CEO and Chief Compliance Officer weigh in on regulatory impediments to IPOs and crypto markets
2024 was a tough year for innovation on Canadian capital markets. Taking IPOs as a measure of the ‘new blood’ introduced to Canadian exchanges, the country saw a total of 17 non SPAC or CPC IPOs last year across all of Canada’s public markets. Those non-CPC/SPAC IPOs raised a total of $345.84 million, with over 91 per cent of that capital flowing directly to Montreal-based clothing company Groupe Dynamite, according to a report by CPE Analytics.
While driven by myriad factors, including high interest rates, inflation, and geopolitical uncertainty, the regulatory and political environment for companies and entrepreneurs may have played a role in dampening capital markets innovation. Following the resignation of Prime Minister Justin Trudeau, and the likelihood of an election in October of this year at the very latest, the question arises of what kind of new regulatory and political environment Canadian capital markets might see if the polls hold and the Conservative Party takes over government before year-end.
“The IPO market, generally speaking, has not been incredibly active, even in the US it has been quieter since the end of the zero-interest rate phenomenon,” says Dustin Walper, CEO of Newton Crypto Ltd., a Canadian digital asset trading platform. “But the second p[roblem is that the amount of capital flowing into Canada has been in decline, whether through private businesses or public companies, or IPOs…There’s not a lot of interest at the moment, and not a lot of capital going into the companies considering [an IPO] because there are obvious downsides to being public. Once you do go public the regulatory piece is not insignificant.”
Walper contrasts US and Canadian regulation noting that in the States regulatory overreach is regularly quashed by the court system. In Canada, conversely, he says that regulators are sometimes even encouraged to interpret legislation and create guidelines themselves, which can have both upsides and downsides. He sees that directly in the digital asset space, where a great deal of capital market innovation has been centred in recent years. Canadian regulators, he explains, are more empowered to step in on these assets than their US counterparts.
That has, in part, contributed to the relatively early emergence of regulated crypto-asset products like bitcoin ETFs in Canada. Contrasted with the US which only approved bitcoin ETFs last year, Canadian regulators appear to respond quickly. Walper explains, however, that the Canadian model is around permission-based innovation. When a product can resemble existing regulated securities and the appropriate request for permission is made, then that permission can be granted. When it doesn’t — as in the case of some decentralized finance strategies that companies like Newton trade in — then innovation is far harder to facilitate. What Walper would like to see is more of a move to “permissionless innovation.”
Nick Savona explains that digital assets aren’t the only industry to see reduced capital flows as a result of regulation. The Chief Compliance Officer at Newton and Independent Trading Group, argues that measures like bill C-69 as well as the likelihood of political intervention in a resource project or major deal have impacted the appetite for Canadian investments and, in doing so, hampered the prospects for innovation on Canadian capital markets.
“The policies that we’ve had to deal with for the past five to seven years have not been favourable for public companies or for startups and entrepreneurs,” Savona says. “That includes taxation policy like the recent capital gains tax inclusion rate increase and the small business tax reforms from 2017.”
Savona believes that if the polls hold and a Conservative government is elected before the end of the year, we may see a tonal shift on regulation. While we don’t have a clear Conservative policy platform yet, Savona argues that the party’s ongoing calls for reduced regulation and taxes as well as the party’s history of ‘business-friendly’ attitudes may be greeted warmly by Canadian and international investors.
Walper agrees that the Tory party appears more willing to give businesses the time and space to make their case. He believes it would take major legislation to arrive at the state of ‘permissionless’ innovation he’s seeking. However, he says that the current government has shown “literally zero interest in having a conversation,” and a change might offer stakeholders like himself an opportunity to argue for a new framework.
“Even on the capital gains tax increase inclusion rate increase, [the government] heard feedback from the entire business community that said ‘this is the stupidest thing you could possibly do,’ and they said, ‘we don't care. Optically, we like it,’” Walper says. “I hope that we see more of a pragmatic approach to this sort of stuff.”
