What is the Private Placement Market?
A private placement is when a company issues securities privately rather than offering them to the public through a stock exchange.
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.
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.
Risks of Investing in the Private Placement Market
An investment made through the private placement market will not offer the protections available in public investment markets.
This means:
- You may not get detailed disclosure about the company and will not have the involvement of a registered investment advisor. The BCSC does not review the disclosure from these companies.
- You may not get ongoing and timely disclosure from the company, either before or after you invest.
- You may not get audited financial statements from the company before you invest.
Private placement investments may also be more difficult to sell because they do not trade on a public stock exchange.
There are additional risks to private company investments:
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.
Commonly Asked Questions About Private Placement Investments
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.