The Future of Capital Formation for Small and Medium-Sized Enterprises : Rethinking Initial Public Offering Regulation after the Restructuration of Canadian Stock Exchanges

Small and medium-sized enterprises (SMEs) play a vital role in the Canadian economy. While the growth and success of these enterprises do not depend solely on financial support, access to financing is critical for their expansion. In this respect, public equity financing performs a crucial function among the various sources of capital in the funding of growing SMEs. From this perspective, the recent restructuring of Canadian stock exchanges which has lead to the creation of a junior stock exchange is commendable. Appropriately designed, a junior stock market can enhance the accessibility of public equity financing for SMEs by giving them access to a liquid secondary market. However, if it is to significantly improve the financing conditions of SMEs, the creation of a junior exchange must be accompanied by a revision of the current regulatory framework governing initial public offerings. As this paper shows, current securities regulation impacts on SMEs' ability to raise public equity capital. On the one hand, regulation enacts requirements which tend to burden excessively small issuers. On the other hand, it fails to correct market imperfections which raise the cost of capital for SMEs. In this context, this paper argues for reforms that will contribute to the implementation of a cost effective regulatory regime adapted to the needs and characteristics of smaller issuers