THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Thursday, March 26, 2026
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 10:30 a.m. [ET] to study 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: I would like to welcome the people tuning in today using sencanada.ca.
My name is Clément Gignac. I’m a senator from Quebec and the chair of the Standing Senate Committee on Banking, Commerce and the Economy.
I would like to ask my colleagues to introduce themselves.
[English]
Senator Varone: Senator Toni Varone, Ontario.
Senator Pupatello: Sandra Pupatello, Ontario.
Senator Fridhandler: Senator Daryl Fridhandler, Alberta.
Senator Henkel: Senator Henkel from Quebec.
Senator Loffreda: Welcome. Senator Tony Loffreda from Montreal, Quebec.
[Translation]
Senator Ringuette: Welcome. Pierrette Ringuette from New Brunswick.
[English]
Senator McBean: Marnie McBean, Ontario.
Senator C. Deacon: Colin Deacon, Nova Scotia.
Senator Wallin: Pamela Wallin, Saskatchewan.
[Translation]
The Chair: Honourable senators, this is our seventh meeting on our new special study 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 would like to welcome our witness, Kevin McCoy, Senior Vice-President, Market Regulation, Canadian Investment Regulatory Organization.
[English]
I understand you have asked to have 10 minutes for opening remarks. That is no problem. After that, we will have a round table for questions from senators.
Welcome, Mr. McCoy. The floor is yours.
Kevin McCoy, Senior Vice-President, Market Regulation, Canadian Investment Regulatory Organization: Good morning, honourable senators. Thank you for the invitation to appear before the committee today. I would like to commend the committee for its work on the important issue of access to credit and capital markets for small- and medium-sized enterprises and for the opportunity to contribute to your deliberations.
My name is Kevin McCoy. I am the Senior Vice-President of Market Regulation at the Canadian Investment Regulatory Organization, or CIRO. In this role, I am responsible for our Market Policy team, Market Surveillance, Trading Review and Analysis, as well as the Trading Conduct Compliance team. I have spent my entire career in capital markets, spanning both operations and compliance, which includes roles on both the industry side and, of course, the regulatory side.
By way of brief introduction, CIRO is a national self-regulatory organization that operates in the public interest. Our mandate is to protect investors and to promote healthy capital markets. We are a pan-Canadian regulator, recognized by each of Canada’s 13 provincial and territorial securities regulators, collectively the Canadian Securities Administrators, or CSA, with our responsibilities spanning coast to coast to coast. CIRO is both the conduct and prudential regulator for the approximately 250 investment and mutual fund dealers in Canada.
Our role also includes surveillance of all debt market trading activity and the 13 equity marketplaces operating in Canada. With support from the Regulatory Division of the Bourse de Montréal, we also conduct cross-asset reviews, including oversight of futures and options trading on the Bourse de Montréal in relation to the trading of the underlying equity or debt instruments.
To give you some idea of the scope of our market oversight activity, we consume upwards of 3 billion messages into our surveillance systems each day, representing each order and trade in both the equity and derivative markets.
As a market regulator, we are aware of many of the challenges currently faced by small- and medium-sized companies in accessing public market financing, as well as the importance of a vibrant and healthy secondary market to support their long-term success.
In late 2025, CIRO convened a small-cap round table in Calgary, bringing together a select group of industry leaders with deep expertise in Canada’s venture and junior public markets. The purpose of this round table was to identify and discuss key regulatory and structural challenges that may be limiting the effectiveness and efficiency of these markets.
Participants included representatives from CIRO dealer firms, listing exchanges, issuers, the CSA and CIRO. The discussion was open and constructive, and it highlighted several actionable opportunities to strengthen Canada’s small-cap markets, which play a critical role in supporting innovation, job creation and economic growth.
A key takeaway from this work is that improving access to public capital and strengthening junior markets will require coordinated engagement among multiple parties, including CIRO, the exchanges, the CSA and the federal government. I would be pleased to address any questions you may have on what we learned from this session.
More immediately, I would like to address the issue of short selling, which has been raised by stakeholders, including listed issuers, in the context of small-cap markets. Short selling occurs when an investor sells a security that they do not own with the intention of buying back or “covering” that short position, typically at a lower price in the future. Importantly, short sellers remain fully subject to settlement obligations, meaning the seller has sufficient shares to deliver on the settlement date.
To meet these obligations, they must arrange to borrow shares from a security holder who owns the stock and pay a fee to the lender. When a short seller is unable to deliver — for example, if a borrow cannot be secured — they may be subject to a buy-in initiated by the party expecting to receive the shares, which forces the position to be closed, typically through market purchases.
Historically, short selling and the regulatory framework governing it have been viewed by some market participants as posing challenges for junior issuers, preventing market prices from rising to the level that they believe matches the value of the company. However, in a market context, value is derived through the agreement of both buyer and seller. Both parties are equally important in determining value for a particular security. In this regard, short selling plays a meaningful role in market functioning by contributing to liquidity and efficient price discovery, both essential characteristics of healthy and well-functioning markets.
In the Canadian small-cap context, CIRO’s regulatory data shows that short selling in securities listed on the TSX Venture Exchange and the Canadian Securities Exchange has been relatively stable at about 10% of trading activity over the past five years. Importantly, only about 13% of those trades were executed on a downtick, meaning at a lower price when compared to the prior trade, thus contributing to downward price movement. A slightly greater number, about 14%, were executed at an uptick, meaning at a higher price than the prior trade, and about 73% were executed at the same price as the prior trade.
This data suggests that short selling does not, in aggregate, systematically drive prices lower.
Experience during the 2008 financial crisis is informative in this regard. Temporary bans on short selling, adopted in both the United States and Canada for certain financial securities, were subsequently examined through multiple empirical studies. One of the most prominent studies by Boehmer, Jones and Zhang found that these bans were associated with a deterioration in market quality, including wider bid-ask spreads, higher impact from a single trade resulting from lower liquidity and increased intraday volatility without robust evidence that the bans supported share prices.
Notwithstanding this evidence, the role played by short selling continues to be raised as a concern.
To inform a more robust public policy debate, in late 2022, CIRO together with the Canadian Securities Administrators published a notice on short selling in Canada, seeking public feedback on the existing regulatory framework and potential opportunities for reform. Following the consultation, a joint CSA-CIRO working group was established to assess whether policy changes were appropriate in a Canadian context. From this work, CIRO published a proposed policy that would require the mandatory closeout of any short sale where the seller was unable to deliver shares on the settlement date, similar to the requirement in the United States.
This proposal was broadly opposed, and we have since adjusted our approach. CIRO is developing a new proposal that is responsive to stakeholder feedback, including concerns around cost and complexity, while continuing to address the underlying objectives of strengthening settlement requirements. We expect to publish a new proposal for public comment in the coming weeks.
Supporting a regulatory environment that supports strong and resilient capital markets is central to CIRO’s role. Equally important is ensuring that our regulatory framework is effective, efficient and fit for purpose, particularly as Canada’s capital markets continue to evolve.
Thank you again for the opportunity to appear before the committee. I look forward to your questions and the discussion that follows.
The Chair: Thank you, Mr. McCoy. I think it would be helpful to explain short selling. With your opening remarks, you have already helped us with that.
Senator Varone: I’m intrigued by the manner in which you introduced the concept of short selling, and then previous to that, you talked about the marketplace and the dynamics between buyers and sellers. But short selling is not about a buyer and a seller; it is about a borrower and a seller. That paradigm in short selling has shifted, and the correlation between short selling and spoofing, which are those trades that take place at 3:59 p.m. of the trading day, is clearly marked and clearing evident. As a regulator, what market protections are you advocating for in order to eliminate that?
It is especially important because many of these companies are start-ups. They are exploration companies. They don’t have revenue. The balance sheet is based on their assets; it’s not a balance sheet with respect to earnings and retained earnings because they are just in the exploration phase. It is so simple for these algorithms from other countries to spoof these stocks. The question I have for you is this: What regulatory controls do you have or what regulatory controls are you missing to eliminate the bad actors of the short-selling dilemma?
Mr. McCoy: Thank you for the question. I will answer it in a couple of different ways. The one thing that we do in terms of our market surveillance — and that’s based on the data we get — is we run a whole battery of different alert-generating algorithms that will show us when there is unusual price movement. I know we hear a lot about trades at the very end of the day. One of the groups that I am responsible for is our Trading Review and Analysis, which is an investigative group that looks into a lot more data than the public can see. We have access to the data from dealers. We have client-level data. We have the opportunity to ask about the motivation behind those trades.
