Capital Markets Insights

Cross-Border Investing: Key Considerations for Brokers and Dealers

2022 was a turbulent year for capital markets but the economic uncertainty that characterized last year is beginning to subside with signs of growing investment activity and market recovery. Companies that were hit hard by the economic shock waves of the pandemic are now adapting to the new reality and are finding ways to thrive in a changed world. With the markets on the upswing, financial brokers and dealers are eager to take advantage of new opportunities that have emerged.

One area that banks and investment dealers can leverage is the growing cross-border flow of capital between the US and Canada. For example, Canadian investors are interested in investing in US-based companies that are poised for growth, while US investors look to participate in Canada's booming tech sector. Broker/dealers who are well-versed in the nuances of cross-border investing are likely to find plenty of success in this market, as there is a high demand for their expertise.

What to consider when looking at cross-border investments?

In particular, what should originating dealers and brokers be mindful of when attracting investors from outside their domestic markets?

The first key difference is in regulations and compliance. While the markets in the US are regulated at a federal level by the U.S. Securities And Exchange Commission (SEC), in Canada, regulation is handled slightly differently.

Each of the ten provinces and three territories has responsibility for regulation and compliance, although the Canadian Securities Administrators (CSA) plays a key role in ensuring there is consistency across Provincial and Territorial jurisdictions. While the CSA provides a passport system to allow investors to access all markets, investors still need to understand where the deal originates in Canada to ensure that they comply with the correct regulatory authority.

While there are several differences in regulations between the two markets, there are some broad similarities that investors and issuers can take advantage of.

One of these key differences is around the use of exemptions. In Canada, investors can only claim one exemption in their subscription agreements. It is more flexible in the US, where sub-agreements can include multiple exemptions which investors can declare.

As a result, solutions for managing subscription agreements need the flexibility to enable counsel to add various exemption options to agreements.

As with any comparison between the United States and Canada, there are marked differences in scale. The Canadian Venture Capital and Private Equity Association reported CA$6.2B invested in PE and VC in Canada's first half of 2022. Although there aren’t comparable figures for the US; PWC reported US$1.1T of dry powder–private equity funds not yet invested, which provides some context for the differences in the size of the markets.

Despite the recent slowdown in markets in 2022, there is still an expectation for sustained growth, with private capital  markets in North America expected to grow by 12.7% between 2021 and 2027, according to a report by Preqin.

So where are the opportunities in which investors might see value across either side of the border?

In 2018 there was a lot of interest from US investors in the Cannabis market as Canada prepared for legalization, with a gold rush for stocks in growers and retailers. However, four years on and the hype of those early years hasn’t been realized yet in investment returns and capital yields.While on the ground, however,  the sector in Canada would appear to be growing; 2022 sales increased by 18% to CA$4.25B–and as of November, there were reportedly more Cannabis stores in Toronto than Tim Hortons–this is still someway shy of the New Frontier Data projection from 2018 that the sector could be worth CA$9.2B by 2025.

Domestic investors in Canada are still hoping that the market potential is realized sooner than later; as of November 2022, data showed a CA$131B loss, but for US investors, there are some other complications. Despite the legalization of Cannabis in various States, it remains a Schedule 1 drug federally. As such, there is some legal grey area regarding whether a US investment in a legal cannabis business in Canada could fall foul of money laundering and risk criminal prosecution.

One sector that might offer more straightforward investment opportunities is mining. Red Cloud Securities listed 89 mining private placements in 2022, raising over CA$ 629m, and as Canada looks to diversify from oil and gas, this sector could grow in the coming years. This has been given added impetus given the global volatility in energy supplies, with more nations considering nuclear power, thereby driving up demand for the mining of Uranium.

How can dealers & brokers better serve cross border activity?

While there are plenty of resources to help investors looking at cross-border opportunities, dealers and brokers face challenges outside of being aware of laws and regulations.

Brokerages need to be creative when operating across the two countries. Sprott Inc., specializing in precious metals and energy transition investment strategies, operates a Canadian and US-licensed brokerage business to offer clients access to both markets.

While many firms still rely on manual processes, old school coordination and communications in managing investment transactions, Katipult’s DealFlow product  th is a portal to share investment opportunities and facilitate borderless participation in deals.

Given that Canada and the US maintain one of the closest economic relationships in the world–underscored by the nearly $2.6B of goods and services traded daily–there will inevitably be a steady flow of cross-border deals and opportunities, is your firm in a position to take advantage and leverage the power of Katipult DealFlow?