A private placement is when a company issues securities privately rather than offering them publicly through a stock exchange.
Both private and public companies use the private placement market to raise money from investors.
This market is also called the exempt market because companies who use it do so under exemptions from the requirement under securities law to file a prospectus when issuing securities.
The prospectus is a document prepared by the company issuing securities and its lawyer. It describes, in detail, the company, its business, how it intends to use your investment, the company’s financial position, and all relevant risks of the investment.
The lawyer prepares the prospectus based on information provided by the company and its advisors. For example:
- Accountants provide audit reports, which an issuer attaches to its financial statements.
- Underwriters or agents advise on the structuring of the offering as well as sell shares under the prospectus. They are also required to make certain inquiries about the company, a process known as due diligence, and sign the prospectus.
- For mining companies engineers or geologists prepare a technical report, which assesses the company’s mineral properties.
The prospectus must be filed and reviewed by a securities regulator, like the BCSC, before it’s provided to you.
Securities offered through private placement investments may be one of many investment types, including shares, bonds, investment funds, limited partnership or trust units, and interests in land or mortgages.
An investment made through the private placement market will not offer the protections available through those offered in the public markets. This means:
- You may not get detailed disclosure about the company and will not have the involvement of a registered investment advisor. The disclosure is not reviewed by the BCSC.
- You may not get audited financial statements from the company before you invest.
- You may not get ongoing and timely disclosure from the company, either before or after you invest.
- If you purchase the investment through a private placement, those securities do not trade on the stock exchange and it may be more difficult to sell them than the securities of a public company traded on a stock exchange.
Without a prospectus, you must conduct your own due diligence and gather important information about the company to make an informed decision.
You might be wondering: can anyone invest in this market?
The short answer is no. Securities laws require companies in the private placement market to ensure their investors are eligible to purchase their shares using the correct exemption.
Make sure you understand the risks before committing to an investment in the private placement market.
And please, ask questions if you’re unsure. Like my mother will.
If you have questions or concerns about an investment, contact the BC Securities Commission.