When we look into those kinds of 3:59:59 p.m. trades, we often see that they are liquidity providers who, by the nature of what they do, don’t want to have any kind of an overnight risk. So they exit whatever position they happen to have, which is residual from the trading they have done over the course of the day. What we also find is that the trade that happens by that type of investor is a random walk. Definitely, there are some where they will sell at the end of the day to get themselves flat, but what will equally occur is that they will actually buy where they have a residual short position, and they will buy that back. Typically, they don’t like to cross the quote because the margin to have some profitability is by capturing that quote. But at the end of the day, they will cross it, and that’s really just for them to be able to exit from the risk at the end of the day and go home flat at the end.
Senator Varone: Why has Australia banned short selling? There are some, at least, in the Canadian landscape who are advocating that short selling shouldn’t take place on anything less than $1 to $1.50 stocks, especially for the exploration markets in oil and gas and critical minerals. What are your feelings on that?
Mr. McCoy: Short selling has generally been seen as having a positive effect on the healthy functioning of a market. It adds liquidity and helps with price discovery. Often, prices are overvalued too. Short selling actually also gets to that equilibrium, where it’s not necessarily looking at what the high-water mark price is but what the fair price is.
Part of the work we’re doing right now, along with the CSA, is looking at whether there are opportunities for that as well. One of the things that came out, which I think will be very helpful, is around the whole concept of regulatory transparency. It’s to put a little bit more colour around what it is that we do as a market regulator, what we see that is different than what the public would see and how we reach our conclusions.
That is something we will be working on in the next year to provide that additional layer of regulatory clarity.
The Chair: Thank you.
Senator Fridhandler: Thank you, Mr. McCoy, for your presentation and enlightenment on short selling. Let me go to your role as a protector of investors. The industry is overburdened with elements of protecting investors. Let me ask you about the role of “know your client” and “know your product” relative to securities exemptions. For example, the accredited investor exemption is, in my view, a dinosaur if you have “know your client” because, through a broker deal, you have done your due diligence and you have assessed the investor’s appetite and ability for risk. This is the second or maybe even the third tier. Then when you get to “know your product” — I’m piling on a lot here — we have now created the broker-dealer dilemma of costs and the inability to even get potential investors into the marketplace. It is overregulation, in my view. Can you give me some of your thoughts on that?
Mr. McCoy: Sure. Thanks for the question. When we hosted our small-cap round table, which I referred to in my opening remarks, these were actually both issues that were raised through those discussions. One of them was around the accredited investor definition and whether it needs some type of modernization. That was one of the takeaways that we came away with.
One of the things that I need to be clear about is that we don’t actually own that definition because it is embedded in a national instrument. Through that round table, we were not trying to look at things that were exclusively within the control of CIRO, but rather a broader look at all of the opportunities that we can put on the table. Something that has definitely come out of that is whether it is time to revisit that definition and see whether there are opportunities to modernize it.
In terms of private markets, this was brought up as well, which is tied to the same definition. The other thing that was brought up at the round table — and I think this is what you were referring to — is some of the ways that the client-focused reforms may have been interpreted in terms of how dealers put early-stage, lower-value mining and resource stocks on their shelf to make them available to their investors. In many areas, there are interpretations that dealers have made, which is that the effort of being able to look at what kind of alternative investments would be available is overly burdensome, and they have made the choice to not actually have those securities available on their shelf.
Again, that’s something that we are working on in terms of guidance with our dealers to be clear on what those expectations are because the foundation of the client-focused reforms and the way we interpret them as a regulator have never been to prohibit investors from investing in early-stage companies. That’s something that, again, is not wholly owned, obviously, by CIRO. That is also embedded in national instruments. It has been raised loudly and clearly through the consultations that we have done.
Senator Fridhandler: Just for clarification, are the “know your client” and “know your product” concepts owned by CIRO?
Mr. McCoy: Yes, part of it is being able to rely on “know your product” and “know your client,” and those are also areas that are in our hopper, so to speak, of things where we can look for opportunities to make that clearer.
To be clear, the idea is not to say that investors should never invest in early-stage companies because, in my own opinion, that’s taking away the opportunity to invest in somebody’s future and in things that will have a positive upside.
Senator Loffreda: Mr. McCoy, welcome to our Senate committee. My question is on market access and small- and medium-sized enterprise, or SME, financing and access to capital, which is such a key element for their success.
Access to capital markets remains a persistent challenge for many SMEs in Canada, as you very well know, particularly as initial public offering, or IPO, activity has declined in recent years. From a market regulation perspective, which you know extremely well, what structural or regulatory barriers do you see that may be limiting SME participation in public markets, and what targeted adjustments could help improve access while maintaining investor protection? We don’t want to forgo investor protection, but there seems to be too many hurdles for SMEs to access public markets at this point?
Mr. McCoy: One of the things that we look at as a regulator — and I can say, as I talk to my colleagues globally, it is a consistent theme right now — is looking at fit-for-purpose regulation. How do you get rid of unnecessary frictions, and how do you make the rules as efficient and effective as possible?
One of the things that was clear from a junior issuer’s perspective is the cost of going public and the cost of maintaining a public listing are significant. Again, talking from the CIRO point of the world, are there ways that we can look at ensuring that access to those securities and the trading of those securities don’t have unnecessary requirements on there?
I can give an example: We have done one targeted thing, which will be finalized in the next couple of weeks, and it’s a clear path for smaller dealers to be able to exercise broker warrants. The broker warrants are typically added to financing securities, and they are given as a way of compensation to the dealer who will be helping them to complete that financing. Under our existing rules, it made it very difficult for the dealer to be able to manage their risk in a way that they could exercise those warrants without putting themselves in harm’s way.
We have a new concept that we call “deemed to own,” which will be finalized in the coming weeks, and it basically gives more flexibility to those smaller dealers to be able to exercise the warrants and exit the position in a way that they have a much higher ability to be able to manage their risk. There are opportunities.
The other thing I would mention is that we, in our own trading rules, have always treated every listed security the same way. We paint everything with the same brush. One of the things that we’re looking at is whether there are enough structural differences between large-cap securities and small-cap securities, where it would be appropriate for us to apply slightly different requirements against the small-cap market to be able to better promote them on the marketplace.
Our job, of course, is not to make sure that security prices only go up. Our job is to make the regulatory framework and foundation that will give them the best opportunity to thrive.
Senator Loffreda: We’re talking about innovation in alternative financing, which is also extremely important. We’re seeing growth in channels, including private markets and fintech-enabled platforms.
How is CIRO adapting its regulatory framework to support it while ensuring adequate oversight, particularly for SMEs which may increasingly rely on these alternatives rather than traditional public listings?
Mr. McCoy: A lot of this likely falls back to the definition of “accredited investor” and how you get broader participation in some of those private markets. Right now, what we have heard is there is a significant amount of private capital that is available for start-up, early-stage, founder-driven issuers or companies. What we have also heard is the time that it takes for those private companies to get themselves in a position where they can pivot into a public company is taking a lot longer.
Again, these are just ways of everybody collectively looking at how we make that public market more attractive, and, frankly, in public markets, just make sure that the access to those particular investment opportunities is widespread for a lot of issuers.
Senator McBean: Thank you. I had a couple of prepared questions, but you answered them nicely in response to Senator Loffreda. I will go to your testimony a little bit.
You said that CIRO had created a suggested policy of a mandatory closeout of short selling stock. Did you feel like that was a fair policy? I know you said everybody opposed it, but did you feel like that was a fair policy?
Mr. McCoy: I think it would have been a very effective policy, but when we create rules, again, going back to those principles of making sure that they are fair, fit for purpose and efficient, regarding what we would be able to deliver out of that in a Canadian context — and we’re not the same size of market as the U.S. — it just did not make a lot of sense once we got all of the comments back and we had finished the consultation. It would have been okay, but I think the cost and the complexities of actually getting that to a point where it was implemented would have been significant.
The way that we kind of pivoted in terms of how we were going to address the same issues was a way that really took into account all those comments that we got back. This is still very much focused on putting some more robust strength around that settlement process, which is kind of intrinsically tied to the short-selling issues as well.
