THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, February 26, 2026
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 10:30 a.m. [ET], in camera, for the consideration of a draft agenda (future business); and, in public, to study Bill S-3, An Act to amend the Weights and Measures Act, the Electricity and Gas Inspection Act, the Weights and Measures Regulations and the Electricity and Gas Inspection Regulations; and to examine and report on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the Canadian economy.
Senator Clément Gignac (Chair) in the chair.
[Translation]
The Chair: Honourable senators, I would like your agreement to move in camera immediately, and we will return in public in a few minutes. Agreed?
Hon. Senators: Agreed.
(The committee continued in camera.)
(The committee resumed in public.)
The Chair: Honourable senators, we will continue our meeting.
My name is Clément Gignac. I’m a senator from Quebec and chair of the Standing Senate Committee on Banking, Commerce and the Economy. I would like to welcome those listening to us online on sencanada.ca.
Before proceeding any further, I would kindly ask my fellow committee members to introduce themselves.
[English]
Senator Varone: Toni Varone, Ontario.
Senator Pupatello: Sandra Pupatello, Ontario.
[Translation]
Senator Dalphond: Pierre Dalphond from Quebec.
[English]
Senator Fridhandler: Daryl Fridhandler, Alberta.
Senator Loffreda: Senator Tony Loffreda, Montreal, Quebec.
[Translation]
Senator Ringuette: Pierrette Ringuette from New Brunswick.
[English]
Senator Yussuff: Hassan Yussuff, Ontario.
Senator McBean: Marnie McBean, Ontario.
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator Wallin: Pamela Wallin, Saskatchewan.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Martin: Yonah Martin, British Columbia.
[Translation]
The Chair: Our first order of the day is to proceed with clause-by-clause consideration of Bill S-3, An Act to amend the Weights and Measures Act, the Electricity and Gas Inspection Act, the Weights and Measures Regulations and the Electricity and Gas Inspection Regulations.
Before we begin, I would like to remind senators of a number of points. If at any point a senator is not clear where we are in the process, please ask for clarification. I want to ensure that at all times we have the same understanding of where we are in the process.
In terms of the mechanics of the process, when more than one amendment is proposed to be moved in a clause, amendments should be proposed in the order of the lines of a clause. If a senator is opposed to an entire clause, the proper process is not to move a motion to delete the entire clause but, rather, to vote against the clause as standing as part of the bill.
Some amendments that are moved may have consequential effects on other parts of the bill. It is therefore useful to this process if a senator moving an amendment identifies to the committee other clauses in this bill where this amendment could have an effect. Otherwise, it could be very difficult for members of the committee to remain consistent in their decision making. Because no notice is required to move amendments, there can, of course, have been no preliminary analysis of the amendments to establish which ones may be of consequence to others and which may be contradictory.
If committee members ever have any questions about the process or about the propriety of anything occurring, they can certainly raise a point of order. As chair, I will listen to arguments, decide when we will discuss the procedural matter and make a ruling. The committee is the ultimate master of its business within the bounds established by the Senate, and a ruling can be appealed to the full committee by asking whether the ruling shall be sustained.
I wish to remind honourable senators that if there is ever any uncertainty as to the results of a voice vote or a show of hands, the most effective route is to request a roll call vote, which obviously provides unambiguous results.
Finally, colleagues, senators are aware that any tied vote negates the motion in question.
Are there any questions?
[English]
Everything is okay?
[Translation]
Colleagues, is it agreed that the committee proceed to clause‑by‑clause consideration of Bill S-3, An Act to amend the Weights and Measures Act, the Electricity and Gas Inspection Act, the Weights and Measures Regulations and the Electricity and Gas Inspection Regulations?
Hon. Senators: Agreed.
The Chair: Shall the title stand postponed?
Hon. Senators: Agreed.
[English]
The Chair: Is it agreed with leave that the clauses be grouped according to six parts of the bill as described in the table of provision of Bill S-3 when appropriate?
Hon. Senators: Agreed.
[Translation]
The Chair: Shall Part 1, related to the Weights and Measures Act, which contains clauses 1 to 27, carry?
Hon. Senators: Agreed.
The Chair: Shall Part 2, related to the Electricity and Gas Inspection Act, which contains clauses 28 to 48, carry?
Hon. Senators: Agreed.
[English]
The Chair: Shall Part 3, related to the Weights and Measures Regulations, which contains clauses 49 and 50, carry?
Hon. Senators: Agreed.
The Chair: Shall Part 4, related to the Electricity and Gas Inspection Regulations, which contains clauses 51 and 52, carry?
Hon. Senators: Agreed.
[Translation]
The Chair: Shall Part 5, related to transitional provisions, which contains clauses 53 to 58, carry?
Hon. Senators: Agreed.
The Chair: Shall Part 6, related to the coming into force, contained in clause 59, carry?
Hon. Senators: Agreed.
The Chair: Shall the title carry?
Hon. Senators: Agreed.
[English]
Shall the bill carry?
Hon. Senators: Agreed.
The Chair: Does the committee wish to consider appending observations to the report?
Is it agreed that I report this bill to the Senate in both official languages?
Hon. Senators: Agreed.
[Translation]
The Chair: Senators, this is our fourth meeting on our special study focusing on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth and improved productivity in the Canadian economy.
I wish to welcome our witnesses: Annie Sinigagliese, Chief Executive Officer of the Canadian Independent Finance and Innovation Counsel; and Jim Dale, Chief Executive Officer of Leede Financial Inc.
I understand you have some opening remarks. Ms. Sinigagliese, you have the floor.
[English]
Annie Sinigagliese, Chief Executive Officer, Canadian Independent Finance and Innovation Counsel Inc.: Thank you for the kind invitation. Our name is very long, and we have a short amount of time, so I will call the company CIFIC. The Canadian Independent Finance and Innovation Counsel Inc., or CIFIC, was created two years ago to become the voice of investment dealers in Canada. We currently represent 42 dealers, mostly independents, all across the country.
