Venture Market Investing Explained

Looking for a new investing adventure? Want to help launch a new idea by investing in it? Venture markets might have caught your eye.

Venture market investing plays an important role in helping companies bring their innovations to life. But there are a variety of risks to understand before considering this type of investment.

We’ll get into what makes venture market investing an appealing choice for some investors, as well as the associated risks. But before that, let’s cover some background about Canadian venture markets and how they work.

What to Know About Venture Market Investing

Venture capital is money that’s provided by investors to early-stage, or startup, companies or small businesses looking to expand. These companies will often raise venture capital in exchange for equity in their businesses. Startup companies often seek to raise capital early on through the private placement market (also called the exempt market) and then, depending on their capital needs, may progress to seek a listing on public stock exchanges. Regardless of where the early-stage company is raising money, it’s important for investors to understand that venture investing can be risky for a number of reasons.

Where to Find Publicly Traded Venture Companies

The goal for many early-stage companies is to eventually be listed on a stock exchange which gives companies access to a large pool of investors – basically anyone willing and able to buy their stock – versus raising money privately, where there are more restrictions. It also makes it easier for early-stage investors and founders who may want to sell the shares they bought when the company was privately held.

Canadian-based public venture companies are generally listed on one of the two public Canadian venture exchanges: the TSX Venture Exchange (TSXV) or the Canadian Securities Exchange (CSE).

The BC Securities Commission (BCSC) is jointly responsible for the regulatory oversight of the TSXV and its listed companies along with the Alberta Securities Commission. The CSE and its listed companies are jointly regulated by the BCSC and the Ontario Securities Commission. Venture companies often file a prospectus as a means of becoming listed on an exchange and are also required to maintain an accurate and up-to-date corporate profile on the public record. This concept is known as continuous disclosure. Continuous disclosure involves:

  • Keeping shareholders fully informed of the company’s affairs.
  • Significant changes on a timely basis.
  • Making all required filings with the BCSC.

This gives investors more information when considering an investment than they would get from a private company.

Potential Benefits of Participating in the Public Venture Markets

There are various benefits for both investors and companies when it comes to participating in the public venture markets. Canadian venture markets are active and dynamic, offering investors the opportunity to invest in new projects or business ideas. Businesses can use the venture markets to try and grow into profitable businesses that return value to their investors.

A listing on a venture exchange provides an opportunity for companies to secure funding for their ideas and get their companies off the ground. Venture money can help businesses expand in a way that might not be possible through bank loans or raising money privately.

For example, junior mining companies who list on a venture stock exchange can raise capital to explore and develop potential mining properties.

A proven track record on a venture exchange can also lead to a promotion to a more senior exchange, like the Toronto Stock Exchange (TSX). Moving from a venture exchange, like the TSXV, to the TSX may bring additional benefits, like increased access to capital, greater visibility, enhanced reputation, and meeting requirements to list on other indices and exchanges. 

Why Venture Market Investing May Be Appealing to Investors

There are investors who are willing to take high risks associated with venture market investing because they believe in a company’s product, service, or project. Some might be looking to the future, hoping to be a part of a new, emerging industry or product type. Others may have a keen interest to help small companies grow and prosper. Or, they may be looking to obtain a company’s stock at a low price in the hopes that it will substantially increase in value over time. 

Regardless of the appeal, it’s important to remember key fundamentals of investing – do your research, determine whether the investment is compatible with your financial goals and risk tolerance, and only invest what you can afford.

Risks Associated with Investing in Public Venture Companies

Publicly traded venture companies come with unique risks.

These companies may suffer from illiquidity, as there may not be an active market for their shares even though they are listed on an exchange. Liquidity refers to how quickly you can turn your shares into cash. When a company’s stock is liquid, shares can typically be bought and sold quickly within market hours. The opposite is true for illiquid investments.

Venture companies can be illiquid and trade lightly for many reasons, including the following:

  • Only a small number of people hold a majority of the shares, so they are lightly traded.
  • Investors may not be attracted to the stock for business or project-related reasons.
  • The company keeps shifting or changing its business focus, causing investor confusion or apathy.
  • Environmental, social, or regulatory hurdles may be impacting the company’s ability to execute its business plan.

It’s important to understand volatility when considering venture market investing. Publicly traded venture companies can be highly volatile and can experience rapid swings in share price for various reasons, including global events, breaking industry news, as well as investors’ behaviors, beliefs, and expectations.