Senator McBean: Do you have a timeline for when you want to present your updated policy? You said you were in the process of creating a response to that.
Mr. McCoy: Yes. We’re hoping our revised proposal will be published within the next couple of weeks.
Senator McBean: Would you be able to provide that to us when you get it? Thanks very much.
Mr. McCoy: Yes, I’d be happy to.
Senator C. Deacon: Thanks for being with us, Mr. McCoy.
I want to keep building on the private placement market because a lot of our most promising companies are pre-revenue, and they have intangible assets. They are not fit for a public listing, and they often have communities of people who want to invest in those companies; they are aware of the risks. There are rules to protect Canadians in that regard.
In many provinces, that’s where it stops. There is nothing in terms of transparency on the part of the company and communication with those shareholders regarding how they have to provide fair warning and opportunities for future rounds of investment and other activities that could revalue the holding that the company has.
I have wondered why we don’t see something where there is greater transparency, where at least all of the communications with the company are filed with the regulator relating to anything in terms of the capital structure. Then at least we know that there is proper notice given and that the rules are being followed. Then if there is a problem or if there is a complaint, it can be investigated. It is a much lighter-touch regulatory oversight than would be required for a public listing.
Do you have any thoughts on that?
Mr. McCoy: Yes, I have my own personal thoughts. When we talk about whatever the reporting requirements would be for private issuers, again, that is something that is at the provincial securities level, not my own.
However, when you talk about private investments, there are some fundamental things that are important that investors need to understand.
We have some programs that are operating right now in Canada, like the listed issuer financing exemption, or LIFE, which allows existing shareholders to be able to get some limited exposure to new restricted offerings.
In terms of private securities, one of the things that is clear is that the exit paths are not nearly as robust as with public securities. It is really important for investors to understand that when you are in that private equity space, you don’t have the benefit and luxury of having a secondary market where you can de-risk at any time.
Senator C. Deacon: I agree. There need to be good restrictions or, at least, gates that people have to go through to make sure there’s informed consent. I’m not debating that.
I’m really talking about a national standard around communication on the part of the company with those shareholders and meeting specific timelines. The difference in behaviour between my province and other provinces can come as a surprise to private investors, even quite informed private investors, as there isn’t a standard repository of any changes to the cap table and how that is managed, how notification is provided and whatever else. That would be a very light-touch national standard. I really want to focus on that.
Mr. McCoy: I think it’s actually a very good thought and a very good idea. I’m not really qualified to talk about it from a national level as to what would be the most appropriate steps.
I think the general principle on disclosure and making sure that everyone has access to the same information at the same time is always really important. To the extent that we can lean into that a little bit, I think it’s definitely something that should be considered.
Senator C. Deacon: You’re finally achieving success in this country and bringing some national operating standards, and this is an area where I absolutely see a need. If we don’t have proper controls of some form around transparency, we’re pushing people out of the markets, and something I think this group is really quite concerned about is having that early capital for our growth companies.
Senator Wallin: I have just a couple of quick points.
In terms of your views on a single regulator, do you have an organizational view on that? Do you lobby for that? What is your position?
Mr. McCoy: In our role, we’re not really in a position to lobby at all. Although we report across the country to each of the provincial and territorial securities regulators, one of the benefits that our organization does bring is that, due to our jurisdictional limitations, we apply the same standard from coast to coast to coast. That’s one of the advantages that we provide. Whether you’re a dealer operating in B.C., in Saskatchewan or in Ontario, we treat it all the same way. One of the big benefits that we bring is being able to look at it at a national level.
Senator Wallin: But would it help or hurt?
Mr. McCoy: The concept of a national regulator has been basically debated since time immemorial.
Senator Wallin: Yes. So you’re saying to get on with it, and we’ll deal with some of the issues this way?
Mr. McCoy: This is the way that we’re structured. Clearly, there is a benefit that we bring by being able to see everything through a national lens.
Senator Wallin: I have a question that Senator Deacon was starting upon in terms of operating standards, transparency and so on.
Time after time, we see bad actors in Canada being exposed and prosecuted in the U.S. What is your role? You’re self-regulatory and voluntary. What is your role in terms of calling out bad actions? Do you have a punitive side to your activities? If so, how does that work?
Mr. McCoy: Absolutely. Our organization does have a fully baked enforcement branch as well. Membership with CIRO is contractual, so we do have the ability to levy fines. We have a hearing panel system as well.
When we talk about stuff that may have touched the Canadian markets but is prosecuted outside of Canada, we do have fairly collaborative relationships with our international colleagues as well. There are different kinds of memos of understanding and information-sharing agreements. We will typically do what we can when there are prosecutions happening outside the country, to the extent that we can assist. It’s vice versa as well, where we’ll have foreign jurisdictions that help us.
Senator Wallin: Have you kicked anyone out of the tent?
Mr. McCoy: I can’t give you the exact number, but it has historically happened.
Senator Wallin: Okay. Thank you.
[Translation]
Senator Henkel: Welcome, Mr. McCoy. In November 2025, your investor advisory panel published a report entitled Women and Investing, confirming that women invest less, feel less confident and are unsure where to start. The report also highlighted the fact that women lack specific guidance.
First, following this report, have you taken any specific measures in your regulatory frameworks to address these findings? Second, do you have any indicators to assess — because if we’re seeing this type of behaviour, how have you been able to assess it — whether this lack of confidence and this lack of support for women investors stems from the fact that perhaps people are trying to discourage them or exclude them from the system?
[English]
Mr. McCoy: Thank you for the question.
I can talk generally about what the Office of the Investor is. Again, it’s not one of the areas that I am responsible for, but I am aware of the work that you’re talking about.
One of the things that the Office of the Investor also looks after is to the extent that we can provide educational materials, we have a whole bunch of stuff that’s publicly available. I think what you’ll see happening is, from the results that come out of this report, there may be opportunities for us to create better tools, better materials and better training aids that can help to address some of those issues that were brought up in terms of women and investing.
[Translation]
Senator Henkel: Again, do you have tools to determine whether any factors are preventing these women investors from taking the plunge? Are there barriers? Can you assess this? The report is quite clear, but why? That’s my question. Why? It isn’t true that all women are unable to invest. I personally know that they tend to want to invest, but that they face barriers. Do you know about these barriers, and do you have tools for eliminating or alleviating them?
[English]
Mr. McCoy: I can’t really talk about anything specific that we would have, but the work that was done by the Office of the Investor will be taken back by the Office of the Investor to consider whether there are tools that can better identify what those barriers are and the extent to which we’re able to remove some of those barriers.
[Translation]
Senator Henkel: I have another question. In the past year, your organization has monitored over $5 billion in market transactions. Do you have any tools or data to identify the SME share of these transactions?
[English]
Mr. McCoy: Maybe if I can rephrase the question a bit, if you’re talking about the activity that we see on the market and how much of that is attributed to small- and medium-sized enterprises, the data that we have is very rich. It’s very robust. The problem is to define exactly what that small- and medium-sized enterprise is. Typically, we would use a proxy where we have different listing markets that support different sectors of listed issuers.
We would typically look at the TSX Venture Exchange, or TSXV, and the Canadian Securities Exchange, or CSE, and we would kind of consider that as the world of that small- and medium-sized enterprise versus the Toronto Stock Exchange, or TSX, which is traditionally more your large cap.
There is some bleed-over between the two of them, but we would look at it as a proxy. We would look at the activity on the TSXV and the CSE versus on the TSX.
It varies how you look at it because the value of the securities that are trading on the TSXV and the CSE are of relatively lower value, and if you’re looking at dollar value, the TSX is going to trade more significantly in dollar value. That’s because of the nature of the specific securities that they would be trading.
Senator Ringuette: I am very naive with regard to the markets, so maybe my question may appear basic to you, but as a premise, I am assuming that you would review the prospectus of SMEs. Do you do that?
Mr. McCoy: No. The prospectus review and the receipt of the prospectus are done at the provincial level, so we don’t have to do anything with the prospectus.
One of the things that we would do is we deal with it in terms of public secondary markets once it actually becomes a listed security. Then we would look at it going forward.
Each of the listing exchanges has timely disclosure requirements, which is really around ensuring the information that is material coming out of a listed issuer is properly drafted, ensuring the press releases don’t have extraordinary promotional language in them and ensuring that we actually manage how those press releases and how that material news is released. We would typically halt a security, meaning that it would stop trading in order for that material news to be disseminated and to be understood.