Our goal is to solve their challenges. We asked our dealers what are the main challenge in Canada right now. They said junior capital markets. For them, start-ups have to go to junior capital markets and then eventually graduate to senior markets in order to create jobs and bring wealth to Canadians. Instead, many of these start-ups are being sold to foreign interests, and this has to stop. It is a good sign when I see senators nodding “yes.”
To be transparent, about half of the dealers we represent do not participate in junior markets. When we asked them why, they said it was because of the regulatory burden and because of the high cost, mostly related to the client-focused reforms.
The half that participated did so because, and I quote, “Somebody has to do it.” To them the junior issuers are a critical part of the Canadian economy, and they have to be there for these companies.
I am not an expert in junior markets, but when I heard that, I thought to myself that this is critical and our financial ecosystem is on the verge of collapsing.
I will now pass it to Jim Dale, who is an expert on the junior markets. Jim Dale is the CEO of Leede Financial Inc. but also the chair of our independent dealers group and our governance panel.
Jim Dale, Chief Executive Officer, Leede Financial Inc.: Thank you for the invitation to speak with you today.
This topic is of great importance to our industry and country. As Ms. Sinigagliese mentioned, we established CIFIC to represent Canadian independent or non-bank-owned investment dealers. I am the CEO of Leede Financial, and I will give you the background of the firm. Leede Financial is a mid-sized dealer with 140 investment advisers that operate from 20 locations in Canada. We have offices from Vancouver Island to Prince Edward Island and service clients in both official languages. Our firm’s roots go back more than 50 years.
Investment dealers are intermediaries between companies and investors, both institutional and retail investors. Prior witnesses Professors Wilson and Tingle provided excellent commentary and recommendations that focused primarily on the barriers Canadian companies face in going public.
My comments will focus on retail investors, as they are essential to the junior capital markets, but their participation has declined steadily in recent years. Many companies need capital, and a public listing would be more likely if we had more retail clients willing and able to invest in them.
I will outline some of the key issues. Retail investors are becoming less likely to be introduced to junior listed companies. Why? First, there are fewer investment dealers due to consolidation, and very few new dealers are being created due to regulatory barriers to entry. Next, many of our existing dealers have shifted their business model to wealth management, where revenue is fee-based instead of the traditional advisery model, which charges commissions on transactions.
Lastly, dealers can avoid some of the additional regulatory costs and risks associated with client-focused reform rules such as the Know-Your-Product rule. The KYP rule, as it is known, has resulted in dealers removing junior companies from their products that are approved for their advisers.
Even where advisers have access to junior listed companies, only the wealthiest investors can readily access these advisers. This is largely due to the high cost of servicing this business, which results in minimum account sizes. Accredited investor rules and syndication practices limit retail client participation and new financings. New financings have historically been a source of new clients.
Further, as you know, bank-owned dealers are risk averse and steer their clients to dividend-paying stocks, mutual funds, exchange-traded funds and GICs. They avoid the junior markets.
Many retail investors have self-directed accounts with online brokers where they do have access to junior issuers, but are less confident investing in them without additional research and advice that advisers can provide.
Some retail investors are discouraged by the impact that short‑selling practices can have on illiquid junior stocks. This causes them to put their money elsewhere. Risk capital is now competing with cryptocurrency, betting platforms and, more recently, prediction markets, which are almost barrier-free and, in the case of betting wins, tax-free. Compare this with tax that is paid on capital gains.
There are federal measures we believe would stimulate investor participation in the junior markets, and the four most important are: first, eliminate capital gains tax on early stage public companies. These are companies that, I would say, have annual revenues below a certain level, maybe $10 million. Second, allow the deferral of capital gains for other venture-listed companies where sale proceeds are reinvested in the market within one year, similar to the U.K. program. Third, extend the lifetime capital gains exemption currently available to Canadian private companies to Canadian public listed venture companies. And fourth, extend the flow-through share incentives available to resource companies to all early stage venture companies passing the tax write-offs to investors willing to put their capital at risk.
We also have some recommendations for our regulators.
We need to modernize the accredited investor rules and limit their applications. These rules do more harm than good. We currently exclude 95% of Canadians from participating in non‑brokered financings. Investment advisers who are subject to Know Your Client, or KYC, rules already have a responsibility for investing their client’s money in accordance with their defined investment objectives and risk tolerance. These rules are redundant. We also need to prohibit short selling for venture-listed securities that trade below a defined threshold. There may be exceptions for market makers and liquidity providers that must continue.
Also, we need to encourage greater retail client participation in new financings by establishing a minimum allocation for retail clients. Currently 100% of new issues can be taken up by institutional clients.
We believe these changes will significantly improve investor confidence and participation in junior capital markets.
I will turn it back now to Ms. Sinigagliese.
Ms. Sinigagliese: Thank you. We asked dealers that we represent what success would look like in junior capital markets. What they said was they wanted to see increased IPO activity and secondary financings. They wanted to see greater liquidity and better price discovery, but, most of all, what they wanted to see was a healthy pipeline of companies that go from start-ups to junior capital markets to senior markets. To them, that could bring more job creation in Canada and more wealth for all Canadians. When we asked them how do we get there, they said that everyone must work together. We’re very happy to be here because we feel the Senate, Parliament, regulators, but also issuers, dealers and investors have to work together to implement solutions on different levels. We believe that the Senate is actually able to encourage fundamental changes in Canada. Thank you.
The Chair: Thank you for your opening remarks. We are happy as well that you are here this morning. You are at the core of our discussion. Thank you for sharing some solutions.
Colleagues, we have 60 minutes. I propose five minutes each for the question-and-answer, starting now with our vice-chair, Senator Varone.
