Proposal for a Single Securities Commission: Comments and Discussion

This report analyzes and comments on the principal arguments put forward by the Crawford Panel to support the establishment of a single securities commission in Canada. One argument advanced is that the current rules-based regulatory structure should be replaced with a principles-based approach similar to that of the United Kingdom's Alternative Investment Market (AIM). According to the Panel, this approach would allow for a relaxation of the conditions for corporate financing. We will point out the very distinctive characteristics of the Canadian market, which allows emerging companiesthose without income and even without any revenueto carry out initial and subsequent rounds of financing. Our estimates indicate that such financing is carried out at an advantageous cost, and the survival of new issuers seems more certain in Canada than in other countries where the rules for listing on a stock exchange are more restrictive. We believe it would be difficult to further relax the rules of a market in which 45% of issuers are able to list their securities on a stock exchange without reporting any revenue and in which 71% of new exchange registrants do not earn any income. This situation is unparalleled in the world. We will show that adopting a system similar to the AIM model would result in a significant percentage of existing issuers no longer being able to access the market. We therefore concur fully with the opinion expressed by one of the experts enlisted by the Panel, namely, that adopting a system similar to the AIM model in Canada is neither feasible nor desirable. The Panel expressed concern about the conditions for the financing of junior issuers. We will show that, in general, the direct costs of such financings are lower in Canada than in the United States. We will see that, in fact, there is a very high number of small offerings and issues in Canada. The Canadian markets seem to have developed strategies that are well suited to the characteristics of an economy heavily dependent on small-cap companies and on the resource sector. An analysis of all financings, including traditional and non-traditional stock exchange listings as well as subsequent financings (a total of more than 10, 000 transactions), clearly shows that financings are very small and are carried out locally and, in 77% of cases, by issuers from outside Ontario. The Panel also expressed concern about the level of competitiveness of the Canadian market; this is a concern that we share. We will show that the principal challenge faced by the Canadian market is the gradual shift of transactions involving cross-listed securities to the U.S. market. In contrast to the Panel, we do not believe that AIM listings constitute a major problem. When Canadian companies cross-list their securities, they opt for the U.S. market at a ratio of eight to one. The migration of companies and transactions towards the U.S. market has many causes, but it would be very difficult to argue that the regulatory structure is a key factor. The argument whereby the costs of capital are lower in the U.S. does not stand up to analysis. Several recent and thorough studies indicate that the difference in these costs between the two countries is minimal, leaning in favour of one country or the other depending on the study. Our own findings show that Canadian companies that cross-list their securities do not benefit from any lower costs. The decision to list securities on a foreign market is driven primarily by strategic business factors and by the search for large pools of investors. In that regard, Canada has no advantage, and it seems unlikely that regulatory changes will convert Canada into a significant source of financing for foreign companies. In our opinion, efforts should be focused, above all, on improving and sustaining the financing options available to Canadian issuers. The Panel has argued that establishing a single commission is necessary for improving enforcement of securities laws in Canada. In this regard, Canada is often compared to the United States. An analysis of data on sanctions shows, firstly, that the SEC is far from being the source of the majority of sanctions imposed on financial market participants. It initiates less than 10% of proceedings involving financial matters and imposes less than one quarter of all monetary sanctions. Secondly, there has been an increase in sanctions imposed in Canada in this area. Thirdly, there are major differences between Canada and other countries. This explains the differences observed and perceived as regards enforcement. The experts enlisted by the Panel have, in fact, recommended a series of eight actions and have suggested, in the eighth item, pan-Canadian enforcement of the law. Consequently, these experts have not concluded that centralization of the securities commissions is an indispensable condition for enhancing the enforcement of securities laws. The issue of costs arises very often in discussions