One of the things that is pivotal in a public market is that the access to the information is asymmetric. Everybody should have access to the same information so that they can all make the same informed decisions.
Senator Ringuette: Okay. From your perspective, what are the barriers for SMEs to be listed?
Essentially, this committee is looking at access to capital. The investor is certainly a major component, but what are the barriers that you see?
Mr. McCoy: Rather than sharing my own original thoughts, maybe I will go back to some of what we gathered when we had our round table late last year, because that was one of the things that actually garnered a fair amount of discussion.
Here is one of the perceived barriers. Typically, and probably historically, there are the smaller investment dealers, which are the ones that, historically, had actually managed the capital raising for those small early-stage companies. A concern was raised that because there are not as many of those small independent dealers, then that distribution channel is really shrinking.
One of the things we also heard is for those small dealers, the costs of either becoming a small dealer or maintaining that small dealer are extremely high.
Again, we look at the regulation that is applied to those small firms. Right now, we’re trying to ensure the rules we have are appropriate and not outsized for what we are trying to do.
To be completely honest, a lot of the industry is also now using very sophisticated technologies, and I think for the smaller dealers, this can be a significant cost. There are a lot of technology costs that are borne in order for people to be competitive in this space.
The other thing that we’ve heard is that it’s also the retail investors who, historically, have been the ones who really supported that early-stage capital raising and maintained that robust secondary market. Part of it is something that was raised at our round table: How do you get increased interest from retail investors to be able to get into that kind of venture space?
Senator Ringuette: And what is the answer?
Mr. McCoy: Again, these are the things where we can create the best foundation that we can, but as I stated in my opening remarks, there are probably little things that everyone can do, and, collectively, we may come up with something better than we have today. One of the things that was raised at our round table was also looking at — and, again, this is completely not in CIRO’s jurisdiction — how you can provide some tax advantages encouraging investors to invest in those early-stage companies, whether it’s like what we see in other jurisdictions where capital gains can be rolled over as long as you’re continuing to invest in other start-up companies.
I think it’s that kind of thing and looking at how we can make it more attractive and a better outcome for those clients.
One of the things we also heard is this: How do we build more trust in these junior markets? How can we get people to be confident when they are investing in junior securities?
One of the things we can do in our jurisdiction is to provide that regulatory transparency because we believe that will help, particularly if we can give a much better view on the following: How are these markets actually regulated? What is it that we do? From a regulatory perspective, what do we consider as the optimum outcome? That’s what we’re working on now.
Again, a lot of things need to be done.
Something else we heard is that there are also opportunities for investor education and getting a better understanding of what these start-up markets are like.
Some things never change. There is no guarantee that every listed issuer and every start-up company is going to be successful, and that’s not a bad thing. For us to be truly innovative, we have to be able to accept that some firms are not going to do well, but we also hope that some firms are going to do extremely well.
The Chair: Senator Ringuette, I will let you take my allotted time because that was my question, and for the flow, it’s better to continue. I will allow you to continue on that topic.
Senator Ringuette: From your data analysis in regard to investors in SMEs, would it be better to have a grouping of SMEs with a joint risk factor instead of going one-on-one? Would your investor be more attracted to that kind of pooling of a portfolio?
Mr. McCoy: It could be. However, when we typically look at early-stage companies, they’re kind of already there. When you look at a non-revenue-producing, very early-stage company, they already get bucketed together to some extent. Part of the investor education that needs to happen is to better understand that.
Senator Yussuff: I’ll pass. I’ll come back.
Senator Varone: In a previous life, I was a home builder. In 1980, when the markets had shut down, I still had leftover paid-for parcelled land that accommodated 60 units. Banks were shut down and wouldn’t lend any money. Access to capital was non-existent, so I thought I was the smartest kid on the block when I made all the purchasers be shareholders. They would give a deposit, then I would put it in a trust account, and it would be backstopped by cash-on-cash security to the bank and allow me to build. I was stopped by the Securities and Exchange Commission because I had 60 shareholders in a company.
When you look south of the border, our cousins are allowed to have up to 1,999 shareholders in a private issuing company, and in Canada, we’re stopped at 50. Is there a reason for that kind of discrepancy? More shareholders leads to more capital and more ability to raise money. What is the reason for the cap at 50?
Mr. McCoy: I actually don’t know the reason behind that. The reason I say that is because, again, in regard to how they put those limits on the maximum that you can have for a private company, that is something that is set provincially, and it’s set in securities law. I don’t know, but I think that we’re at a stage where when we look at modernization, rule modernization and accredited investor modernization, those are all things that could be on the table.
Senator Varone: Is that something that you will look into in terms of finding the answer as to the reasons why we have had that for at least the 50 years that I know of?
The Chair: At the next panel, we’ll have the Ontario Securities Commission, so maybe we’ll go to another senator. Thank you, Senator Varone.
Senator C. Deacon: I really like the model that you’ve created. You’re getting people to work together in a national framework, but what we are struggling with, as a country, is that many of our independent dealers have seen their ability to compete limited by the regulatory burden and the number of regulators in the space, be it the exchanges, provincial regulators or national groups. When we get independent dealers being pushed out of the marketplace or at a level where they can’t compete with the big banks that can manage any level of regulation — that’s the reality, and they’ve got the scale to do so — then how do we reverse that trend? I think an organization like yours is part of that, but how do we accelerate that? We have a significant problem in Canada where our capital markets are dominated by six men behind six doors.
Mr. McCoy: Clearly, our markets in Canada are extremely concentrated, and that has been the situation for a long time. That being said, when we talk about securities requirements and modernization and when we talk about fit-for-purpose regulatory frameworks, this is exactly the kind of thing we need to take within that scope. When we ask if we should have the same regulatory touch for a small independent dealer as for an integrated bank-owned dealer, intuitively the answer is probably not really. One of the focus areas we have is to look at: Is it fit for purpose? When we look at that small independent dealer, are we doing more than we need to do, understanding that we still have to manage the risks because that’s our role, but there is probably a better way of doing that? Right now, our challenge is to unwind some of that web and figure out what would be the most appropriate applied against those smaller dealers.
We look at that in terms of how we apply our compliance oversight and the costs to the dealers themselves to actually be compliant with what the requirements are, so these are all things that are in focus now.
When I spoke earlier, I said it takes a village. We have a piece of it, but there are other pieces as well, and we all need to work collectively.
Senator C. Deacon: I have just a very narrow follow-up. Have you thought about changing how you regulate certain dealers so that they can attract only a certain type of client and then, because of that, perhaps require less oversight in the transactions that they do because they have got a qualified client?
Mr. McCoy: Yes. We actually have started to look at that, where you have a small dealer that does one particular kind of client and they’re limited to that and whether there is another way you can look at that without having everything piled onto it. We kind of have that concept today, but we have more work to do.
Senator C. Deacon: Thank you.
Senator Fridhandler: A narrow issue that’s been a bugbear of mine is the deployment of funds in deferred plans — for example, RRSPs, TFSAs and RESPs — and the ability to invest in the private market. I think CIRO requires dealers to do a market-to-market analysis in quarterly statements, and they can’t do it easily with private companies. Therefore, they restrict you from using your deferred capital in your self-directed plans to invest in private companies. I do “know your client,” and I think you’re overregulating in that space. What I need to do typically is to get those issuers out of the registered dealer and set up new RRSPs in the unregulated trust companies that are also RRSP administrators. I think you’re overregulating, and I don’t know what your thoughts are on that. It’s a problem.
Mr. McCoy: Let me take that one back because I don’t really have a good answer for you. Again, one of the challenges of private securities is that valuation and pricing are always hard because, basically, the company has to tell you what your investment is worth, so it’s very tricky. It’s easier in a public market where you have market data and history as to what’s going on.
I don’t have the answer for you but —
Senator Fridhandler: But when you go to a private company, you’re in it for the long term. You’re not looking for day trades, so you don’t need that information.
The Chair: We have four minutes left.
Senator Yussuff: Given the challenge that SMEs are faced with in terms of raising capital, the problem is not going away. It’s here with us and it’s an impediment, given the percentage of the economy they represent. We don’t have the luxury of ignoring this problem. We have to solve it. What are the two things you would recommend that would make sense from your experience but also as a regulator? What do you think will have value in actually enhancing the opportunity for SMEs to gain access to the capital that they can’t currently or are struggling with?