Senator Varone: Thank you. Ms. Sinigagliese, you wrote a letter to the Ontario Securities Commission, and it was on the topic of CIX trading, as they call it. I found it interesting in terms of the points of view being offered and some of the novel concepts on fractional trading. My question is, will the implementation of the CIX trading platform enhance or impede access to capital for SMEs in Canada, considering the concerns that you’ve outlined in that letter regarding operational readiness, fractional trading, infrastructure and risk-market fragmentation, as noted by the stakeholders?
Ms. Sinigagliese: Thank you for the question. We believe that capital markets must be modernized in Canada. We are looking at the U.S. We see that they are going to tokenization. They may be there in two years, where tokenized securities will be traded on NASDAQ, NYSE and so on. We have to modernize our capital markets in Canada. In that letter, however, we did say that we did have some concerns. We need to ensure that, for our smaller capital markets, we make decisions that make sense for Canadians. We believe that CIX trading is welcome in Canada. It is going to modernize what we do, but we would like to see more Canadian companies come up with this type of enterprise.
Senator Varone: For the benefit of my colleagues, can you expand on what fractional trading means?
Ms. Sinigagliese: Fractional trading is happening in the U.S. right now. Investors in the U.S. are participating. Instead of buying a very expensive stock, they can buy a portion of it at a cheaper price. It permits them to participate in an issuer that otherwise they would not have access to.
Senator Marshall: Thank you. Mr. Dale, I found it very interesting. You went through four suggestions, but they are all aimed at tax reform, isn’t it? That wasn’t my question; I just found that interesting. Maybe I am looking at this simplistically.
Is there a structured system whereby if someone has a half million dollars to invest, how do they access these junior companies? It seems like there is no structured process. If I had a half million dollars, I would be looking at the Toronto Stock Exchange and probably looking at the banks. What is the process if you want to access these smaller companies?
Mr. Dale: Thank you for the question. There is a great amount of difficulty right now in accessing the junior markets. It depends upon who you first talk to. If you talk to your bank, they are more likely to steer you to other products. If you have a larger account, then you will likely be placed with an adviser. That adviser may have access to the Toronto Stock Exchange, the TMX, but in most cases, stocks that are listed on the TSX Venture Exchange or the Canadian stock exchange will be unavailable to them. They won’t be on the designated product shelf. If you would like to buy them, you might be granted an exception by their compliance departments.
It’s difficult. There are some advisers who work for banks who are more demanding in terms of meeting their clients’ needs, but it is an obstacle within a bank. Independent dealers fulfill more of that niche in the business, but increasingly, as I mentioned, even independent dealers are moving more to a wealth-management platform.
Senator Marshall: How do you change that? You want to encourage people to access these smaller companies. My experience has been that someone who has something on the go will call you or show up at your door and say, “I have this project on the go. Are you interested in putting in a couple hundred thousand dollars?” That’s just ad hoc. How do you change it so more people can access these smaller companies?
Mr. Dale: I think most of the recommendations are directed at that. There isn’t one simple solution to it. There are a number of regulatory changes that are required, but there also has to be incentives for investors who want to participate and are willing to write the cheques. That’s where some of the tax incentives come in. That helps derisk their investments or delay the taxes that they would otherwise pay, causing them to recycle that money in those markets more frequently.
Senator Marshall: Thank you.
Senator Fridhandler: I’m interested in how we break down the institutional education of our regulators, who are working with consumer protection legislation and believe that they have to put up gates so that people don’t lose their money and make it as difficult as they possibly can. That’s why 95% of the population doesn’t get to participate. Those who are wealthy enough, who are believed to be smarter and can look after themselves get to participate in all the private placements and the upside development of small companies.
You talked about the creditor-investor exemption and said it is archaic. The creditor-investor exemption for everyone in Canada is generally that you have to make $200,000 pre-tax for the last two years and anticipate it for this year or with your spouse, $300,000, have net liquid assets of $1 million or net assets of $5 million. If you have that, you can invest in all of these companies. If you don’t, you can’t put money in.
You’ve indicated that broker private placements because brokers have the KYC — know your client — they understand when they put someone in that the consumer is getting their protection. I don’t know if you’re advocating that there be no maximum amount someone can do, that it’s open season.
Then, for non-broker private placements, where a lot of them will knock on your door and say, “Put your money in my company,” would you advocate that we should be able to do that? Or should we have some ceilings and look at that but get rid of this oppressive consumer protection that the regulators exercise?
Mr. Dale: Thank you, Senator Fridhandler. That’s an excellent question, and the answer is complex.
As you say, the accredited investor rules are — a large majority — I would say 95% of Canadians are not participating in the non-brokered investments. However, investors at firms, at independent dealers, are introduced into those deals, and that’s where the redundancy occurs. These accredited investor rules are layered on top of existing rules, and clients that would otherwise qualify for higher-risk investments, to some degree, are being excluded from those deals. In the process of being excluded, they are often also excluded from the benefits that are attached to deals, like warrants. The warrants are effectively an option that they can exercise in the future, at the same price that the issue was at, which rewards them for taking the risk.
The wealthier investors are able to access those warrants. The other 95% can buy those same securities on the stock market, if they have access, without the warrant but at the same price as the issue is being done. That’s why I say it’s harmful to investors. It penalizes less wealthy Canadians.
Senator C. Deacon: Thank you, Ms. Sinigagliese and Mr. Dale, for being here.
This is a really important topic. This is at the end stage of a successful company growth plan that has been hard to raise the money to get to that point. We see too many, as you pointed out, of our most promising companies exiting to the U.S. or going public in the U.S. because the challenges are so great here. That contrasts dramatically with the industry that I worked in the late 1970s to the end of the 1980s.