For example, many venture companies tend to be focused on developing a single project, idea, product, or service. Unlike larger, more diversified companies, a singularly-focused venture company can be greatly affected by an event that directly impacts their project or industry.

Investors should also be aware of the promotional nature of venture markets. Venture companies will often promote themselves in order to attract capital; sometimes, these marketing efforts can be overly promotional and could be signs of market manipulation. As an investor, ensure you’re being diligent and careful when reading promotional material.

The Risk of Misconduct in Public Venture Markets

Public venture markets are not fully shielded from the possibility of  misconduct.

Public venture market misconduct may include market manipulation and misrepresentation.

Market Manipulation

The unique characteristics of venture stocks make them susceptible to market manipulation. Market manipulation is the artificial inflation or deflation of the value of a security, or otherwise influencing the behavior of a market for personal gain. This is also known as a pump-and-dump scheme. Pumping up the share price suddenly, and then dumping shares into the market looking to profit from a trading frenzy is a common market manipulation tactic used by scam artists. Investors could lose their entire investment if they invest in a company that is being manipulated.

Market manipulations can also occur with venture companies when these unsavory market players issue false information or conduct illegal trading practices. Wash trading is one of several illegal trading tactics that may be part of a manipulation. Others include bid layering, up ticking, and high closing.

Did you know: Wash trading is a process where an investor buys and sells securities to create misleading information in a market. It may pave the way for market manipulation, where manipulators will try to generate interest in a company to inflate its value, before selling their shares to gain profit.

Misrepresentation

Misrepresentation occurs when a company or advisor intentionally misleads or omits information about an investment. Misrepresentation can include false claims about the value of a resource project, the financial condition of a company, or a potential business deal or partnership.

Risks to Consider with Private Venture Companies

A private company with a new innovation, along with its investors, may be navigating in the dark – they won’t know how a public market values the investment until the company makes it to an initial public offering (IPO).

Startup companies go through various stages before they can publicly list on a stock exchange. It can be costly to have a public listing and there are ongoing listing fees, so there’s a very real chance that the private company you’re considering investing in may not make it to the IPO stage.

It can also be common for private venture capital investments to be illiquid. This is usually due to securities laws that the company is subject to, which restricts the trading of its shares. Holding private company shares means you may not be able to sell your shares until the venture company you’ve invested in goes public.

The Risk of Fraud in Private Venture Investing

With private venture investments, be wary of potential investment fraud. It may be more difficult to recognize the warning signs of investment fraud when investing in a private company, because the company is not required to disclose the same level of information that a public company is required to disclose. Sniffing out fraud becomes more difficult when there is limited oversight, and no financial statements available for investors, analysts, and regulators to review.

Understand Your Risk Profile Before Committing to an Investment

Knowing your risk profile is key to making informed investment decisions. Your risk profile includes your willingness to accept a level of risk in order to achieve a given return. And it varies for each person, depending on factors like time horizon, financial goals, and cash requirements.

Learn more about investment risk, and take our free Risk Test to help determine how much risk you feel comfortable with.

Always Do Your Research Before You Invest

Whether it’s a private startup or a public company, don’t take shortcuts when considering a new investment opportunity, including venture companies. Dig into the investment, and the person selling it! This can help you make a more informed decision and avoid investment fraud.

Researching an investment can include the following steps:

  • Using search tools to review a company’s financial statements. SEDAR is Canada’s central electronic filing system, and you can use it to look up various financial documents.
  • Staying on top of financial news. Financial markets are constantly changing, so staying informed on the latest news and global investment market stories is an important way to learn more about emerging trends (and frauds).
  • Regularly checking the Investment Caution List. The BCSC’s Investment Caution List identifies unregistered activity or unqualified securities promotions from outside the province that target British Columbians.

These are helpful steps when researching a company, an individual or an investment advisor:

It’s also a good idea to seek out independent advice about an investment with a registered professional, such as an investment advisor or a lawyer.

Report a Concern

If you have any concerns about a person or company offering an investment opportunity, please contact BCSC Inquiries at 604-899-6854 or 1-800-373-6393 or through e-mail at [email protected]. You can also file a complaint or submit a tip anonymously using the BCSC’s online complaint form.

InvestRight.org is the British Columbia Securities Commission’s investor education website. Subscribe to receive email updates from BCSC InvestRight.


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