In contrast, the national network of angel investors continues to be an important and stable source of equity financing for Canadian private companies, especially smaller regional companies.
In addition to revamping the angel investor network (more on this below), new initiatives to boost capital flows to domestic private markets can be achieved by mobilizing smaller regulated financial institutions, including investment funds. managed investment companies and investment brokers focused on providing intermediary private capital to small private and public companies.
In 2019-20, Ontario’s Capital Markets Modernization Task Force launched innovative initiatives for more effective securities regulation, new proxy rules and structural reforms. Measures such as the consolidation of the self-regulatory system and concepts such as open access to the product shelves of large financial institutions will improve the efficiency of small regulated financial institutions.
The task force is now well placed, with strong leadership and an experienced team, to see through and build on its proposals and resume its work to strengthen small cap markets through tax measures.
However, the task force should be reformed to be national in scope, expanding membership to all regions and extending responsibility to provincial and federal governments.
Here are some specific initiatives to consider:
- As the working group resumes its work almost two years after its initial proposals, it is appropriate to assess the state of progress of the initial recommendations and the possible modifications to be made to them.
- Small financial institutions, many of which have limited research capacity, need access to quality financial information on private companies for investment purposes. A regulatory framework to facilitate the exchange of information between individual angel investors through not-for-profit angel investor groups is one way forward. Additionally, the task force could consider a version of the Curated Capital platform developed and implemented by the Enterprise Investment Scheme (EIS) Association in the UK, which advises the government on private investment. Curated Capital matches participating investment firms with eligible startups and small businesses through a rating system, allowing smaller dealers and funds to invest and build diversified investments in private companies.
- A personal tax credit on individual small business stock purchases would offset risk and encourage investment. Some provinces already offer a dividend tax credit for small business investments. The task force might consider recommending a version of tax relief like the twenty-year-old EIS.
- The UK found that the EIS had created a cluster or ecosystem of local and regional investment firms, accounting and legal firms, information and trading platforms and small businesses to exchange information and strengthen the process of raising capital. A similar result would occur in Canada.
- There has been a proliferation of private equity platforms aimed at private companies and sophisticated investors. The task force could consider measures to improve these platforms by adopting more accommodating rules that recognize the evolution of investor participation.
Constructive measures are needed to renovate the private and public market to improve the process of capital formation for small and medium enterprises in Canada. The solution must be multidimensional – not just securities regulation, but also tax and competition initiatives. Immediate action is essential given the important contribution of small businesses to economic growth and employment. The heavily indebted small business sector, with an estimated debt of $135 billion, combined with the need to transfer ownership to a younger generation, means the government cannot afford to ignore corrective action.
Ian Russell is a partner at Russell Deacon and Co. and past president of the Investment Industry Association of Canada.