Mr. Dale, you spoke about the regulatory burden not just on the companies themselves that go public relative to staying private but on the dealers themselves and the relationships that they have. An op-ed with Ari Pandes back in June pointed to the Big Six as being part of that and a change to the Bank Act in 1987 as being a pivotal or a hinge moment, as our Prime Minister likes to say, in this industry, what used to be my industry. I’ve seen it in the companies that I worked with before coming to the Senate.
Can you speak about that? I’m focused on a solution of deconsolidation of our financial sector because I just think there is too much control with six men behind six doors, and we don’t get that competitive energy at the foundation of our economy. This is a lifeblood of our economy, and we just don’t get it. If I could start with you, Mr. Dale.
Mr. Dale: Thank you, senator.
Yes, I agree 100%. Our financial industry is highly concentrated within the six large banks. More than 90% of Canadian wealth is managed by those six banks, and not just their wealth, but also loan portfolios extend to the same companies that are looking for capital or considering going public. Their banking relationships with those clients often dictate how they go public or whether they qualify to go public.
I agree. There is far too much power within the banks. Companies like ours are operating as a niche business in Canada, and it’s becoming more and more difficult to remain in that business with the regulations that are following.
Senator C. Deacon: Ms. Sinigagliese, can you give me some sense of the shrinkage in the industry? When I go back to the 1980s and the number of independent dealers, they were owner-operated businesses. The people taking the risks were investing the money in the company.
Now we’ve got a handful who are really having trouble participating in capital markets, as Mr. Dale mentioned, and are being regulatorily squeezed. Can you give us some sense of the parameters of how that shrinkage has occurred?
Ms. Sinigagliese: Right now in Canada, we probably have, at maximum, 150 independent dealers. About 100 of those will service the retail investor, and that’s it.
Out of our 42 members at CIFIC, we only had 20 that participated in the junior capital markets and these types of deals. That’s why we are here to raise awareness.
Senator C. Deacon: How would the size of their activity in the whole ecosystem of capital deals compare to what is being dominated by the banks? It’s single digits.
Ms. Sinigagliese: Probably. I don’t have the number, but yes.
Senator C. Deacon: I’d love it if you could forward that information to the clerk after the meeting, any evidence you have in that regard. I would really appreciate it.
Ms. Sinigagliese: Perfect. Will do.
Senator Loffreda: My question is for both witnesses. Thank you, Ms. Sinigagliese and Mr. Dale, for being here. I’ll continue on that topic but take another tangent to what we’re discussing.
Is going public still a viable growth path for Canadian SMEs, or has it become too complex and costly? Are we losing promising Canadian firms because going public domestically is no longer attractive? You’ve raised some of those concerns.
Economic sovereignty is a concern. Are we at risk of becoming a farm system for foreign acquirers of Canadian innovation? They do go public, and I’ve raised it before. Fidelity Investments has $4.5 trillion of assets under management. Even the banking system doesn’t compete with that. I think it’s $3 trillion in Canada.
Would stronger domestic institutional investment mandates make a difference? Could you name two barriers preventing SMEs from listing in Canada, and is there anything we can do on policy or instituting financial measures to help out with those concerns? I think they’re important concerns.
Ms. Sinigagliese: I will speak on my own behalf on this one. Unfortunately, I don’t think that we have an environment in Canada where companies can flourish easily. Like I mentioned during the opening remarks, when we went to our dealers and asked what we needed to do at this point, they said we all have to work together.
Universities have to get involved and develop the talent. Further than that, businesses have to create the opportunities, and then, in turn, the community has to support these businesses. There is definitely a lot that we could be doing going forward.
Mr. Dale: As I mentioned earlier, the retail investor has been instrumental in supporting start-up businesses in Canada in terms of those that go public, but it is a hurdle to get there and difficult as a firm to find clients willing to write the cheques for high-risk ventures.
The alternative to retail investors are institutional investors in Canada. There are very few long funds in Canada that participate in the venture markets. There are a couple in mining. Sprott is one that comes to mind, but largely in most sectors, we’re void of any institutional investors that participate in the junior capital markets.
Our pension funds are too large to have any interest in the junior markets. If they were to invest even 3% of their capital in the junior markets, they would need a team of people following those companies that would probably be equivalent to the size of their team that would follow the other 97% of their investment. It’s not practical for them to do that. It’s a structural issue we’re facing in our marketplace, and it’s a difficult one for us to recover from. I’m sorry, I don’t really have a solution to that one.
Senator Loffreda: Thank you.
Senator Yussuff: Thank you for being here. We have data to tell us what the problem is in terms of what SMEs are facing in the country. The bigger question is how we get to a place that we could make some recommendations.
I’ll start with the first obvious to me. There is always a tendency to compare us to Americans. We are 40 million people; there is no comparison, to be very blunt about it. In addition to that, we have, essentially, 11 regulators trying to manage their own security exchange in whatever fashion they decide. Jim Flaherty was the last one trying to bring them together and was beat up pretty bad. He finally gave up and said, “I’m not doing this anymore because we can’t get there.”
In the context of the challenge we face, we can’t do one thing at the federal level without the provinces reciprocating because that’s where most of the SMEs are located across the country. If we’re trying to do something really constructive and helpful for SMEs, how can we bridge this gap between the federal government and the provinces? They have a joint role in trying to mitigate the challenge we face if we’re going to grow the economy of the country but also help SMEs meet the challenge of getting capital from the market.
Mr. Dale: You raise a good point. Canada has 13 commissions, including the territories, but we do have an umbrella organization, the Canadian Securities Administrators, that oversees the rule making from those commissions. Many of the national instruments have universal application, so I’ll start there.
We have a passport system in Canada that has been endorsed by 12 of the 13 jurisdictions; Ontario is the exception. Unfortunately, one jurisdiction, Ontario, is also 50% of the market, so it’s a pretty significant gap in terms of participation.
