High-Risk Investments

Start-up or early-stage businesses can raise money for their operations by selling securities (such as bonds and common shares) to investors through a start-up crowdfunding campaign. If you contribute, you are an investor and hope to earn interest or participate in future profits of that business.

Can Anyone Invest in a Start-Up Crowdfunding Campaign?

Yes, anyone can invest in a start-up crowdfunding campaign. Canadian securities regulators have adopted a number of exemptions to allow companies to sell securities to investors through crowdfunding. It is up to you to protect your own interests by knowing what exemption the company is using to sell you its securities.

How Much Can You Invest?

The maximum a business can raise from each investor is $2,500.

In certain circumstances, investors can invest up to $10,000 if a registered dealer has determined that the investment is suitable for that investor.

Where Can You Find Start-Up Crowdfunding Offers?

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. There are two types of funding portals:

• Funding portals that are relying on an exemption from the dealer registration exemption must not provide you with advice about your investment. In this case, you will have to assess the suitability of the investment on your own.
• Funding portals that are operated by registered dealers are obligated to determine if the investment is suitable for your situation.

What Risks do These Types of Offers Have?

Pay close attention to the risk warnings. Before you invest, the funding portal will ask you to confirm that you have read and understood the risk warnings and the offering document. These investments are risky and you could lose your entire investment.

Can You Sell it Easily?

Likely no. In many cases, you will have to hold your investment indefinitely.

What are the Expected Types of Returns?

Returns are always uncertain and depend on many factors beyond the company’s and your control. The majority of start-up and early-stage companies never go public. If the company you invest in never goes public, then you may never be able to sell your shares. That’s what makes it so risky and why you should only invest in a private company using crowdfunding if you can afford to lose your whole investment.

For more detailed information, review the Start-up Crowdfunding FAQs on the Canadian Securities Administrators’ (CSA) website.

Crypto assets include cryptocurrencies, blockchain companies, cryptocurrency funds, and initial coin offerings (ICOs). In recent years, certain crypto assets have generated a lot of interest from investors and the financial media. These products are considered high-risk because of their speculative nature.

Many people use the term “cryptocurrencies” when referring to crypto assets. However, while many crypto assets are digital mediums of exchange (and therefore act similar to currencies), not everything that is referred to as a cryptocurrency is a digital medium of exchange, but could be a crypto asset with other properties.

Not all crypto assets are securities. The BCSC only regulates crypto assets that are considered securities under B.C. laws.

What are the Risks?

Crypto assets have a number of common and specific risks, depending on the asset.

Generally, there are liquidity, security, and volatility risks. Some crypto assets have no secondary market, which may make it hard to sell your holdings or track prices.

Crypto asset exchanges and trading platforms are often unregulated. Key investor protections may be missing from these trading platforms and exchanges, including secure handling of client funds, safekeeping of assets, protection of personal information, pre-trade disclosures, measures against market manipulations, and other harmful practices.

Changes in the crypto asset space are constant, and prices may change with little warning or news disclosed to investors.

The digital nature of this type of investment presents an international scope, which can challenge investors to get enough information, communicate with the issuer, or seek help from a securities regulator.

No crypto asset investment is guaranteed. You could lose all your money.

How Are Crypto Assets Bought and Sold?

There are many ways that you can buy, sell, and store crypto assets. For instance, you can buy crypto assets directly (e.g. in a peer-to-peer or P2P manner), and you can hold them in digital wallets that you maintain sole access to. Digital wallets are encrypted with a password, and that may lead to a greater sense of security for investors; however, there have been instances where people have forgotten their passwords or deleted their wallets, and locked themselves out of accessing their invested dollars. As well, depending on how secure your wallet or what your password is, there is the possibility that either can be hacked, and the hacker can gain access to the crypto assets stored within.

Can You Sell Them Easily?

Not all crypto assets are liquid, meaning it may be difficult to sell your holdings for cash in a short amount of time. There may also be limits, holds, and transaction fees that are hard to know about before selling a crypto asset.

What are the Costs?

Some crypto assets incur trading fees and other charges. There is no standard for the level of fees charged to trade or own a crypto asset.

What are the Expected Types of Returns?

The speculative and volatile nature of crypto assets can cause returns to vary significantly. Crypto assets have the potential to lose large amounts of value in ways that may seem unpredictable or unlike other investments.

Generally, investors earn a return through selling the crypto asset for more than the purchase price. Some crypto assets, like coins or cryptocurrency funds, may receive dividends or other distributions depending on the terms.

