With the recent increase in public inquiries regarding investments in real estate securities, the Alberta Securities Commission (ASC) and the British Columbia Securities Commission (BCSC) are urging people who are considering this type of investment to do their homework before investing.
“Many of these investment opportunities are offered by private companies selling real estate securities in the exempt market,” advises ASC Executive Director, David Linder. Private companies are not required to give the same ongoing disclosure (financial statements, press releases or material change reports) as public companies do.
“If investors are considering investing in these opportunities, it’s important to understand that in the exempt market, you are largely on your own without many of the investor protection provisions that are mandated when investing in a public company,” says Linder.
The exempt market generally applies to the sale of securities to investors without a prospectus and the advice of a registered dealer. Some securities are sold under the offering memorandum (OM) exemption. OMs provide varying levels of information about the investment and, unlike prospectuses, they are not subject to a review by securities regulators.
These exemptions allow the sale of securities to investors who meet certain criteria – for example, investors who have a relationship with the company or principals and therefore have direct access to information about the investment, or investors who have sufficient financial resources to withstand a loss.
“Investors need to remember that these types of investments are often risky, and high returns are not guaranteed,” says BCSC Executive Director, Brenda Leong. “Sometimes the potential returns described are based on past history, not current market conditions. The securities are usually not listed on any stock exchange, which means your ability to resell them to liquidate your investment is extremely limited, if not impossible.”
Concludes Linder: “The most important piece of advice to give to people considering an investment described by an OM is to read the ‘risk disclosure’ in the OM. Then they should consult with a person who is not participating in the deal, such as a lawyer, banker, accountant, financial adviser or someone else with business acumen, before making any decision to participate in the investment.”
To protect yourself, you should:
- Make sure the investment is suitable for your risk tolerance and investment goals.
- Be clear about the terms and jargon used to sell the investment. If you don’t understand something, get clarification in writing.
- Seek independent advice from a lawyer or financial adviser.
- Be aware that you may not have the same legal rights as you would with an investment issued under a prospectus.
- Understand that reselling private company securities can be difficult due to resale restrictions or lack of market.
The “For Investors” section of the ASC website (www.albertasecurities.com)
gives investors the information and tools they need to “Check First” before investing. This includes a “How do I check out a real estate investment opportunity?” section with tools for conducting background checks, gauging your risk tolerance and looking up a company’s record with the ASC. The site also provides an investor alert that explains real estate investment seminars and the “red flags” of investing.
InvestRight is the BCSC’s one-stop resource for investors to educate themselves on how to make informed investment decisions. Its comprehensive website at www.InvestRight.org
provides a wide range of tools to help investors develop critical thinking skills they need to protect themselves – information such as how to do background checks, investment products, a scam meter and video clips from victims of investment fraud. Read the Investor Watch on Private Companies http://www.investright.org/alerts.aspx?id=306
The ASC is the regulatory agency responsible for administering Alberta’s securities laws.
The BCSC is the independent provincial government agency responsible for regulating trading in securities within British Columbia. Both agencies are entrusted to foster fair and efficient capital markets in their provinces and to protect investors.
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Mark Dickey Andrew Poon
Alberta Securities Commission British Columbia Securities Commission
ASC Public Inquiries BCSC Public Inquiries
Toll Free 1-877-355-4488 Toll Free 1-800-373-6393