What is a private company investment?
If you invest in a business, including private companies and limited partnerships, which depends on others to make it successful, you are purchasing a security - commonly referred to as a share or stock.
Securities of private companies do not trade on a regulated stock exchange or quotation service. Investing in a friend or family member's business is one example of an investment in a private business.
What should I know about investing in private companies?
Private companies sell securities without filing a prospectus. A prospectus provides investors with key information about an investment. Without one, it is more difficult for an investor to determine the investment and business risks.
Private companies provide less disclosure to investors. Investing in private companies will not give you access to the same level of continuous disclosure (such as financial statements, press releases or material change reports) as you would get if you invested in public companies trading on a regulated stock exchange.
Private companies can sell their shares directly to investors. This means you will not get the investment advice that you would get if you purchased the securities from a registered full-service dealer or adviser.
Reselling the securities of a private company is difficult. There are resale restrictions attached to private company securities. You may not be able to cash out your investment when you want or need the money.
Understanding the investment and business risks before you invest is key to making an informed investment decision.
Private companies sell securities without filing a prospectus
Private companies selling securities generally do not have to file a prospectus with securities regulators (the British Columbia Securities Commission (BCSC) is the province's regulator).
A prospectus is a document that a company files with the BCSC before it can sell securities to the public and trade on a stock exchange. It provides investors with material facts and financial information about the investment opportunity and its underlying business.
The BCSC administers the Securities Act. Under the Act, companies or businesses offering securities to B.C. residents must provide a prospectus to the purchaser or rely on an exemption. There are a number of exemptions from filing a prospectus. Companies must meet all the conditions of an exemption to rely on it.
Some private companies, referred to by securities regulators as non-reporting issuers, offer their securities under an offering memorandum (OM). An OM must adhere to certain disclosure requirements, and the company must file it with the BCSC. An OM does not give investors the same level of disclosure as a prospectus, and BCSC staff does not review an OM before a company can use it to sell securities. Before investing, you may want to have a qualified adviser - a lawyer, an accountant or someone registered under the Act review the OM.
Private companies provide less disclosure to investors
Before you purchase shares in a private company, be aware that:
You may not have the same legal rights (such as the right to sue for misrepresentation) as a purchaser that you do under a prospectus
You may not get any mandated disclosure
You may not get any meaningful ongoing disclosure to monitor your investment
An OM does not provide the same level of information as a prospectus
Private companies selling securities under an exemption are not required to provide investors with the same level of continuous disclosure as public companies trading on a regulated stock exchange.
Get information about the investment in writing. Read the documentation, understand the risks and do your due diligence before you invest. It is illegal for anyone to tell you a company's securities will increase in value.
In addition, be careful of people who say you will get your money back. Unless it is part of the written terms of the security or you can prove you have a verbal contract, there is no obligation for anyone to refund or repurchase your investment.
Private companies can sell their shares directly to investors
Many private companies raise money by selling their shares directly to investors. Private companies selling directly to investors are not required to use an underwriter to investigate the company and its management. Registered underwriters conduct detailed investigations into the company's operations, financial position and background of management.
Potential investors should be aware that any person offering an investment in a private company must rely on an exemption from the Act, or they must be registered under the Act. Unregistered salespeople can provide you with information about an investment opportunity, but it is illegal for them to recommend the investment.
Registered salespersons have an obligation to ensure the investment is suitable for you, it meets your investment objectives, and it meets your risk profile.
Reselling the securities of a private company is difficult
If a company uses a prospectus to sell securities and obtains a listing on a stock exchange, the purchaser will immediately be able to resell the securities. Private companies sell securities under an exemption. These securities are not listed on stock exchanges, and are subject to significant to resale restrictions. It will very be difficult to resell securities of a private company.
Take these steps before investing in a private company:
Visit to the BCSC's investor website at
www.InvestRight.org. Check out our three knows - know yourself, know your adviser, know your investment.
Investigate the people selling the investment and the directors and officers of the company. You can find out if someone is registered to sell securities on the InvestRight website. You can also find out if the BCSC has sanctioned the person by searching its Disciplined Persons' List.
Conduct an Internet search for background and company information - a simple Google search may turn up important information that will help you with your decision.
Obtain as much information as you can on the investment and the company selling it. Ask for financial statements or if there is an OM. Visit the company's website, and look for media coverage about the company or its management team.
Make sure you understand the investment and business risks.
Speak to the company, your legal counsel or your financial adviser about the restrictions on resale before you buy, and ask what kind of information the company will provide you in the future.
More information about how to choose a financial adviser is available at www.InvestRight.org.
Learn to recognize the red flags of an investment scam, such as:
Guaranteed high returns - no risk! There is no such thing. The higher the potential returns, the higher the risks.
Insider tips - get in now! Scam artists use this tactic to pressure you into making a quick decision.
Offshore tax-free investment! If your money is going offshore, it will be more difficult to get in back.
Profit like the experts! Beware of exclusive opportunities that are only available to the rich.
Great investment opportunity - your friends can't be wrong! This scam preys on your trust of family, friends or community leaders.
If you have doubts, do not invest. If you feel pressured or are suspicious about an investment, stay away from it and report it.
You can report a potential scam by calling our inquiries group at the numbers listed below.You can also use the InvestRight website to report a scam anonymously.
If you have questions, contact the BCSC inquiries group:
Telephone: 604-899-6854 or 1-800-373-6393 (toll free in B.C. & Alberta)
E-mail: inquiries@bcsc.bc.ca
Hours: 8:00 a.m. to 4:30 p.m., Monday to Friday.
The BCSC is the independent provincial government agency responsible for regulating trading in securities within the province. The BCSC sets the rules for securities trading in B.C., makes sure people comply with those rules, and takes enforcement action when necessary. The BCSC also educates investors to help them protect themselves from investment fraud and unsuitable investments.