The U.S. market has the SEC, but they also have 50 states that also have some input into how securities regulations are enforced in the U.S. It is different but not entirely different. It is complicated and time-consuming. In addition to CIFIC, I am involved as an adviser to some of the other bodies in Canada.
Some of the exceptions we have in Canada are very difficult for dealers to operate with. It would certainly be nice if Ontario decided to join the passport system, and through that then I think you would be able to eventually harmonize more of the rules.
Ms. Sinigagliese: One thing that we thought would be beneficial for dealers would be for adviser registration. Right now each adviser has to register in each province where they have clients, and that’s $2,000 to $4,000 per jurisdiction per year. That licence is very expensive, so maybe that’s something we could take a look at as well.
Senator Yussuff: Credit unions play an important role because they’re local, small and nimbler. They understand their clients because there is a unique aspect to their business. How can you differentiate between what the credit unions do in helping SMEs versus what we’re dealing with in the big banks at the national level?
Ms. Sinigagliese: I could talk a bit about Desjardins that has their capital de risque where they support regional businesses, and retail investors can actually invest and receive a tax credit at the end of the year. That has been around for at least 20 years, so these are the types of incentives that we could put forward.
The Chair: Thank you. It’s interesting because the government wants to eliminate barriers between provinces, but we have some angels that we have to consider because it is not the federal government’s decision. It is a Government of Ontario decision, so this is something. Perhaps I could work on that with my former trade economic colleague, former minister from Ontario, Senator Pupatello.
Senator Ringuette: Mr. Dale, you mentioned a U.K. program that seems to be very well received and meeting the goals. Could you elaborate on this program?
Mr. Dale: To put it as simply as possible, if you sell a junior security in the U.K., the sale proceeds can be reinvested in other qualifying junior securities within a year and defer paying the capital gains tax. You will pay it eventually, but by reinvesting those proceeds, you’re not eliminating tax dollars in your next investment.
Senator Ringuette: We’ve talked a lot about investors moving to the junior market and how to achieve that to create a certain pool, but what is the process for an SME to access the junior market? Fundamentally, we are looking for small- and medium-sized businesses to have access to funding.
Mr. Dale: The process typically involves the SME finding an intermediary that would be willing to support them and take them to a public listing. So a firm like ours, like Leede, we are quite involved in that. Historically, we have been more active than in recent times because it has been more difficult to find investors willing to open up their wallets. But the process is that we would work with the company and the exchange to get them listed on the market. It used to be an IPO, an initial public offering, and there is additional protection for investors through the due diligence process that’s conducted in understanding the company and in ensuring that all the key components are in place for them to have a chance at being successful.
More recently, IPOs are being avoided, and a lot of companies are listed in other ways through either existing listings, reverse takeovers or other manners of obtaining a listing. Again, there are many tasks to it, but it takes time and it costs a lot of money.
Often, delays in obtaining a listing will require a company to refresh their audited statements, for example, and that’s just one example where costs can skyrocket. These are companies that don’t have a lot of capital at the time.
Senator Pupatello: It’s very interesting to listen to your comments. I have a question about government programs. I think, always, but in particular the last 10 years that I’ve watched more closely, they have come up with grant or loan programs specifically designed for innovative small companies to grow and try to find that gazelle, all this terminology with animals. I’m curious, though, about the regulatory part that you spoke of. It was always on the side of the investor how difficult it is to make the investment and how we could make that easier for them. Senator Fridhandler talked about those who aren’t in a big game that the amount of paperwork just to become an investor, even on a small scale, is too daunting.
If it were from the government’s perspective trying to hand money to a small start-up where there is a high risk, they ask questions like, we need to see your last five years of financial statements. Well, we haven’t been here for five years. Or very credible individuals who are starting a new business so that business does not have those five years. You can appreciate the government perspective; whatever they’re going to do with their money, there will be a high level of scrutiny, so they need to be very sure, and they can’t be shown to be failing with these investments. When we have seen that, it’s always a disaster for the government.
How do you approach that where you know it’s high risk? You’re taking care of your investors as well in that space and have to gauge for that. From a government perspective, what do they do? It’s typically partnering, for example, so that they see other investors they’re in or their investment is going to leverage other investors so you’re sharing the risk.
What advice would you have on the programs that exist that you might already be aware of when it comes to risk for government and red tape or regulatory barriers with these programs?
Mr. Dale: Well, I’m going to start off by saying I’m not an expert in the government programs that exist today. I have a general awareness of a number of them — a scientific research program, for example — and a lot of those programs do a lot of good things for start-up companies.
Unfortunately, what they don’t do is guarantee those companies stay in Canada once they do get to some level of success. My view would be that, rather than place more money into these programs, let investors decide by giving them some incentives to invest in companies, and hopefully through that mechanism, more of them will list in Canada on the public markets here.
Ms. Sinigagliese: Maybe something that some of our dealers said because, as you know, I just ask our dealers what they think, and I bring it forward. They said that for a lot of the government support programs, support should be given based on the size of a business and not whether a company is private or public. They were saying that there are a lot of government programs for private companies, but then a company becomes public, and it’s much harder for them at that point. That’s also when they have to look for their auditors; it’s more expensive. And because the junior market is shrinking — I’m coming back to your question from before — they’re having a hard time finding securities lawyers, for example, to support their businesses. It gets hard once you become public, so we need to look at that as well.
Senator Pupatello: Have you seen that trend of public companies reverting to private? I mean, you hear the discussion of it, but is there data that backs up — there is a growth in that, in that they are actually getting out of that public market?
Mr. Dale: Again, I don’t have data with me to answer that question. I think you will have a witness in the future that would probably be able to answer that question much better than I. Richard Carleton with the Canadian Securities Exchange probably has some data on that.
