When a company wants to raise money from the public by selling securities, it must submit a prospectus to regulators unless:
- It is selling stock to a small number of accredited investors. In Ontario, being an accredited investor means you have, before taxes, more than $1,000,000 net in financial assets such as cash and securities. Those assets cannot include your home. You can also qualify if you have had a net annual personal income, before taxes, of over $200,000 (or, combined with a spouse, $300,000) for each of the past two years and expect to do so again this year.
- The company is seeking investment from only private sources (e.g., a spouse or close family member, or a close personal friend of the company founder), to a maximum total of 50 such investors under the private issuer exemption.
- Investors are investing at least $150,000 in cash at the time of a trade.
Don't be fooled!
Some salespeople have tried to persuade investors who do not meet the criteria to invest in these opportunities anyway. For example, they may:
- Ask you to lie about being an accredited investor on a subscription form.
- Suggest it's unfair if only wealthy people have a chance at this type of investment.
- Hint that the company will soon list on a stock exchange, with a share price much higher than the current price.
Be careful! These types of tactics, taken together, are often associated with boiler room scams. Boiler room scams artificially drive the price of stock up. After some time, the price often drops and you could lose your money.
Also, making a claim about future share prices or a stock exchange listing is illegal. Don't deal with a salesperson who asks you to lie. You could have big legal problems later.
Tip: If you want to invest in new companies, one option is a Labour-Sponsored Investment Fund (LSIF). Both Indigo and Research in Motion (the makers of the Blackberry) have received funding from LSIFs and have made money for investors who bought their stock early on. Most people, though, don't put a lot of their savings into LSIFs. The risks are too high.
Remember: Be extremely careful choosing stocks with no prospectus
Many small businesses fail within a few years. There are also restrictions on your ability to sell your investment. You should not invest in these situations unless you are truly prepared to lose your entire investment.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.