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In these troubled economic times, bringing in regulation that would allow the free flow of investment capital between countries would help stimulate the economy. For that matter, so would permitting it among Canadian provinces.

The international General Agreement on Trade and Tariffs (GATT) did an amazing job of cutting the average tariff imposed on industrial products by the developed countries from 40 percent immediately following the Second World War to four percent after the conclusion of the Uruguay round of GATT talks in 1994.

One study that looked specifically at the impact of the Uruguay round alone (1986 to 1994) estimated that the overall economic gains that resulted directly from increased trade are just under US$70 billion, amounting to 0.4 percent of world GDP. Trade growth consistently outpaced production growth throughout the GATT era. Since 1948, when GATT originally came into effect in 23 countries, world trade has expanded at an average annual rate of 5.5 percent, considerably faster than world output or GDP. GATT now has over 150 signatory countries.

A general agreement on securities regulation could, over the years, have an effect on finance that, while being not quite as dramatic as GATT, would substantially enhance productivity and effective creativity.

Think of it: an inventor in conservative Japan is unable to raise the capital there to bring his new gizmo to the prototype stage. All he needs is $20,000 more. Inventor’s cousin in Alberta has a next-door neighbour who loves gizmos, and she always looks for new ones. Neighbour hears from the cousin about the potential for the new gizmo and offers to put up the $20,000 for 25 percent of Inventor’s company. Inventor agrees and sends Neighbour the company shares.

Inventor has probably broken Alberta law. If Inventor had hired a lawyer to find out what exemptions from prospectus requirements might be available to issue securities in Alberta, the cost could run from several hundred dollars to many thousands of dollars, depending on the prospectus exemption available, if such exemption were available at all.

An agreement among developed countries could determine who needs the protection of securities regulation, and to what degree they need that protection. It could publicize broad rules among countries on how to raise capital in the most efficient manner and allow those seeking capital to reach those looking to invest. The current rules are such a labyrinth of pitfalls and nuance that they unnecessarily increase compliance costs, making small financings untenable. Lest no one forget, many great innovations come from small entrepreneurs or inventors who often need just a small amount of financial backing to shore up their projects.

In Canada alone, efforts have continued for many years to harmonize capital-raising regulation among provinces in the absence of a national securities regulator. This effort has made some progress, but it is still unclear why there are substantial differences among provinces for regulation that one would expect to be uniform.

For example, exemptions from the prospectus requirements are enumerated in Canadian Securities Administrators’ (CSA) National Instrument 45-106 (NI 45-106). One might expect that the same types of protections that are applied to potential investors in say, Saskatchewan, should be equally applied to potential investors in New Brunswick. Aren’t all the potential investors in those provinces entitled to similar types of safeguards? Apparently not.

Under NI 45-106, in B.C., New Brunswick, Nova Scotia and Newfoundland and Labrador, an issuer can issue securities to an investor if the issuer delivers an offering memorandum before the investor signs an agreement to purchase. In Alberta, Manitoba, Northwest Territories, Nunavut, Prince Edward Island, Quebec and Saskatchewan, the same applies but the maximum investment that can be made under this exemption is $10,000. In Ontario, the offering memorandum exemption is not available at all. In most provinces, securities can be issued to friends, family and business associates of an issuer and its directors; that exemption from prospectus requirements does not exist in the same form in Ontario.

These are just some of the differences of capital raising rules among provinces. One can assume from all this diversity that regulators in various provinces consider their residents in need of different securities protection than residents of other provinces. It makes no sense.

The federal government seems to agree. On June 22, it appointed Doug Hyndman of the B.C. Securities Commission to head up a team for the creation of a national securities commission within three years. That team is to negotiate with provinces and recommend nationally applied legislation. It will be interesting to see whether all 10 provinces and three territories can agree to national standards.

For that matter, why stop at national borders? In Canada, securities can be issued under NI 45-106 to “accredited investors.” One criterion for an individual to qualify as an accredited investor is that the person has $1,000,000 in financial assets (i.e. stocks or bonds: owning an apartment block does not count). The term “accredited investor” came from regulation in the U.S., as did most of the qualifications to be considered one. However, the U.S. definition of “accredited investor” includes a person who has $1,000,000 in assets, not “financial” assets. Vive le petit difference! But the word “financial” in NI 45-106 probably precludes tens of thousands of Canadians who would qualify as “accredited” if they lived in the U.S.

Let’s bring uniformity and reason to the capital-raising process. Sophisticated people should be able to invest where and when they feel it right, as should wealthy people and certain others who have sufficient knowledge of the players, the project, or the industry. Whether the investor resides in Korea or Belgium, capital should flow from investors who want to invest in a project or company to the projects or companies that need capital. Standard prospectus and registration exemptions, carefully drafted under an international general agreement on securities regulation, will help the free flow of capital in the same way that GATT helps the free flow of goods.

Bernard Pinsky is head of the Corporate Finance/Securities Group and of the U.S. Practice Group at Clark Wilson LLP in Vancouver.