Mr. McCoy: One of the things that I’ve talked about a little bit before is looking at how we rebuild trust in those junior, early-stage markets, understanding that people know there are risks in those markets. Risk is not necessarily a bad thing, but we need to up our game in being able to establish and build that trust back up in those markets.
The second thing is that I think incentives are good. We know this is important: Given we’re a country of mining and resources and technology, we need to do what we can to incentivize people to enter into those types of investments for the betterment of the country and, frankly, for them to have access to some really good investment opportunities.
[Translation]
Senator Henkel: I would like to follow up on my earlier question about women investors. I’m one myself. Naturally, women like to invest in women-owned companies. You said earlier that you would check the indicators and possible reasons and see whether you had ways to mitigate the factors blocking women investors. Could we have access to your results, please?
[English]
Mr. McCoy: Yes.
The Chair: Before closing, I will go with my last question. You referred to tax advantages because you mentioned that the distribution channel is basically shrinking and closing. It’s complicated. You referred to some tax advantages. Could you elaborate? Are those foreign investors? And what would be the role of the federal government?
Mr. McCoy: This is not anything to do with CIRO and what we have the ability to do. This is what we heard when we had gone out and talked to a diverse group of thought leaders in this area, and one of them was just looking at if there is an opportunity to have some sort of a system where if I own a junior security and make a little bit of money and then I sell it, then maybe I can defer having to pay the capital gains tax on that as long as I reinvest that in another junior-stage company. Really, it gives that investor the kind of incentive to be able to be in that market, not be afraid to actually take some profit from it and be able to continue participating in that way.
The Chair: So this was a takeaway from your small-cap round table —
Mr. McCoy: Yes, that’s correct.
The Chair: Okay. If you have a written summary of this round table —
Mr. McCoy: I do have a memo that summarizes —
The Chair: If you can send it to us, we will distribute it to our colleagues. Thank you. It was very informative today, including Lesson 101 on short selling. We want to thank you for your testimony.
[Translation]
I would like to welcome our second panel. We’re continuing our study on access to credit and capital markets for small- and medium-sized enterprises as the basis for growth in the Canadian economy. I want to welcome the representatives from the Canadian Securities Administrators.
[English]
We welcome our witnesses representing the Canadian Securities Administrators: Stan Magidson, Chair; and Grant Vingoe, Chief Executive Officer of the Ontario Securities Commission. Since both of you are appearing via video conference, if any technical problems emerge, just let us know.
I understand that both of you have five minutes of opening remarks. Mr. Magidson, the floor is yours.
[Translation]
Stan Magidson, Chair, Canadian Securities Administrators: Good morning, Mr. Chair and honourable senators.
[English]
My name is Stan Magidson, and it is a pleasure to be joining you today with my colleague Grant Vingoe. We are pleased to appear before you on behalf of all 13 jurisdictions that make up the Canadian Securities Administrators, or CSA. We appreciate the opportunity to contribute to your important work.
The CSA is the umbrella organization of Canada’s provincial and territorial securities regulators. Our mandate is to deliver a harmonized securities regulatory system that fosters fair and efficient capital markets; protects investors from unfair, improper or fraudulent practices; and contributes to the integrity and stability of Canada’s financial system.
In fulfilling our mandate, we deliver a highly harmonized national securities regulatory regime that also accommodates important regional needs in our capital markets. We exercise rigour and take a measured approach, and we engage with and listen to all market participants. CSA members are also long-standing partners and collaborators to federal institutions that support Canada’s financial system.
Canada’s economy is experiencing significant challenges, including a well-documented decline in productivity. Ensuring that small- and medium-sized enterprises have access to the capital and financial supports they need to grow, innovate and scale is central to addressing these broader economic challenges. This is a shared responsibility that all participants in the financial ecosystem must contribute to.
Capital markets play a critical role in connecting investors willing to provide risk capital with growing companies and investment vehicles seeking funds to finance their activities. These markets complement and do not substitute bank financing and government programs. Through direct and indirect forms of owning securities, Canadians can participate in the growth and innovation of small- and medium-sized enterprises, supporting entrepreneurship while building wealth and retirement savings.
In addition to a robust senior market, Canada has a unique and effective junior public market through the TSX Venture Exchange and the Canadian Securities Exchange. This junior market has become world-leading thanks in part to the CSA’s tailored regulatory regime for venture issuers. This regime provides proportionate, lighter-touch regulatory oversight of Canada’s junior public issuers.
Within the last year, we have taken meaningful steps to advance our commitment to support and enhance the competitiveness of our markets while maintaining investors’ confidence in them. We introduced measures to support companies looking to raise capital and to support public markets. I will briefly mention four of them.
First, we streamlined financial disclosure requirements for IPOs and liberalized marketing disclosure. Second, we introduced an exemption which will make it easier for companies to raise capital and for retail investors to invest in them. It will complement the existing accredited investor exemption to enable broader participation in the capital markets by investors who self-certify their relevant experience or expertise.
Third, we recently announced an initial regime to allow smaller public companies to file semi-annual financial statements rather than quarterly, reducing their costs. This option is available through a pilot project to venture issuers that have annual revenues of less than $10 million.
Lastly, we increased the capital-raising threshold available under our listed issuer financing exemption, an initiative that reduces costs for certain listed issuers by allowing them to raise capital publicly using a shorter offering document that does not require review by a securities regulator.
Since those most recent changes, hundreds of smaller listed issuers have raised several billion dollars across Canada using the exemption.
Our objective is to ensure that both public and private capital markets operate as efficiently as possible while providing appropriate investor protection. Investing involves risk, and our role as regulators is not to eliminate risk but to ensure that markets function with integrity and transparency. Strong investor protection not only safeguards investors but also supports the competitiveness and attractiveness of our markets by reinforcing investor confidence in them.
Our priorities, which were outlined in our current business plan released in June, will enable us to continue to deliver a regulatory framework that is responsive to the evolving capital-raising needs and the competitive context of Canadian companies — small, medium and large.
Federal and provincial governments and regulators, in addition to CSA members, have an important role to play in improving access to capital. Ensuring that Canadian businesses, including small- and medium-sized enterprises, have access to a wide range of financing options requires a rich ecosystem that includes financial institutions, appropriate government programs and policies, and both institutional and individual investors. The CSA is committed to working with our ecosystem partners to advance this important objective.
We commend the committee for bringing together a wide range of perspectives to explore these issues, and thank you for the opportunity to appear before you today.
The Chair: Thank you for your opening remarks. I understand that Mr. Grant Vingoe is with you, so it was opening remarks for both. We will go to questions. Colleagues, I propose five minutes each, and we will start with our deputy chair, Senator Varone.
Senator Varone: Thank you, Mr. Magidson, for appearing today. I will ask my question in a different way because I asked it in the previous panel. The crossroads is when a private issuer or private company becomes public, and the example that I will use is the shareholders of a U.S. private company. They can have up to 1,999 shareholders before the need to file a prospectus, but in Canada, it is 50. The question that I have is: Why 50? And it has been around for at least the 50 years that I know of. Why is that number so strategic for us? Is it under review or subject to change? Has it been reviewed in the last 50 years, and why are we still sitting at 50?
Mr. Magidson: I could answer that, if that is acceptable. Thanks for the question. It might be helpful to, first of all, clarify the situation, senator. In fact, you are right that our definition of the exemption for a private company caps out at 50 shareholders. This is correct. But if you cross 50, that does not mean you are a public company in Canada for securities law purposes. You can continue to raise capital, using a bunch of different exemptions to tap into investors well in excess of 50, but you will have to have an exemption to do that. One exemption that has been talked about a lot is the accredited investor exemption.
What causes you to transfer into being a “public company” is when you are seeking a listing which will require either a prospectus or a listing statement with the exchange. We actually have a number of companies in Canada today that are still private in the sense that they are not public for securities law purposes, but they have well in excess of 50 shareholders.
We could consider upping that number. It is an interesting dilemma, though, because we are being encouraged at the same time to have vibrant private capital markets to kind of encourage companies to go public, and if you make these private market exemptions too generous and too capable of expanding your capital base and shareholder base without going public, then the dilemma we are all concerned with now about not having enough junior public companies in Canada will be exacerbated.