We do see companies that are listed drop their listings, and often that’s because the cost of staying public is just too high for them. It can be anywhere from $1 million to $2 million a year to maintain a public listing. And it’s also the time it takes a senior management team to conduct all the reporting, all of the monitoring that’s required, even completing your annual audits and all the information you need to compile for the MD&A and the notes to the financial statements is a daunting task for a lot of smaller companies.
Senator Wallin: We’ve heard much testimony in front of this committee about the lack of incentives for companies to go private with government funds or to extend funding to issues like post the first year, post the second year. So when you talk about incentivizing investors to play the long game, you mentioned the U.K. plan, you mentioned flow-through shares, which I would like to hear from you on, and what industries, other than energy, do you think that would apply to and if there are other incentives that you have in the back of your mind? Thank you.
Mr. Dale: Well, thank you for the question. With respect to the flow-through incentives, currently they’re available largely to resource companies, which includes energy and mining companies, but there are a number of companies that have a long build-out time in terms of developing their assets that don’t have access to that program. These are pre-revenue companies that require continuous injections of capital so that they can continue to build those assets. This would, for example, be companies that are involved in pharma and are developing drugs, which is very common, particularly in Quebec but also in B.C. and other parts of our country.
There are ag tech companies that are developing very novel and important new technologies that are important to our future of agriculture in Canada. Again, those take years to develop and get approval for and get sales coming in through their doors for them. Those are the industries that come to mind, but there are many industries that have long pre-revenue periods where they’re spending money not earning money.
Senator Wallin: Just other incentives that the government could and should employ in the distribution of funds?
Mr. Dale: I’m a free market person by nature, which is what’s drawn me to this business, I suppose. I like to place the decision making in the hands of investors, and the more that we can encourage that, the better. With a high-risk sector like the junior capital markets where you can suffer a lot of losses for the occasional, larger gains that you have, I think having the same tax formula for your gains in that sector that you would on dividend-paying stock just doesn’t make sense to me. If you can derisk the decision making for the investor, that would do a lot.
Senator Wallin: Thank you.
The Chair: Maybe before moving to the second round, I would have a question. A lot of capital is concentrated with the banks, and we have big pension funds as well, and you mentioned too big, maybe, at some point. I know it’s important that pension funds remain independent, so it’s not politicians who would decide which company to invest in and which sector and even which country. Any suggestions regarding that? Do you have any experience with other countries with such concentration and any solution? Assuming that we break it into three categories or whatever remain independent, is it something that will solve something? Or not really at the end of the day because it’s up to them to decide whether to invest in which sector or which company. Are there some avenues that we have to explore, or would it be a bad idea?
Mr. Dale: Thank you for that question, but I would have to say that’s a little bit outside the area of my expertise. I would say, though, that in Canada, even on the TMX, there are probably only 60 companies that I would legitimately say are not SMEs by world standards. Most of our Canadian companies are very small companies. When you have large funds, the nature of the amount of capital that they invest, they have to diversify their investments, but they’re limited to how much diversification they can achieve in Canada. So I think it’s very difficult to limit their ability to invest in other countries or in other markets without a detriment to the beneficiary of those pensions: our Canadian retirees or others who are counting on that money in the future.
The Chair: Thank you.
Senator Varone: This question is for you, Mr. Dale. In one of your recommendations, you talked about short-selling and putting limits or guardrails on that. Can you elaborate on that comment?
Mr. Dale: Yes. Thank you for that question. You know, short‑selling has become a greater phenomenon in the last several years, and in some ways it has been abusive, in particular, to illiquid companies, many of which are companies listed on the junior stock exchange. So short sellers are required to cover their short positions by having access to the securities to cover it if called upon. In many cases, they’re using warrants that they hold that are not traded to cover that short position. Again, in many cases, those warrants are exercisable at a price that’s below the market. I think that’s something that should be looked at because it’s unlikely that you would exercise that warrant covering a short position if it’s going to create a loss for you.
What they have been able to do is defer the settling of those trades or continue with them for some time and then eventually cover it through, perhaps, a new issue that’s being done instead.
Senator Varone: Could I encourage you to put that on paper for the benefit of the committee?
Mr. Dale: Will do.
Senator Varone: Thank you.
The Chair: Good idea, Senator Varone, that could be helpful to increase the background on our understanding of the short-selling issue.
Senator Marshall: Mr. Dale, you mentioned, I think right at the beginning of your remarks, that the problems were the regulatory burden and the high costs, and then throughout your testimony you referenced the cost of audits, financial statements, all those forms that have to be filled out and all the rules. How do we compare with the United States with regard to the regulatory burden? Do they not have that same problem, or is our regulatory burden much more burdensome?
Mr. Dale: Again, thank you, senator. That’s an excellent question. The irony is as a Canadian investment dealer, the ability for us to actually conduct business in the U.S. is severely limited to those companies that are able to set up a U.S. subsidiary. I don’t have a lot of detailed knowledge on that, other than I follow what we’re doing in Canada rulemaking, and often we follow U.S. rules to be harmonized with what they’re doing.
I think maybe the difference for us is that we have smaller companies that are trying to go public in Canada on our junior markets. The U.S. junior companies tend to remain private longer and then go on to the public markets at a much larger size because they have more access to capital. So we’re competing with the U.S. markets, certainly, but to compete with them, we can’t match what they do. We have to be better, we have to make things easier, not just match what they do.
Senator Marshall: You gave some examples; you said the cost of audits and of financial statements. I’m an auditor, so I appreciate that. And then all the forms. Is there something else? I’m trying to relate to what these small companies have to cope with. So I know that they have a multitude of forms. I know they’ve got to have audited the financial statements, which costs a lot. What other items are very, very costly?
Mr. Dale: Well, in some cases, it’s not only the costs. There are a lot of costs, but in Canada right now, a lot of audit firms are limited in their ability to support junior companies because they have limited staff. So a lot of the larger audit firms are concentrating their staff on larger companies where they do quarterly reviews and filings and a greater certainty of collecting their receivables. A lot of junior companies are having more and more difficulty finding an audit firm that would be willing to conduct an audit and then have to have some assurances that they will have the ability to pay them.
