Provincial securities regulators that want to crack down on the exempt securities market should tread lightly, says Jack Mintz, director of The School of Public Policy at the University of Calgary.
In the exempt market companies are allowed to raise money from investors without going through the trouble of providing a prospectus, provided the investor meets certain conditions. For example, the person may be exempt under the "accredited investor" category, and have $1 million in investable assets or an annual income of at least $200,000. The reasoning behind the rule is that investors of this size should be sophisticated enough to determine the risks of an investment without a prospectus.
Provincial regulators in Quebec, Ontario, Alberta and Saskatchewan have been considering placing stricter controls on these unregulated exempt markets, but in a recent paper Dr. Mintz suggests they should be careful because a lower investment limit could end up harming a capital market that contributes to business and innovation.
"There are three reasons why proposed regulation needs to be reconsidered," says Mr. Mintz. "First is the lack of knowledge about this market. Regulators have a responsibility to fully understand the size, scope and operations of this market before attempting to further regulate it. Second, no substantive need has been demonstrated to cap contributions made by eligible investors to $30,000. This is a solution to a problem that has not been clearly articulated. Finally, proposed regulations aimed at limiting the number of investors in the exempt market could actually discourage solid firms from entering the market, and leave only less stable companies behind."