During Your Review, Ask These Questions

• Am I making a rash or emotional decision without necessary facts?
• Where is the business or individual issuing the crypto asset located?
• Do I understand what the crypto asset does or how it is structured?
• Am I prepared to lose all or most of my invested capital?
• Are there any signs the crypto asset may be a scam?

Consider speaking with a registered investment advisor or other independent third party before deciding to invest in a crypto asset.

Foreign exchange or forex is traded around the world in a decentralized market based on simultaneously buying one currency and selling another. It is mostly traded in the over-the-counter market where brokers and dealers negotiate directly with each other to determine the relative values of different currencies.

There are a variety of ways to trade forex:

• Spot forex involves cash settlements by delivery of the purchased currency on the spot at current rather than future prices.
• Currency futures involve contracts for a specific currency at a set price to be bought or sold at a future date.
• Currency options that provide a right to purchase or sell currency at an agreed upon price.
• Contracts that reference an exchange rate between two currencies where there is no intention to actually deliver the referenced currency. These contracts are often traded on the Internet.

Currently, trades in spot forex contracts are not regulated by the BCSC but trades in other types of forex transactions are subject to regulation. For more information about the difference between spot market contracts and regulated contracts see BC Instrument 91-502 – Short Term Foreign Exchange Transactions. Forex is complex, volatile, and highly risky. Political or economic events and market psychology can affect currency prices.

Can Anyone Invest in This Market?

Yes, but before opening a trading account with any individual or firm to trade forex, other than spot forex where you receive delivery of the agreed upon currency, you should check their registration. Generally, when a BC resident invests in forex securities, the firm or individual the investor deals with must be registered. If they are not registered to trade securities in BC, you should contact the BCSC.

What Risks Does it Have?

It’s important to understand that forex trading is a zero-sum transaction where one party profits and the other loses. Even knowledgeable and experienced traders can suffer significant losses when market conditions change.

There is no central exchange or clearing house for forex transactions. This means that there is no single exchange rate (price) but many different rates depending on the bank or market maker involved in the trading.

Retail forex marketing can be aggressive and aims to make individual investors feel they can be expert forex traders. Seminars and software programs cannot replace the need for research and expert knowledge in forex trading.

Many firms that offer trading services for retail forex contracts, other than spot market contracts, are not appropriately registered as a securities dealers. Take time to understand if the firm offering you trading services is registered or exempted from registration in BC. Unregistered firms are not subject to any of the investor protection requirements that apply to registered dealers.

Fraudsters use forex trading as a means of attracting investors to their scams. Read about forex scams.

Can You Sell it Easily?

Many types of forex contracts, including currency futures and currency options, cannot be sold and must be settled with the firm that offered you trading services in the contract.

What are the Costs?

Firms offering forex trading often charge a commission and/or a mark-up in addition to the market price. In addition these firms frequently make a spread which is the difference in the price they pay for forex and the price at which they buy forex. Frequently, these charges, particularly mark-ups and spreads, are not disclosed and can change over time.

What are the Expected Types of Returns?

Forex trading results in profits when you sell at a higher price than what you paid, taking into account mark-ups and spreads.

While a trade itself may be profitable, investors can still lose money because of overnight fees, referral fees, and other transaction costs.

A hedge fund is an investment fund that uses advanced investment strategies, and invests in just about anything.

Hedge funds don’t generally use the traditional ‘buy, hold, sell’ strategy, but employ alternative strategies like short selling, leveraging, or trading in derivatives on an exchange or in the over-the-counter market.

Hedge funds are usually structured as open mutual fund trusts or limited partnerships, and are issued by way of a private placement using a prospectus exemption, sometimes with an offering memorandum, which offers less investor information than a prospectus. Hedge funds typically require higher minimum investments than regular funds.

The are three main categories of hedge funds:

• Stand-alone hedge funds that depend on the investment decisions of a single fund manager.
• Fund of hedge funds that invests in units of other hedge funds with multiple managers.
• Principal-protected products, which are funds or other financial instruments that allow investors to participate in the returns of the underlying hedge fund, but with a guaranteed return of their original investment at maturity.

What Risks do They Have?

Investing in hedge funds is not for everyone. Unlike mutual funds, most hedge funds are not subject to restrictions on the assets that they hold or the leverage that they use. The level of risk depends on the fund, the types of investments used, and the fund manager’s skill.

The following factors contribute to hedge fund risk:

• Lack of transparency: private entities have few public disclosure requirements.
• Lack of regulation: hedge funds are subject to very little oversight by regulators.
• Risky underlying investments: hedge funds can invest in risky products, such as derivatives, including options, whose value is volatile
• Leveraging: hedge funds often borrow money or trade on margin.
• Short selling: short sellers may misjudge the price of the assets and incur a loss rather than profit.