That’s one issue. That’s not necessarily answering your question, but the same is true for securities lawyers, and I think, to some degree, the hourly costs have gone up, as they have for auditors. And again, companies that are constrained in the amount of capital that they have are often reliant on doing financing to pay for those auditors and securities lawyers from the proceeds of that financing.
So there are risks associated with providing those services and ensuring that you’re going to get paid for the work that you do.
Senator Marshall: Thank you.
Senator C. Deacon: I thought Senator Fridhandler was next.
Senator Fridhandler: Let him go and I’ll go after. I’m sure he’s not going to steal my question.
Senator C. Deacon: Don’t be so sure. You got the good ones.
Companies often go public too early. They haven’t really settled on their go-to-market strategy. The ability to fund, to say we’ve got the mechanism now to fund this growth, justifies that investment, and that’s where they really need to be. And then the costs and the public scrutiny that come with quarterly reporting and whatever else, but we don’t have public markets when companies have to have a liquidity event, and they’re capping out on the ability to raise funds in Canada, they’re out of the country. So we’re in a tough spot as a country right now.
Looking for practical solutions, we need to increase the amount of private capital available. We’ve got to use things like the rollover scheme in the U.K, and their Enterprise Investment Scheme, which is like equity tax credits. I don’t know if you are familiar with that program or not.
I look at the opportunity — it has died, but I think it is going to come back — is the focus on interprovincial trade and investment.
The federal programs that Senator Pupatello was talking about, to whatever extent they are helpful, quite often they are restricted to a jurisdiction, so you get a good organization going, and it is regional, not national.
Your thoughts on getting there from here because we need some interim measures and long-term approaches if we are going to solve this problem. Is that a fair summary? Then what would you suggest?
Mr. Dale: Thank you for the question. That is the most difficult question to answer because there are some short-term measures that could be done. I mentioned some of those in my recommendations.
We are competing, in a way, for dollars with companies that are marketing crypto assets or betting platforms that have huge marketing budgets, and you see their ads all the time. We don’t advertise for our junior markets. If we had some way to market and raise awareness for investors, there is an avenue to help good Canadian companies become listed; and where those companies will be successful, they will be successful as well. That is one thing we could look at doing and supporting.
The other thing we should remember is that companies should be allowed to fail. Every investor and investment does not make money. I think investors should have the right to invest and lose money, as long as they are not losing money because management is doing fraudulent things, stealing their money and running away with it.
If it is a legitimate business that is doing their best to get started, they may run into unforeseen problems that may delay their progress. We have to give them the opportunity to be entrepreneurial, to win or, sometimes, lose.
Senator C. Deacon: I think that reinforces the importance of the flow-through share idea because let’s use those losses to help the company to succeed. But using that mechanism for R&D expenses well beyond oil, gas and mining, 100%. It built the oil and gas industry of Alberta, the flow-through share model, without question. Thank you.
Senator Fridhandler: One comment before I ask a question: When we talked about all these companies exiting and the grants they get, I think that there should clearly be attached a clawback on the grant money if the company is going to exit the country; if it is not going to exploit its IP, whatever it has developed here, the grants made by the government should have a clawback mechanism.
Maybe there is an earn out over time and a sunset, but you should not be able to get a $1 million grant one year, and then, the next year, the company is sold to an American company, and they move everything to Denver, Virginia or whatever. A comment.
I will throw a crazy idea. This government set up the Major Projects Office, or MPO, to make things good and efficient for big companies to get big projects done. But they forgot about the small companies. Maybe we need an SPO, something that the federal government could look at to consolidate the way it operates vis-a-vis SMEs. There are lots of programs in different departments to provide grants. There are fights on losing tax points with Finance — on giving up on flow-through.
This stuff needs to be not siloed all over the place but brought together in an office that actually looks at how they are going to bring all of this together for small- and medium-sized enterprises. Whether it is an SPO, a SIPO — a small IPO office — the feds can exert a lot of pressure and, in coordination with what they are doing, they should consolidate this rather than siloing it all over the place. Just an idea to throw out there.
The Chair: Any reaction on your side?
Ms. Sinigagliese: I think it is a wonderful idea, talking as an SME owner.
Senator Loffreda: We have a productivity problem in Canada, right, one of the problems — besides the competition being an issue — major problems.
How directly does limited access to capital translate into Canada’s productivity challenges? Are SMEs delaying? You speak to many SMEs; are they delaying investments in technology or expansion due to financing constraints?
I do believe that we’re not doing enough to support non‑traditional financing channels, such as private markets and venture debt, or fintech solutions. The government should play a bigger role, maybe because I believe that financing is the missing middle in Canada. I believe there is a missing middle. Maybe you can share your thoughts or concerns on those issues.
Mr. Dale: I will try to do my best.
First, recognizing that I am from the West, from Calgary, largely a resource-based city. Our highest productivity comes from our natural resources that we export: oil, natural gas and mining.
If we can concentrate on producing, exporting and satisfying our country’s needs in those resources, that would increase our productivity as a nation.
But knocking it down to the junior markets, I think if you have to delay your investment in equipment or technology, or other things that prevent you from moving forward, you are also limiting the productivity of those smaller companies that are trying to do more with what they have. You cannot do more with less.
The Chair: Thank you.
Senator Ringuette: I come from New Brunswick. I know that New Brunswick has, provincially, a credit program for local investment. Would it be possible to group, for instance, New Brunswick SMEs that are in search of capital into one stock for the junior market?
I see that it would bring credit from the province, first of all, because of the provincial program, and then it would also provide a derisking factor because of the grouping. Could that be possible?
Mr. Dale: Senator, thanks for that question. I think it is an excellent question. There are avenues for the aggregation of junior companies into a fund that could be traded.
