exchange.

In other words, it doesn’t matter how big your company is: your status depends entirely on which stock exchange you happen to list on. If your market cap is more than $1 billion and you are listed on the CSE, you are a Venture Issuer. If your market cap is near zero and you are on the Toronto Stock Exchange, you are an Issuer.

This labelling matters. Issuers and Venture Issuers are not treated equally. CSE-listed Venture Issuers are not eligible for margin relief under the existing rules. This means they can’t be purchased in client margin accounts; securities of these issuers in dealer inventory are carried at full value against the firm’s regulatory capital. This increases their cost of financing and can keep some dealers out of the space altogether.

Another way Issuers and Venture Issuers are treated differently is that investment mandates from institutional investors may not permit asset managers to purchase the securities of Venture Issuers, thus narrowing the range of capital available to these companies. In much the same way, some international index providers will not consider Venture Issuers for inclusion in their indices, thus denying companies exposure to investors.

Until recently, these differences were not a major issue. When smaller public companies reached a certain level of success on the TSX-V or CSE, they would typically move their listing to the TSX or a U.S. exchange. Accordingly, they would shed the Venture label and be re-classified as Issuers, at which point the Venture restrictions would no longer apply.

But thanks to the CSE’s recent success in attracting and retaining larger issuers, particularly in the cannabis sector, the “normal” evolution of successful companies jumping from the CSE to the TSX has broken down. The CSE is now established as a credible home for larger, more advanced firms.

While we are delighted by this development, the Venture Issuer status has become a real problem. These larger CSE-listed companies, some of which have market capitalizations in the billions, are at a significant disadvantage to comparable companies on rival exchanges that happen to be classified as Issuers and can thus enjoy margin eligibility and greater access to investors.

We could wait for the various regulators to address the competitive imbalance. But true to our nature as disruptors, we are tackling these problems head on.

We are currently re-writing our listing policies to create two tracks for CSE-listed companies: one for Venture Issuers and another for more mature companies. Under the new rules, most of our companies will remain Venture Issuers. The larger and more advanced companies, however, will get reclassified, allowing them — we hope — to enjoy the same benefits as Issuers on the TSX. Accordingly, they will also be subject to a more rigorous corporate governance regime that mirrors the regime governing existing Issuers on other exchanges.

We have worked in concert with regulators at the Ontario and British Columbia securities commissions to formulate this revision of our listing policies. The proposed changes are currently open for public comment on the regulators’ respective websites and the CSE’s website.

We invite members of the investment community to support our proposal by submitting comments. In our view, the changes are a matter of fairness and common sense. By addressing regulations that are clearly out of date, we can enhance the competitive landscape for issuers and investors in Canada and ensure a strong and vibrant capital market well into the future.

Source: Financial Post