Like all things we do at the CSA, we’re very mindful of calibrating properly. I just would add that for us, we’re kind of agnostic. If a company can raise money going to the bank, that’s terrific. If it can raise money from families and friends without any need to deliver documentation because of the relationship, that’s terrific. If you want to go broader than that and start to tap into the public, we do have calibration, all the way from staying private to going to the TSX Venture Exchange and, ultimately, the big board, tapping into venture capital or institutional investors. For us, we want a framework that facilitates all these different ways of raising capital and doesn’t put constraints unnecessarily on them.
Grant Vingoe, Chief Executive Officer, Ontario Securities Commission: If you wouldn’t mind, I would like to amplify the answer briefly. Regarding the reference to 2,000 holders in the United States as the entry point to becoming a public company, in that sense, it is actually more restrictive than the Canadian regime, which would require a prospectus or a listing to become a public company. In fact, the United States doesn’t have an exemption like the private company exemption for under 50 shareholders. Anyone issuing in the United States from a private company would have to find an exemption of a similar kind to the ones that my friend Mr. Magidson described.
Senator Fridhandler: I would like to visit the democratization of the marketplace. I think the regulatory regime under the securities acts is largely set up to restrict 95% plus of Canadians from getting into the exempt market. There are a few elements.
But between your regulatory regime and the obligations of broker-dealers on brokered placements for “know your client,” I would suggest that there is some duplication, and we don’t need two regulators of that point. Then let me add, before we get into that, the response to market issues in the United States in 2012 was the JOBS Act — which isn’t “jobs,” but “Jumpstart Our Business Startups,” so that we know what the acronym stands for — and the look-back on that and the extent it opened up crowdfunding and the ability for many investors to get into that. What I am seeing is maybe the failure of crowdfunding in Canada to follow on that model. There are a number of questions in there, but over to you.
Mr. Magidson: Those are terrific questions and observations, Senator Fridhandler. I have a couple of thoughts. On the democratization of the capital markets, we certainly understand the concept, and we’re very mindful of it, but there is also another consideration for us, which is a desire to calibrate access to private companies in a way that we think is intelligent from also an investor protection objective. Very much the art of regulation in this area is one of judgment and calibration.
I will say that we embrace this idea that we want to very much enhance capital formation, and this is definitely a focus of ours. I think you will have received our business plan previously that signals this in spades.
Now to be a bit more specific: On the point about accredited investors as an overlay in terms of if you are getting advice from your financial adviser, who also has to consider suitability, “know your client” and “know your product,” I think there is something for us to look at as to whether or not, in those circumstances, we might say that if you have gotten suitability advice from a broker-dealer, maybe we don’t need that extra layer of needing to be an accredited investor. I think that’s something we should take away and consider, and I really welcome the idea.
As for the other areas of retail participation in private markets, make no mistake about it, there is a lot of risk there. We have calibrated some of our exemptions to account for that. In some cases, we say retail investors can participate, but they have a cap on the amount they can put in. The idea being if you are accredited, you have financial worth and can take a greater hit. We have done that.
We have also recently introduced the Self-Certified Investor Prospectus Exemption. In this case, if you have some experience or expertise investing in that particular issuer, you are allowed to put up to $50,000 per year into these riskier start-ups. That definitely opens the channel here for further democratization, but we do ask for self-certification as to your acceptance and understanding of the risk.
As for crowdfunding, it’s been quite the trend in the past. We looked at the world and what they are doing. We have the crowdfunding exemption available in Canada. The fact of the matter is it has not been widely taken up. It allows for raising up to $1.5 million, and there are caps on the maximum amount a retail investor can put in.
This could be attractive to small companies that are just starting out. They’ve tapped into all their family and friends. They are not yet ready to go broader, and it is an effort like a GoFundMe-type approach to see what they can get through a proper portal. I will say that we understand the importance of allowing Canadians to invest, but we’re trying to do it in what we call an intelligent fashion of proper calibration.
I’ll defer to my friend Mr. Vingoe. He may have some other comments to add as well.
Mr. Vingoe: Actually, I just think it is very important to have that balance between investor protection and allowable risk. The reality is that for many Canadians, if they had invested in a low-cost financial product through indexation, their returns and the security of their retirement would be much greater than if they tried to engage in the picking of stocks. There is this dilemma between our mandates to foster capital formation and investor protection and results for investors.
[Translation]
Senator Henkel: Welcome, gentlemen. My question is for Mr. Magidson.
According to the Women Entrepreneurship Knowledge Hub, Canadian women entrepreneurs receive only about 4% of the country’s venture capital. Within the regulatory framework, have you been able to identify any potential biases or barriers that may contribute to perpetuating this situation?
[English]
Mr. Magidson: Thank you.
I would say that we’re very mindful at the CSA of effectively having access to capital and capital opportunities for all Canadians irrespective of gender, race, ethnicity or whatever it may be. Everything we do in terms of our regulations very much caters to all Canadians.
As for women and venture, we don’t, per se, have anything that is expressly aimed at women in capital markets at the CSA level and I don’t necessarily believe at the provincial level. I will say that this is an issue that is gaining much currency, and I will just give you some idea of what I have been hearing about.
I know, for instance, one of the associations that oversees investment dealers has come to recognize that with aging demographics, fortunately or unfortunately, men seem to be predeceasing women in marital relationships. There is a real need to reach out to women to enhance their financial literacy. I think this is happening at the practical level of those who have relationships with their customers.
This is just a one-off, and I don’t know if it has been replicated elsewhere in the country: In Alberta, there is a group called The51. This was developed by women entrepreneurs who have been very successful in their business careers, and they set up a fund for investment. They support innovative women entrepreneurs doing start-ups.
Things are happening, but from a regulatory perspective, we consider the needs of all Canadians — Indigenous, et cetera. I can tell you that things are happening, I believe, in different pockets across the country.
Mr. Vingoe: If I could just add, in our publication Get Smarter About Money, we highlight behavioural research that focuses on the specific needs of women as investors and their different risk tolerances and stress levels and how women as a group overall respond to investing as they age. Mr. Magidson is absolutely correct that we protect all investors, but we have had a focus on investor segmentation and understanding the particular needs of women in our investor education and research publication. I refer you to our Get Smarter About Money publication.
[Translation]
Senator Henkel: My next question is for you, Mr. Vingoe. Your 2024-25 annual report acknowledges that a significant number of Canadians are victims of online fraud and that your enforcement team is managing a record flow of fraud cases. When investors lose confidence, the entire ecosystem loses confidence.
I want to know whether you measured how fraud affects the ability of small businesses to attract investors.
[English]
Mr. Vingoe: Thank you very much for your question.
It is very difficult to measure the impact on SMEs specifically, but your general point is absolutely sound that if people do not have trust in the overall system and feel that they are being scammed, then it undermines the ability of legitimate companies that are more speculative to raise capital as well.
[Translation]
Senator Henkel: My question was mainly about your report. You have a report showing an increase in fraud. When fraud increases, Canadians lose confidence. It’s becoming increasingly difficult for our companies to attract investors as a result of fraud.
My question was the following. Do you have any idea of the real impact of this fraud on the investor system? Is there a real and tangible link?
[English]
Mr. Vingoe: There is a tangible link, but it is very difficult to quantify. It undermines confidence in investing generally and deters people from engaging in more speculative but appropriate investment strategies for fear of being scammed.
Mr. Magidson: If I might add to Mr. Vingoe’s comment, we are very attuned to the issue, senator. One of the things that we are doing now is — as you will appreciate, with the advent of social media and the internet, online fraud is, unfortunately, one of the negative downsides of the ease of access. We have secured a tool that is intended to actually proactively take down sites that we see as problematic. We think this proactivity assists rather than just having to wait for the damage to occur and trying to unscramble the egg thereafter, unfortunately, when the fraudsters have absconded with the money.
We are highly attentive to this. It’s like catching fish in the ocean. We need to make a significant dent here, and we’re doing everything we can to do that.
Senator C. Deacon: Thank you to our witnesses.
I want to start with a question for Mr. Vingoe and then one for Mr. Magidson.
Mr. Vingoe, I like the term that I’ve heard a bunch today: “calibrated regulation.” Specifically, I’d like to ask you about private placements.