We haven’t, as a company, looked into doing that because we aren’t a manufacturer of funds in our firm. I would think there are fund companies out there that could look at it. Whether or not they would make money on it is a good question. I guess maybe that is why they haven’t done it to this point. It would be an excellent mechanism for an investor to have access and derisking it through a venture-focused mutual fund.
There are some smaller ones out there. A past colleague in Vancouver started their own firm. They have been successful in terms of generating profits through the fund. But it is not very well known and, again, it has grown through the years, but it is not very large.
Senator Ringuette: I think that New Brunswickers wanting or seeking to invest would be excited to invest in New Brunswick companies moving forward. At the other end, it would provide more access to funds for New Brunswick SMEs. Thank you.
The Chair: Thank you, colleagues. We have time left. I will ask my question, then recognize two other senators.
Mr. Dale, you have four recommendations regarding the federal government’s proposal. Could you elaborate more on the second one regarding venture-listed companies with revenues above this threshold and allowing capital gains deferrals? You also referred to the U.K., but is it the case on the U.S. side regarding that particular recommendation? Could you elaborate, please?
Mr. Dale: I’m most familiar with the situation in the U.K., senator. I think there are various programs in other countries as well. The U.K. program is an example that could work very well in Canada. It is not a huge cost in my mind for the government. It is a deferral. We already have tax deferral programs in place for things like investments in RRSPs and so on. But this would be a very good program that would stimulate interest and investment in the junior markets specifically.
The Chair: The U.S. venture market would come to Canada, and currently this kind of thing exists? We will see.
Senator Yussuff: Ms. Sinigagliese, I will come back because I have more knowledge than my colleagues on this, and maybe you could elaborate a bit more.
In Quebec and the regional development maturity that they have had for such a long time. The Quebec solidarité fund plays a more significant role than other funds in that. It has been extremely valuable for small SMEs and others because they are able to access that on a consistent basis. The fund now has more; half are in the billions of dollars. To a large extent, the provincial tax credit — the federal tax credit also that complements it — has shown extremely productive results over the years because there is a horizon you can look at over time.
Can you elaborate a little bit more so that my colleagues might appreciate the uniqueness to that reality?
Ms. Sinigagliese: I don’t have specific data on the success rate. I can tell you that when I was a bit younger, I used to do income tax returns at a CA firm and many clients in Quebec would have these products because it was a way of participating in your own economy.
One thing that Mr. Dale said before is that we need to educate investors right now because nobody will stop them from spending their paycheque on crypto, but they don’t know what is going on with the junior capital markets. If they would, I think they would be more interested in putting their money into generating revenue and generating jobs for their kids and grandkids.
The Chair: Thank you for raising that issue. In Quebec, we have Capital de risque Desjardins, Fonds de solidarité FTQ, Investissement Québec. Quebec, many decades ago, had Régime d’épargne-actions. Alimentation Couche-Tard everybody knows, but Couche-Tard started with Régime d’épargne-actions. I think they have something that we could look at and think about how to encourage it, because people have to diversify their portfolios. So rather than invest in one single company, when you invest in the fund which targets small- and medium-sized businesses, this is a way to participate and increase wealth.
Senator C. Deacon: Thanks again. A really excellent session.
I want to build off of the last two questions that you had. We did have a national program. The labour-sponsored venture capital corporations program was not very successful for investors. There has been a framework in the past so we can learn from lessons, fail forward, learn from some lessons and do something better. There has been a model in the past, and it was very well received by Canadian investors. The beauty of it was it did have a lead investor who was doing the due diligence and giving some confidence that your risks were being managed as a junior investor.
I contrast that with what was done four years ago, I think, with the Know-Your-Product rule that was put in place. Another layer of regulatory burden. The banks immediately used that as a reason to say, “Okay, we’ll just sell bank-owned mutual funds,” cutting out all competition. Now there was enough pushback.
The point I want to make is that we are anti-competitive in how we run our investment system. The decisions about our money, for those of us who don’t live in Toronto, get made in Toronto. It does not get made in our communities or in our provinces or our regions. I would like you to focus on the importance of making our industry more pro competitive.
Mr. Dale: That is an excellent comment as well and a question as well that follows from it. How do we make ourselves more competitive?
We have to be better than the competition. I think Senator McBean probably understands that. You have to be better than the competition to succeed. That is why we have some independent firms that still exist today; they have learned to be better in the market that we operate in and have been successful. Others that haven’t been able to compete have been targets of acquisitions, or they have simply closed their doors.
When we look at what we can do to be more competitive, we have to deregulate, we have to have less regulation instead of more. We have a regulatory apparatus in Canada that is in the business of generating more regulation, which keeps Ms. Sinigagliese and I very busy providing feedback to them in terms of why these regulations will or won’t work or if they are needed or not needed. There is no requirement for regulations to pass a cost-benefit test in Canada, and that is something that would help a lot.
Senator C. Deacon: Perhaps for the regulations to be more balanced so that there aren’t the biggest monopolies dominating because they can afford them. The other thing is I do not think that it is a matter of making it riskier. There are different ways of managing identified risk that does not eliminate opportunity. Is that a fairway of saying it?
Mr. Dale: Yes.
Senator C. Deacon: Thank you.
The Chair: As you can notice, there is a lot of expertise around the table. It is a very helpful discussion. On behalf of my colleagues and myself, we want to thank you. It was very helpful today.
Following Senator Varone’s intervention on short selling, it would be appreciated if you could send us some written elements to explain to us exactly how it is working. It would be helpful for us.
Colleagues, our next meeting will be on Wednesday, March 11, because next week is a non-sitting week.
We want to thank our witnesses today as well as our interpreters, clerk and our senators’ staff and all the logistics people who make it possible for the meeting to happen.
(The committee adjourned.)