The B.C. Securities Commission is breaking away from the national regulatory pack with a new proposal designed to provide inves-tors with greater transparency and more information before investing in the higher-risk exempt market.

This far-reaching proposal boosts information disclosure requirements for both reporting issuers and non-reporting issuers — which, in many cases, are startup companies that are often illiquid.

“This is the type of information that would strengthen investor protection and market integrity by providing more transparency about the exempt market,” says Brenda Leong, the BCSC’s chairwoman. “We are proposing that companies raising capital in the exempt market be required to file a new form disclosing more information about the company and monies raised.”

In the exempt market, a stock is still regulated but exempted from the requirements of filing a formal prospectus under British Columbia’s securities legislation. This market segment covers a variety of securities, such as the founding shares of a company, shares issued through private placement in a public company, or options on stocks for a company’s officers or directors.

“The exempt market is one of the foundations of venture capital, and it’s very important for economic growth and prosperity,” says Martin Eady, director of corporate finance for the BCSC. “Really, it’s the way a successful company often starts. But it’s also a market that requires a fair degree of attention by securities regulators because it doesn’t have as much transparency as the public securities market.”

The proposal comes as a result of Leong’s work since she took over as chairwoman of the BCSC in October 2009 after serving as the regulator’s chief operating officer and chief enforcement officer. As early as this past January, Leong had served notice that she was going to review the exempt-market disclosure issue, in which a significant amount of information was being kept from investors for privacy reasons.

“People investing in these companies, for example, may not have been receiving regular updates or regular financial statements,” Eady says. “They may not even know who owns what in a company. So, our chairwoman asked staff to review our policies in regard to disclosure and transparency in this segment of the marketplace.”

The result of that review was the BCSC’s proposal to open up the disclosure process in exempt markets.

If this proposal is approved, investors in non-reporting or private companies would receive disclosure about its insiders, as well as the promoters who help market the securities. In other words, investors would have added important information about people running these often young, startup ventures.

The proposal also dictates that both reporting and non-reporting companies be required to disclose more information about purchasers of their securities, including purchaser names and any connection they have to the firm. This requirement could disclose whether a purchaser is a director, officer or significant shareholder.

The proposal is “another step” in the BCSC’s integrated strategy to protect investors from the risks of investing in the exempt market, Leong says. Just as important, it also supports legitimate venture-capital companies in raising money for their businesses.

“This additional disclosure in B.C.,” she adds, “should help investors make more informed investment decisions.”

However, this proposal isn’t the only step the BCSC will take to assist investors in the exempt market, Eady explains: “We have a task force in corporate finance that’s also looking at compliance measures in the exempt market to see if they have to be beefed up. And we’re looking at which exemptions are being used and which, if any, are being abused. So, the proposal we announced on Sept. 9 is just the first step in our exempt-market initiatives.”

The disclosure proposal is a first for any Canadian jurisdiction, Eady says: “With this proposal, we’re out in front of the pack. But we think it will be worth it.”

However, the new rules will require more administrative and clerical work for companies to compile the information, Eady acknowledges. He points out that the BCSC seeks to strike a delicate balance between disclosure for the inves-tor’s benefit and the right of personal privacy.

“We recognize that some information is so sensitive that we will not allow it to be disclosed,” he says. “We will not disclose an individual’s residential address, nor will we disclose exemption details under which the shares were issued because some of the exemptions may deal with a person’s wealth.”

The proposal is now open for public comment until Nov. 9, at which point it will be considered by the commissioners themselves. IE