Can You Sell Them Easily?

Every hedge fund is different. Some hedge funds have liquidity restrictions that may not allow you to sell whenever you want. As a rule, hedge funds are more difficult to sell than traditional mutual funds. Some funds have a ‘lock up’ period, a set period of time when investors cannot sell or redeem shares.

What are the Costs?

Fees are tied primarily to performance. Hedge fund managers typically charge a performance (or incentive) fee in addition to the management fee. Some funds also charge a redemption fee if you withdraw money from the fund.

Read the product disclosure statement to make sure you understand the fees and compensation structures, and to make sure that you are getting value for the fees you are paying.

What are the Expected Types of Returns?

Most hedge funds distribute their profits each year. This is normally reinvested in fund units automatically. In addition to any distribution of profits you may receive, you will make money if you sell your fund for more than you paid.

A leveraged Exchange Traded Fund (ETF) is designed to return a multiple of the daily performance of the underlying index. An inverse ETF aims to achieve the opposite of the daily performance of the underlying benchmark.

Portfolio advisors manage inverse and leveraged ETFs to speculate or hedge other positions they hold. Unlike regular ETFs, inverse or leveraged ETFs do not hold actual stocks. They hold derivatives that are intended to mimic the performance of the indices or other benchmarks that they track. These ETFs often implement complex strategies that result in unexpected outcomes. Prices of these funds are volatile and go up and down over time, so investors may lose money on both of these products if they hold them for any length of time.

What Risks do Inverse and Leveraged ETFs Have?

There are a number of risks related to these types of ETFs:

• Leverage risk: using leverage can cause magnified losses in adverse markets.
• Price volatility risk: prices fluctuate more widely than prices of conventional ETFs because of the use of leverage and daily re-balancing and compounding.
• Counterparty risk: use of derivatives exposes the investor to risk if the other party defaults.
• Transparency risk: inverse and leveraged ETFs are not very transparent because of the use of derivatives and complex strategies.
• Fee risk: these ETFs have much higher management expense ratios (MER) because the fund managers actively manage a variety of investments, including derivatives. MERs have an impact on returns over time.

Investors of leveraged and inverse ETFs should monitor their investment in the ETF daily.

Can You Sell Them Easily?

Yes. You can sell ETFs at current market prices at any time during the trading day on a stock exchange.

What are the Costs?

There is a transaction cost for each trade to buy or sell.

The MER of these ETFs are considerably higher than the MERs of most ETFs. The higher the MER, the more the fund will have to earn in order for you to make money.

What are the Expected Types of Returns?

Inverse and leveraged ETFs can pay large returns or can result in significant losses when the market moves up or down. Furthermore, the daily rebalancing nature of leveraged and inverse ETFs makes these products unsuitable to hold for more than 1-2 days.

To learn more about indexed ETFs, visit the Exchange-Traded Funds section.

Private companies use the private placement market as a way for companies to raise money for their operations from investors by issuing securities.

Unlike investing in public companies, private companies can use exemptions to sell their securities directly to investors without a prospectus or continuous disclosure, and therefore without the added layers of regulatory oversight and protection that the regulation of public companies provides to investors.

Can Anyone Invest in Private Company Investments?

Securities laws require private companies to ensure that investors are eligible to purchase their securities using an available exemption. It’s up to you to protect your own interests by knowing what exemption the company is using to sell you its securities.

What are the Risks?

Company risk: The failure rate of start-up businesses is very high compared to established businesses with a history of successful operations. Whatever the cause, a failed business is unlikely to return your capital, let alone give you a return.

Sales person risk: People in the business of selling private company securities must be registered. However, a person selling you a private company investment may be eligible for an exemption from the registration requirement and therefore might not be registered.

Always ask someone offering you an investment if they are registered. If the answer is no, then be certain they are allowed to sell you an investment by calling the BCSC inquiries line.

Can You Sell Them Easily?

No. Securities sold under an exemption are usually subject to strict resale rules. If you invest in private companies, then these restrictions mean you may not be able to get your money out when you need or want to.

The majority of private companies never go public. If the company you invest in never goes public, then you may never be able to sell your shares.

What are the Costs?

Private company investments often include high commissions for recruiting investors. Always ask what the sales person will receive if you invest. Remember to also factor in indirect costs such as administrative and legal fees, and the cost of the second opinion you should seek from a professional unconnected with the investment.

What are the Expected Types of Returns?