regarding the Canadian regulatory system. Yet, there is little evidence showing that the current regulatory structure leads to significant costs for investors or issuers. The costs of the regulatory authorities represent a negligible percentage of the transaction costs borne by investors and of revenues from brokerage activities in Canada. The direct costs of regulatory authorities are lower than those incurred in other countries, when expressed on the basis of the number of reporting issuers. Finally, arguments to the effect that a single commission would generate substantial savings are less than convincing. Such savings would be possible only if the activities of securities commissions outside Ontario were virtually abolished. Three elements appear from our analysis. First and foremost, the principal arguments put forward by the Panel to justify the urgency of centralizing securities commissions in Canada do not stand up to analysis and are, at times, contradicted by the research and the experts mandated by the Panel itself. Secondly, the major challenge faced by the Canadian marketthe shift of enterprises and transactions to the U.S.does not seem to have been perceived as such or even discussed. Finally, we believe it is essential to recognize and preserve the distinctive characteristics of the existing market. It is a market that welcomes growth companies and small-cap companies, is highly decentralized and is apparently very favourable to issuers. Ce rapport analyse et commente les principaux arguments avancés par le Comité Crawford pour justifier l'instauration d'une commission des valeurs mobilières unique au Canada. Un premier argument défend que la structure actuelle de réglementation, basée sur des règles, devrait être remplacée par une approche basée sur des principes, inspirée de l'expérience de l'Alternative Investment Market (AIM) au Royaume-Uni. Selon le Comité, cette approche permettrait d'assouplir les conditions de financement des sociétés. Nous montrons les caractéristiques très particulières du marché canadien, qui permet les financements initiaux et subséquents de sociétés en développement, sans bénéfice et même sans revenu. Nos estimations indiquent que ce financement se fait à un coût avantageux, et la survie des nouveaux émetteurs semble plus assurée au Canada que dans d'autres pays où les règles d'admission en Bourse sont plus restrictives. Nous considérons qu'il semble difficile d'assouplir encore les règles d'un marché où 45 % des émetteurs s'inscrivent en Bourse sans rapporter de revenu et où 71 % des nouveaux inscrits en Bourse ne rapportent pas de bénéfice. Cette situation n'a pas d'équivalent au monde. Nous montrons que l'imposition d'un système semblable à celui de l'AIM ferait qu'une proportion importante des émetteurs actuels ne pourrait plus accéder au marché. Nous rejoignons donc totalement l'avis de l'un des experts engagés par le Comité, qui indique que l'imposition d'un système semblable à celui de l'AIM au Canada n'est ni possible, ni souhaitable. Le Comité est préoccupé par les conditions de financement des émetteurs de petite taille. Nous montrons que les coûts directs de ces financements sont, de façon générale, moins élevés au Canada qu'ils ne le sont aux États-Unis. Nous indiquons par ailleurs la fréquence très élevée des émissions et placements de petite taille au Canada. Les marchés canadiens semblent avoir développé des stratégies bien adaptées aux spécificités d'une économie qui repose fortement sur les entreprises faiblement capitalisées et sur le secteur des ressources. Lorsqu'on analyse l'ensemble des opérations de financement, incluant les entrées en Bourse conventionnelles ou non ainsi que les financements subséquents (soit plus de 10 000 opérations), il apparaît nettement que les financements sont de très petite taille, effectués localement et, à 77 %, levés par des émetteurs non ontariens. Le Comité est soucieux du niveau de compétitivité du marché canadien et nous partageons ses inquiétudes. Notamment, nous avons montré que le principal défi auquel fait face ce marché provient du glissement progressif des transactions portant sur les titres interlistés vers le marché américain. Contrairement au Comité, nous défendons que les inscriptions sur l'AIM ne constituent pas un problème majeur. Lorsqu'elles s'interlistent, les sociétés canadiennes optent pour le marché américain dans une proportion de huit à une. La migration des sociétés et des transactions vers le marché américain a des causes multiples, mais il semble très difficile de prétendre que la structure des organismes de réglementation y soit un facteur déterminant. L'argument voulant que le coût du capital soit inférieur aux États-Unis ne résiste pas à l'analyse. Plusieurs études récentes et rigoureuses indiquent que la différence, à ce niveau, est infime entre les deux pays, et le sens de la différence varie suivant les travaux. Nos propres résultats indiquent que les sociétés canadiennes qui s'int

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