Private Placement Market
Both private and public companies use the private placement market to raise money from investors. It is an important source of funding for BC companies and entrepreneurs. This market is also called the “exempt market” because those who use it do so under exemptions from the requirement under securities law to file a prospectus when issuing securities.
Private Issuer Exemptions
A company that meets the definition of a private issuer may sell its securities to qualified shareholders—that is: directors, officers, or major shareholders of the company; close family, friends, or business associates of a principal; accredited investors; and current shareholders.
Close Relatives, Friends, & Business Associates Exemption
A company may sell its securities to you without an offering memorandum or other disclosure if you are a close relative, close friend, or a close business associate of a director, executive officer, or major shareholder (a “principal”) of the company. The definition of who qualifies under this rule is very strict:
- A close relative is a spouse, parent, grandparent, sibling, child, grandchild, or in-law.
- A close friend is someone who has known a principal of the company for enough time to be able to judge that person’s capabilities and trustworthiness. The relationship must be direct. It’s not enough to belong to the same organization, association, to be a friend-of-a-friend, or be connected through some form of social media.
- A close business associate is someone who has enough prior business dealings with a company principal to be able to make a sound judgment about that person’s capabilities and trustworthiness. You don’t qualify just because you are a customer, client, co-worker, or colleague.
Accredited Investor Exemption
A company may sell its securities to you without an offering memorandum or other disclosure if you qualify as an “accredited investor”.
To qualify as an accredited investor, you must have at least one of the following financial qualifications, or qualify in some other way:
- At least $1 million in financial assets (cash and securities) before taxes, net of any debts – neither your home nor any other real estate you own are considered financial assets.
- Net income before taxes of more than $200,000 consistently over the past two years ($300,000 when combined with a spouse’s net income).
- Net assets of at least $5 million.
If you qualify to buy securities under the above categories of accredited investor, you will be asked to sign a 45-106F9 Form for Individual Accredited Investors that describes, in plain language, the categories of individual accredited investor and identifies the key risks associated with purchasing securities in the private placement market. You must confirm that you understand the risk of the investment and the exemption that applies to you.
$150,000 Investment Exemption
A company cannot use this exemption to sell securities to individuals. Companies can only use this exemption to sell securities to non-individuals (corporations, investment funds, etc.) If somebody offers you or someone you know securities under this exemption, you should contact the British Columbia Securities Commission (BCSC) immediately.
Start-Up Crowdfunding Exemption
Under certain conditions, start-up companies and small businesses can use this exemption to raise money without having to file a prospectus or financial statements.
In order to raise money through start-up crowdfunding , a company must first complete an offering document outlining its idea and make it available online through a funding portal. The offering document contains basic information about the project, including the minimum amount of money that needs to be raised in order to proceed and the deadline for raising this minimum amount. The maximum a business can raise from each investor for a project is $1,500.
Before you invest, you will be asked to confirm that you have read and understood the offering document and the risks of the investment you are about to undertake. Pay attention! These investments are risky and you could lose your entire investment.
Offering Memorandum Exemption
A company may sell its securities to anyone using the Offering Memorandum (OM) exemption. An OM is a legal document like a prospectus, but much shorter and less detailed. It must describe the company’s business, provide annual financial statements, discuss the relevant risks, and tell how the company will use the money it raises. Securities laws require companies in the private placement market to file their OM with a regulator after the financing, not before approaching investors.
If you purchase shares under the OM exemption, you will be asked to sign the 45-106F4 Risk Acknowledgement Form, which describes in plain language the risks of the investment and how to exercise the withdrawl right. You also have a right to cancel your purchase by delivering a notice to the issuer before midnight on the second business day after you agree to purchase the securities.
Existing Security Holder Exemption
A company with securities listed on certain Canadian markets and that has filed all required timely and periodic disclosure documents may issue securities to existing security holders without preparing an offering document. In order to do so, the company must issue a news release disclosing the proposed offering. The company must make the offering available to all security holders that hold the same type of listed security.
Unless you have obtained suitability advice from a registered investment dealer, you can only invest up to $15,000 in a 12-month period under the existing security holder exemption.
Investment Dealer Exemption
A company with securities listed on certain Canadian markets may issue listed securities to anybody, even if you are not an existing security holder, if you have obtained suitability advice from a registered investment dealer. Like the existing security holder exemption, issuers using the investment dealer exemption to raise capital must have filed all required timely and periodic disclosure documents. Similarly, the company must first issue a news release disclosing the proposed offering. This news release must provide reasonable detail on the distribution and confirm that these are all material facts and that material changes have been generally disclosed.
There is no maximum on how much you can invest under the investment dealer exemption.
Is This Company Worth Investing in?
Always do your homework before deciding. Without the prospectus or ongoing disclosure that regulators require from public companies, you will have to gather information about the company to make an informed decision yourself. Be sure to find out as much as possible about its management team, financial situation, viability as a business, and financing activity.
Get the full legal names of the company’s directors and officers. Conduct a background check to see if they were ever disciplined for bad business practices. If anything you learn leaves you feeling uncomfortable, don’t invest or get a second opinion.
Anyone who wants you to invest in a private company should be able to provide you with a comprehensive set of financial statements showing the company’s financial position, operating history, and cash flow, unless the company is less than a year old.
Ideally, these should be audited financial statements. If not, they should include at a minimum a balance sheet, income statement, statement of changes in financial position, and detailed supporting notes.
You will also want to know for what purpose the company is raising money and whether its planned fundraising is adequate to cover those costs. Is there a “minimum offering” amount? If not, then the company can spend the money as it comes in, rather than waiting for the full amount to be raised. Be cautious about “final closing dates”. Companies you don’t want to invest in may extend the closing date again and again, sometimes indefinitely.
Viability as a Business
Make sure you receive detailed information about the company. Watch for unsupportable claims about the investment’s strengths and speculation about future results. There may be fine print, in the form of explanatory notes, and it’s important that you read and understand it all before you decide to invest. What’s the business plan? How will the company grow? How will it make money, and within what period? No revenue potential means no return on your investment.
Remember that securities laws do not require companies in the private placement market to provide ongoing disclosure. However, except in certain limited circumstances, provincial and federal corporate laws require annual financial disclosure, which all investors are entitled to receive.
Beware of the promise that the shares will soon be listed on a stock exchange. Going public can be a long and expensive process and many companies that apply are not accepted to be listed on the stock exchange.
BC companies and companies from another jurisdiction using any exemption to sell securities in British Columbia must file a report of exempt distribution with the BC Securities Commission, usually within 10 days after they have raised the capital.
Go to the BCSC website before you invest to gain insight into the company by reviewing its Exempt Distribution Reports for previous capital raising. After you invest, check to make sure that the financing was carried out as the company said it would.
BCSC InvestRight’s Guide to Investing: The Private Placement Market for Retail Investors is a free guide for people considering a private placement investment. You can find it in our Investor Toolkit.