Returns in this market are always uncertain and depend on many factors beyond the company’s and your control. That’s what makes it so risky and why you should only invest in it if you can afford to lose your whole investment.

If you invest in one of the rare companies that is taken over by a third party or goes public, then you could earn capital gains or losses, depending on the price you paid for your shares.

Many securities sold in this market promise to provide tax relief. If you are considering such a product, it’s a good idea to get independent tax advice.

For more information:

Visit the Private Placement Market page.

A promissory note, also known as a corporate note, is an unconditional promise made by a borrower to pay interest and repay borrowed money by a specific date or set of dates.

The date set for full repayment is known as the maturity date.

What Risks do They Have?

Promissory notes are not risk-free and are only as good as the companies or projects they are financing. You should research the company or project to determine whether it’s viable. An inexperienced management team, competition, or unfavourable market conditions are some of the risks associated with promissory notes.

These risks may result in the company not having enough money to repay your promissory note. If this occurs, then you may lose some, or all, of the money you invested.

Always check to see if the person selling you a promissory note is registered to sell securities or if they qualify for an exemption.

Promissory note investment schemes are common, so you should do your research and get advice from an independent investment advisor, accountant, or legal professional before purchasing this type of investment.

Read more about promissory note schemes here.

Can You Sell it Easily?

Legitimate promissory notes describe the terms, conditions, the timing of payments, and whether you can sell the promissory note. Generally, companies that sell you a promissory note will not buy back the note before the maturity date. Promissory notes do not trade on an exchange.

Speak to your financial advisor about any options that may be available for selling your promissory notes before their maturity date.

What are the Costs?

Sales people earn commissions for selling promissory notes.

What are the Expected Types of Returns?

Assuming the company is able to pay, the promised rate of return for a promissory note is related to the risk associated with the company. The higher the risk of the company not paying, the higher the promised interest rate on the promissory note.

Exempt real estate-based investments are sold to investors in the private placement market without a prospectus, without the BCSC’s review or approval, and usually, without the advice of a registered dealer.

Examples of real estate-based securities include investments in:

• raw land held for resale to a developer in the future (sometimes referred to as “Land Banking”).
• a real estate development project.
• a pool of commercial or residential rental properties (known as a Real Estate Investment Trust, or REIT).
• an interest in a pool of properties.
• a pool of mortgages, such as a mortgage investment company (MIC).
• a single mortgage (syndicated mortgage).

What Risks do They Have?

Real estate securities sold in the exempt market have higher levels of risk than products such as GICs that may offer a lower rate of return.

You may not have a direct interest in the underlying real estate assets. As a result, you may not be able to take legal steps to seize and sell the assets or foreclose on the borrowers.

Investments in real estate-based securities are not guaranteed. You may lose all your money.

Some companies offer a Dividend Reinvestment Plan (DRIP), under which you will receive a higher return if you agree to reinvest the income you earn into additional real estate-based securities. However, if you participate in a DRIP, you may not discover a company has financial problems until you try to cash in your investment (particularly if you do not receive audited annual financial statements from the company).

Finally, because exempt real estate-based securities sold by non-public companies are not publicly traded, the price you pay for your securities may not bear any relationship to the value of the underlying real estate-based assets.

There are risks common to any exempt real estate-based security, such as the ones noted above. This chart shows specific risks of a number of types of exempt real estate investments.

Can You Sell Easily?

No. Exempt real estate-based securities are not listed on a stock exchange and almost all have resale restrictions. This means you cannot sell your securities once you purchase them (unless a prospectus is filed). It may take you a long time to recover your money.

While many companies offer a redemption feature, there are often significant restrictions on redemption. If you need cash in a hurry, the company may not have sufficient cash to redeem your securities because the money is usually tied up in non-liquid assets, such as mortgages and development projects.

What are the Costs?

Administrative costs or management fees, which should be disclosed in the purchase agreement, and legal costs will reduce your returns.

What are the Expected Type of Returns?

If the real estate investment is based on mortgages or rental properties, you can expect to receive payments, similar to dividends, as long as the mortgage payments or rents are actually paid.

You can also expect to receive capital gains or capital losses when the property is sold or when you sell your investment – capital gains if the property value has increased, and capital losses if the property value has decreased.

During Your Review, Ask These Questions:

• Can I get my money back if I need it in an emergency?
• Can I see the redemption history for the past two years?
• How much money does the company owe to people seeking to redeem?
• Has the company diversified its investment portfolio in terms of types of loans, types of properties, and location of properties?
• Can I see the company’s mortgage or property portfolio schedule?
• For development projects or mortgages on those sorts of projects, can I see the valuation reports, including the supporting assumptions?