As I understand it, in Ontario, when there is activity with private placements, they don’t necessarily fall under the coverage of the Ontario Securities Commission. I’m wondering about placements where there could be a useful oversight role simply by having companies that have raised any money, be it with family, friends or others, to have to at least register any changes to the cap table and their communications with shareholders around changes to the cap table, and documentation would be time-stamped to ensure proper communication is provided. In some provinces, this is not required and it is in others.
What are your thoughts in that regard? I think it would be a way of making sure there are some protections in place without the Ontario Securities Commission, for example, providing full regulatory oversight.
Mr. Vingoe: Generally, in connection with private placements, given the volume of private placements, we have a risk-based approach. We normally receive filings of reports of exempt distribution, so in most cases, we’re aware of the retail private placements. Then based on risk analysis, complaints and other indicators, we’ll look into those issues further to determine whether the placements were appropriate and investors were protected.
On the point of requiring additional information, it is an interesting idea. For the most part, the exempt market has been premised on the idea that limited information is provided. If someone utilizes the offering memorandum exemption, for example, their additional information is provided to the investor but not the continuous reporting mandated by the commission. That leads to the idea that perhaps we modulate, and in our present environment, is the distinction between a private company and private placement and a public company and public offering too definitive? Should we modulate the reporting requirements based upon the impacts on Canadians or the number of holders? But I would say that this would take us away from the worldwide trend and the trend in the U.S., which has similarly been to not impose continuous reporting in connection with private placement activities.
But there is merit in the idea that it’s now a much more fluid category. I’m impressed by the concept.
Senator C. Deacon: The thought is to have a way to time-stamp communications and ensure shareholders are properly communicated with only around changes to the cap table, not other reporting. It’s that one simple step that I think might bring security to those who are early investors and perhaps help to prevent inappropriate activity.
That’s the only thought. Thank you very much.
Mr. Vingoe: That’s something we can consider.
Senator C. Deacon: I think there would be real value in it.
Mr. Magidson, this is regarding the year before you came on as chair. The “know your product” rule introduction in 2021 caused a reflexive response on the part of the big banks to choose to limit their access to products to exclude independent mutual funds and other competitor funds from their list of products they offered. It was interesting that there was enough pushback that they rescinded that choice.
What was learned through that? It was really deeply upsetting to see that reflex and the anti-competitive aspect of that.
Mr. Magidson: Thank you for the question, senator.
I will start by saying that we at the CSA were disappointed to see that reaction of only going to proprietary products at the big banks. We had that negative reaction.
I will defer to my friend Mr. Vingoe in the sense that the Ontario Securities Commission conducted sweeps to look into this further, and if it’s acceptable to you, I’ll hand it off here. I’m happy to come back in, but I think Mr. Vingoe has some greater insights on the situation.
Senator C. Deacon: Thank you.
Mr. Vingoe: It’s certainly true that there has been the following: I’ll address two phenomena. One is that the banks have moved to sell their proprietary fund products to a much greater degree following the adoption of the client-focused reforms. The client-focused reforms with regard to fund investments only required a comparison with the market to a very limited degree. As part of our process of engagement with our stakeholders, the idea that we would require a universal product comparison was never moved forward with. They simply have to demonstrate that their product is comparable to other products in the marketplace and that their investors are not disadvantaged by the sale of the proprietary product.
To some degree, I think, as a communication mechanism, the banks use the occasion of the client-focused reforms to restrict their product shelves, but it was never inherent in the way the client-focused reforms operate that this decision should be made. I, like Mr. Magidson, am disappointed by the pretext involved in saying that they can only be proficient with their own products rather than other products from independent fund providers.
With regard to SMEs, the issue is much the same. If they’re not underwriting the product, if they’re not underwriting an offering of securities and if they aren’t providing research on the securities, even though they’re capable of providing the fundamental information to their advisers to impart to their clients, then they’ve withdrawn, to a large degree, from offering junior company securities not because of the client-focused reforms, I would say, but because of their own pecuniary interests and the streamlining of their operations.
Senator C. Deacon: Thank you very much. I observed the same problem.
The Chair: It’s a point that we might have to raise with the Competition Bureau because it sounds as if they are unacceptable practices. Thank you for raising that topic.
Senator McBean: Mr. Magidson, SMEs often point to regulatory complexities to raising capital across provinces as a barrier. I appreciated your use of the phrase “the art of regulation,” with our art being very flexible and regulation being regulated. I was going to ask you what steps the CSA had taken to streamline the process, but in your testimony, you actually gave us four pretty clear ones: streamlining the financial disclosure exemptions and self-certifying.
I wonder if we can go into more detail on some of the newer ones. You said one of the newer ones was to allow smaller companies to report semi-annually versus quarterly.
I am curious about the fourth one you gave — and maybe you can explain how it’s benefiting SMEs for their access — regarding the shorter timeline exemptions. I’m wondering if there are any other options that you are giving to streamline the process.
Mr. Magidson: Thank you for the question.
There are a number of initiatives that we’ve embarked upon, but specifically, there have been these several that are aimed precisely at trying to ease burdens, particularly for the more junior markets.
You may have seen this last week: On semi-annual reporting, it was released that the Canadian Securities Administrators, or CSA, are going to allow venture issuers — so those listed on the TSX Venture Exchange, or TSXV, and the Canadian Securities Exchange, or CSE — with annual revenues of under $10 million per annum to be able to opt to disclose their financial information semi-annually versus quarterly. We think this is a significant nod to burden reduction for those issuers.
When I talked about calibration and trying to do it intelligently, we’re not requiring the junior issuers to go to semi-annual reporting. It’s an option for them. Therefore, they’ll have the ability to continue quarterly or semi-annually. We anticipate the market is going to go to work here. Junior companies that feel it is a redundancy for them — extra cost — might be quite attracted to the idea of about 50% of the reporting, but if their investors are saying, “No, no, we insist on having those quarterly reports from you,” then they will have to appease their investors.
That’s out as a pilot, but at the same time, we’re looking at, perhaps, making this a much longer-term part of our hard-wiring. It is to be looked at. It’s in the market currently. We think it’s going to be well received. That’s what our insight tells us. We did a consultation.
You referred to one other. Was that possibly the listed issuer financing exemption —
Senator McBean: It was the shorter timelines with respect to raising capital. It was your fourth point in your testimony.
Mr. Magidson: I’ll go to that very briefly, and I’ll figure it out. That is, I think, the fourth one on the listed issuer financing exemption. Let me explain this one to you because this has really turned heads, quite frankly, and it is being utilized.
Specifically, we now allow a company that’s publicly listed on any of the exchanges — venture or non-venture — that has one year of reporting history to now raise up to $50 million per annum as a maximum based on a short document they file that updates their information that’s material.
They don’t have to use an underwriter. It’s distinguished from the full prospectus regime. Since we’ve introduced that exemption, we’ve seen an eightfold increase — eight times as much money being raised under that exemption. In particular, it seems to be very attractive for junior mining companies that have needs for high-risk capital raising. As I said, several billion dollars have been raised under this innovative offering that we’ve allowed for.
It’s a tangible illustration of really trying to facilitate capital raising in Canada and having a competitive capital market that is tuned into the needs and not tone-deaf.
I’ll defer to Mr. Vingoe. He might have additional comments.
Mr. Vingoe: I think the listed issuer financing exemption is a very powerful example where, since it was introduced, $3.8 billion has been raised, and it represents a trend in our thinking where if a company has a sound disclosure record, capital can be raised based on their continuous disclosure record rather than requiring a full prospectus.
We also introduced a new mechanism for newly public companies that have gone through an extensive review process in connection with a prospectus, where for 12 months after that and also based on a very abbreviated summary statement, they can raise additional capital within limits. That’s a very unique feature now of the Canadian marketplace and our efforts —
Senator McBean: Mr. Vingoe, I’m going to interrupt because I’m getting a sign that I’m running out of time.
I wanted to ask you: Have initiatives such as regulatory sandboxes and innovation offices translated into improved access for SMEs, particularly in the emerging sectors?
Mr. Vingoe: Yes. That was really the foundation for our expansion of the accredited investor exemption to include the self-certified category based on experience and educational qualifications, so it did in that regard. It also allowed us to clarify circumstances where issuers would not face the possibility of dealer registration but engage in financing activities with a lower burden. It has been effective in that regard across the country.
Senator McBean: Thank you very much.
