A balancing act – investor protection vs capital raising

Robert Roach, a senior researcher at the Canada West Foundation, recently published an article entitled “Why embracing failure is good for the economy.” He suggested, “Canadians need a higher tolerance for failure…instead of sticking with what we know, we need to support bold new ventures.” He makes the point that Canada’s economic prosperity relies on our ability to take risks.

Clearly, our appetite has been curtailed by the 2008 market crash. Yet one could argue that supporting entrepreneurs with new ideas is the cure we should be looking for.

At this year’s Capital Ideas, a group of panellists discussed the challenges of raising money in the private capital markets in BC and Alberta. There was discussion around the importance of start-ups to the economy; the fact that the supply of capital for these companies had shrunk significantly over the past couple of years; and an agreement that the private or “exempt” market is critical for raising money.

A Vancouverite who oversees an angel network of over 500 investors asked the panellists if there was a way to encourage more retail investors (not just wealthy investors) to get involved in supporting start-ups, particularly in the technology sector.

Bill Rice, Chair of the Alberta Securities Commission responded by saying that as a regulator, he is asked to do just the opposite. While he recognized the importance of this market as a “necessary and fundamental aspect of our capital market process”, he said that under the current regime, because continuous disclosure is not required, there is a “significant amount of risk and good faith in the process.”

Bill Rice asked if the “buyer beware” form was enough to warn investors about the high risk and illiquid nature of these investments. “The pressure we are under is to provide more protection to keep more people out of this market and away from this risk rather than into it.”

Hans Knapp, Partner and General Counsel of Yaletown Venture Partners, acknowledged that he was in a position to ask for lots of information before deciding to invest. The individual investor was not in as strong a position. He might get “some disclosure up front, but post investment, little if any.”

Knapp went on to say that for every fifteen or twenty good scenarios, there are always a few that fall into a different category. It is a tricky balancing act. “Think of the implications of many of those people who have a bad experience…they won’t invest again.”

Clearly, the “exempt” market remains a challenge from an investor protection prospective — a balancing act that will have policy makers’ attention for a long time to come.