Securities Regulation

The following was first published by the National Post on November 20, 2013

On Thursday, the Investment Industry Regulatory Organization of Canada (IIROC) is scheduled to release its much-awaited study on high frequency traders. The standard image of the high frequency trader (HF trader) is that of a slavering troll working assiduously to destabilize world stock markets and laughing gleefully while prying gold fillings out of retail traders’ mouths. In the minds of many, HF traders caused or greatly contributed to the infamous U.S. “Flash Crash” of May 2010, when the Dow Jones plunged (and then recovered) 1000 points (roughly 9%) in a matter of minutes. HF traders also stand accused of increasing trading costs for both retail and institutional traders.

The following first appeared in the National Post on July 2, 2013.

THREE EXCHANGES, NOT TWO: EXTRA COMPETITION WILL BENEFIT CANADA’S FINANCIAL INDUSTRY

TSX competitors a good thing

Monopolists classically overcharge their customers

Last month, to much fanfare, a group known as Aequitas Innovations announced its intention to start up a new Canadian stock exchange. Reading the press reports, one could be forgiven for thinking that Aequitas will be the only exchange in Canada other than the TSX and its satellite listing platform, the TSX-V.

The following first appeared in the National Post on July 31, 2013.

EXTRAORDINARY POPULAR DELUSIONS AND THE MADNESS OF CROWDFUNDING

Many, if not most, crowd funded endeavours will head straight for the scrapheap

If you utter the word “crowdfunding” in front of a dusty old-fashioned securities lawyer, make sure you have a fully charged defibrillator on hand. Perhaps a fully equipped contingent of ER doctors and nurses. It won’t be pretty.

Let’s be clear — we’re not talking about the mere solicitation of donations, such as the attempt of a Toronto man, reported earlier this week, to raise $400-million to purchase Mobilicity (note to prospective donors: If he succeeds, he owns the company, not you). That’s perfectly legal. We’re talking about the actual sale of an ownership interest to investors over the Internet.

At present, the default rule is that if a corporation or other issuer is going to sell securities it must assemble an informational document known as a prospectus. Because of arcane securities laws whose full import is only understood by two or three Tibetan monks, this is expensive. Even Buy-Rite-Cut-and-Paste-Prospectuses will charge you about a hundred grand, and the bulge-bracket firms reportedly like to take an option on your firstborn child. Understandably, the prospectus option is not the first choice of startup firms looking to raise money.

Co-authored with John Chapman, JD student, University of Toronto Faculty of Law.

Did you know that your investment adviser is not bound by an explicit legal duty to act in your best interests? Surprising? Yes, but more curious is the intense debate about whether this duty should be made explicit in the law. Those who represent investors should be bound by an express fiduciary duty. Alas, such is not the case.

First, let’s be clear that the relevant law is a mess. The standard of conduct is cobbled together from provincial securities regulations, common-law principles and industry requirements, so it is difficult to say when a fiduciary duty applies without evaluating each relationship on a case-by-case basis, which often requires a full trial. Another reason that a national securities regulator is a good idea.

This week, the Ontario Securities Commission published a progress report in which it indicated that it will consider a crowdfunding exemption. This is good news for investors and issuers.

“Crowdfunding” is a means of selling any product or service over the Internet to a broad group of consumers. The cost savings for the issuer  are obvious: the issuer can raise capital more quickly than under the traditional prospectus method. The absence of an underwriter means that there is no “spread” (i.e. the net profit between the proceeds of the issue and the amount the issuer receives) payable to the underwriter. The issuer “speaks to” investors directly by selling its securities over the Internet. Non-pecuniary benefits include an investor’s ability to purchase securities in a startup that is connected to social causes that he or she supports.