Let’s face it: despite acres of legislation and a regulatory body or two for every nook and cranny in the vast business and financial services landscape, plenty of entrepreneurial activity takes place in the spaces between one rule and another, often because not everyone is always clear about what those rules are.

Take the capital markets. As one presenter noted at a recent securities seminar for lawyers given by Osgoode Hall Law School’s professional development centre: “Securities legislation is getting so complex, it’s beginning to look like a tax statute.”

No kidding. Given the thicket of documentation required of the simplest initial public offering or takeover, it’s a wonder anyone goes public. And it’s certainly not a surprise that the exempt market, occupied by the wealthiest and most influential investors, is so popular.

One recent case highlights the problem. Last month, one of Canada’s more flamboyant entrepreneurs, Biovail Corp. founder and Ottawa Senators owner Eugene Melnyk, was rebuked by the Ontario Securities Commission. On Oct. 1, 2003, a truck carrying a load of Wellbutrin, an antidepressant produced by Biovail, was in a bad accident. On Oct. 3, Biovail put out a press release suggesting that the company’s disappointing third-quarter earnings were partly due to losses caused by the accident.

But Biovail’s third quarter had ended a day earlier, and it was acknowledged at the OSC hearing that the accident was irrelevant to the earnings report. Those earnings were significantly lower than the company’s predictions earlier in the year and, as the OSC decision points out, the press release likely was intended to distract investors from the real problem — weak sales.

After a lengthy hearing, the OSC concluded that Melnyk had not contravened any securities laws — because press releases were not included in the voluminous disclosure documents required by the provincial Securities Act at that time. That hole, which indeed seems big enough to drive a truck through, was patched up the following year. And Melnyk is facing an OSC sanctions hearing in the future. Under a little-used section of the act, designed to catch conduct that does not fall under other sections, the OSC concluded that Melnyk acted “contrary to the public interest” because he “knew or should have known” that misleading information was going out in the press release.

There’s really no way to block every type of business conduct that undermines the most crucially important feature of the financial system: confidence in a reasonably level playing field. And open-ended sections that give regulators wider but far more discretionary powers should be used with caution. The OSC’s courageous decision in this case sends two messages, and neither is particularly comforting: no amount of regulation will catch everything; and, in the end, there’s not a lot to be done about that fact without completely shutting down the entrepreneurial system. IE