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Evaluating a Private Company

Always do your homework before deciding on an investment.

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.

Research the Management Team

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, get a second opinion, or don’t invest.

Understand the Financial Situation

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”. You may not want to invest in a company that keeps extending its “final” closing date.

Financial Statements

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 private companies 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.

Check Financing Activity

Companies using most of these exemptions to sell securities to BC investors must file an exempt distribution report with the BCSC after they have raised the capital. A company using the private issuer exemption is not required to file an exempt distribution report.

Go to bcsc.bc.ca before you invest to gain insight into the company by reviewing its Exempt Distribution Reports for previous capital raising. If a company has raised a lot of capital in the past, you may want to ask how that capital was used to advance the company’s business plan. After you invest, check to make sure that the financing was carried out as the company said it would be.

Crypto Quiz

Test Your Crypto Asset Knowledge.

This quiz is designed to introduce you to the basics of crypto assets. It is not intended to provide investment or financial advice, and should not be relied upon as a substitute for such advice.

Cryptocurrencies and blockchain are the same thing.