Senator Yussuff: I’m going to be brief. I’m just coming back to the follow-up question from my colleague. Given the regular changes you’re making to help SMEs gain additional access to capital, what is the level of cooperation amongst the provincial securities commissions in learning from each other on the changes that you’re making that will allow SMEs to benefit? Wonderful innovation that may work in Ontario might have a different impact in Manitoba or B.C. How often is that collaboration happening amongst you guys when you get together or don’t?
Mr. Magidson: If I might, Senator Yussuff, I would start off by saying that it’s an excellent question. We live in a big country, and there is ideation that is happening coast to coast to coast, and one of the beauties of the CSA is that’s precisely what we do. We work collectively, seeking to take the best of what we’re seeing in our regional markets and then harmonize across the country. That is exactly what is being done day in and day out at the CSA.
I will give you one illustration of that. On the self-certified exemption that we’re now seeking to have uniform across the country, this originated in Saskatchewan and Alberta, and it was at a time when, a couple of years ago, there was real difficulty raising money in the junior market and the start-up communities in the two provinces. We thought this was a good idea to try on as a pilot.
We spoke to our colleagues in the CSA. They said, “You know what? Why don’t you test it out and see how it’s being accepted?”
It turned out that it wasn’t that popular, but people were nibbling around, and they said, “You know what? This would have a lot more currency if it was done across the country.”
Sure enough, over time, other provinces adopted it. Ontario took a slightly different approach, and now we’re at the stage where we are actually seeking to harmonize coast to coast to coast. It’s an exact illustration of what you’ve spoken about.
If I might say one more thing about the CSA in this regard, there is a lot of discussion about, “Wouldn’t it be great if we had a national regulator?” I do want to say that, quite frankly, having been in the CSA tent now for 10 years and having chaired it for the last 4 years, I have yet to see such creativity coast to coast to coast working collaboratively to serve up a product for the country.
I think it is a true testament to our ability as a nation to work together to deliver the right regulation for Canada.
The Chair: For me, it is music to my ears to hear what you have just mentioned because we heard previously that we maybe have some barriers, particularly regarding the prospectus and initial public offerings, or IPOs, and Ontario does not recognize the passport system with other provinces.
Maybe, Mr. Vingoe, could you give us an update on that? Is that still the case? Where are we heading with that? Apparently, it’s only Ontario that does not recognize the passport system.
Mr. Vingoe: First, I’d like to reiterate that I agree entirely with Mr. Magidson about the high level of cooperation and commitment to harmonization within the CSA. That is our fundamental focus.
The decision on the part of Ontario to enter into the so-called two-way passport that affects entities outside of Ontario and coming into Ontario is ultimately a political decision that would have to be made by our government.
The Chair: It’s more of a political decision. So the answer is it’s politically. We have Prime Minister Carney who tried to have one economy and remove trade barriers, and here we are where we have a situation, but the responsibility is more at Queen’s Park at the political level. Okay. It’s a fair answer.
Mr. Vingoe: Thank you.
The Chair: We appreciate your answer.
Senator Fridhandler: I’m going to revisit something I addressed earlier, but it’s over to your comments on appropriate calibration of regulation. I’d like to see some stats on crowdfunding in Canada, if you have them, because I think it’s certainly relative to what’s gone on in the U.S., which has been moderately to largely successful. I’ve been doing some research on it.
Without having these numbers, my perception is it hasn’t been very successful in Canada. I look at people investing, so to speak, in prediction markets, crypto-currency and VLTs — and you may be getting into prediction markets soon — yet they can’t throw their $5,000 or $10,000, with a cap, without being otherwise regulated in an additional layer.
I don’t know if you have numbers that you could give us in due course and whether you can comment on the success or issues relative to crowdfunding.
Mr. Magidson: I’ll start by just saying, Senator Fridhandler, we will seek to serve up what we have on that. As I say, I do think it’s not a particularly robust picture in Canada, but we will do our best to serve up what we can in that regard in terms of data.
It definitely was viewed as a niche opportunity to augment those companies that have kind of tapped out, as I said, on the friends and family but didn’t quite have the ability to tap into arm’s-length markets, and it was meant to be that.
As for anything else, Mr. Vingoe, I don’t know if you have anything to add.
Mr. Vingoe: No. I’ll just agree that it has not been widely used. I think, in part, it’s a cultural difference in the approach to risk, but in addition, Canada has an ecosystem for junior companies on the venture exchanges, which doesn’t exist in the United States in any meaningful form. That part of our ecosystem is very advantageous to SMEs and gives an opportunity for graduation to more senior levels, and I consider it to be far more important than the start-up crowdfunding exemption that has had little take-up, despite being reasonably facilitated for investors.
Senator C. Deacon: I want to keep building on the ways of managing the two ends of this marketplace in terms of the issuers and those guiding the investments of Canadians — our big six banks at one end and a limited number of smaller independent dealers at the other end and very little in between.
When I look back on the industry of the 1980s, from my standpoint, it is a challenge that we have ended up with a regulatory burden that really makes it impossible for the independent dealers to compete or makes it very difficult for them to compete, and I don’t see bridging this gap that has emerged without some changes.
What do you see as being the biggest priorities in trying to get more independent dealers that are well regulated? Maybe there’s an asymmetric regulatory style, and maybe there are different clients that get to work through those dealers. But how do we get back to something where there are independent risk takers and our investment sector is not all being run by bankers who can afford a very big regulatory burden relative to everybody else?
Mr. Vingoe: I would say on the changes that occurred, this actually caused many independent dealers to be acquired by the banks and then for the banks not to be engaging in the same activities. Part of it is the banks’ power with regard to lending and the ability, even if there isn’t tied selling, to offer the opportunity for both commercial lending and underwriting activities, which is a very important factor. Another has been the impact of bank capital requirements and maybe inclination, which has caused banks to not be willing to provide backstops or financing to independent dealers.
The banks overall have rarely, and probably in an idiosyncratic manner, involved independent dealers in their underwriting syndicates; rather, they exchange those opportunities with large bulge bracket U.S. firms and similar firms in Canada, and that has all been disadvantageous to independent dealers.
Also, there has been a market change where the independents used to be an important source of securities research about new and upcoming companies.
Senator C. Deacon: Absolutely.
Mr. Vingoe: That service, for whatever reason, is not valued by hedge funds and others who used to pay up for it in the past. So that’s a market phenomenon as well.
Nonetheless, we have several very strong independent dealers. It always seems that Canada has one big independent dealer at any one time, and the market accommodates that — and that is true today — as well as a number of other smaller firms that participate, largely in follow-on offerings and exempt market transactions.
But the other modulation we have is the exempt market dealer category that is directly administered by CSA jurisdictions, which is a far lighter touch but more restricted avenue. We did make a change that those firms could potentially participate in underwriting these syndicates, but they couldn’t find a way into those syndicates, unfortunately.
There are a variety of competitive factors, but I also agree that the regulatory burden has to be further examined and that the burden needs to be proportionate to the nature of the activities, and it’s not one-size-fits-all.
Mr. Magidson: If I might add, senator, definitely, if you want a vibrant junior market, it certainly helps to have dealers that focus on the market, so they’re the boutiques that you’re referring to. We agree with that completely.
I think a lot of them are making decisions based on the economics of the business. We’ve heard some now tend to move more into wealth management as opposed to trying to promote the junior stocks, but not universally.
I know that, for instance, in Vancouver, there is a robust junior dealer market that follows the junior mining issuers. In Alberta, there was a time when the junior oil and gas space was on fire, and there were tons of dealers supporting that activity. I think Senator Fridhandler would have first-hand knowledge of this phenomenon, but today, to raise enough money to do a start-up in energy with all of the regulation, et cetera, is a non-starter. But there still is a community of dealers that focus on oil and gas.
There is activity, and, with Mr. Vingoe, if there are things that we can do to further enhance the attractiveness of the space, we will. But a lot of it is coming down to the fact that the market is speaking and the business models are reacting.
The Chair: Thank you for this last five-minute exchange because there are some gaps we have identified and the role of regulation as well. From my point of view, the access to create for SMEs in Canada is not too much of a problem, but access to capital is a significant issue, and we will try to do our best here with this study.
Thank you both for your time and contribution to our study. Your testimony today has been very useful and will be taken into consideration for our study. Thank you, senators. Our next meeting will be on Wednesday, April 15, at 4:15 p.m.
(The committee adjourned.)