BCSC releases report on B.C.'s private placement market

VANCOUVER, June 20, 2014 /CNW/ - The British Columbia Securities Commission has released a report on its Private Placement Review Program (PPRP), which monitors private companies that raise money in the private placement market. The PPRP has been active since 2010, prior to which there was no formal compliance review program of its kind in Canada.

The report indicates that, for the past several years, more money has been raised in B.C.'s private placement market than in the public markets – from 2010 to 2013, companies reported that they raised $45 billion in BC's private placement market versus $25 billion in the public market. The amount raised in BC's private placement market over this period rises to $79 billion when you include companies from outside of BC.

"The private placement market is critically important to the economic well-being of our province, and the BCSC has demonstrated leadership in regulating this market," said Brenda Leong, Chair and CEO of the BCSC. "In overseeing this market, we want to ensure that companies are playing by the rules, and that investors understand the risks and receive the information they need to make informed investment decisions. If we find evidence of misconduct, we will investigate and take appropriate enforcement action."

The PPRP monitors private placements, reviews selected companies, enforces the rules, and educates market participants. Some of the private placement securities sold to retail investors are high-risk and illiquid, and can result in significant losses. 

Since 2010, 2,400 private companies filed exempt distribution reports with the BCSC. After performing a preliminary analysis of all of those reports, staff completed 284 in-depth reviews. Actions taken include:

• 15 files were referred to Enforcement, and 17 files were referred to other divisions in the BCSC and other securities regulators. Enforcement opened several cases, with one resulting in a BCSC hearing and findings of fraud, illegal distributions and breach of a cease trade order (CTO), and another ending in a settlement where the issuer agreed to pay $10,000 to the BCSC. Several cases are ongoing.

• 42 CTOs were issued. Of these, 21 have since been revoked because the deficiencies identified were addressed. The 21 companies that remain cease-traded have shown no progress in having the cease trade order revoked, were likely higher risk, and are no longer raising money from investors.

• Eight companies completed rescission offers to their investors.

• In April 2012, the BCSC participated with regulators in other Canadian jurisdictions to create and publish guidance around preparing and filing an offering memorandum, and preparing and filing exempt distribution reports.

Additionally, the PPRP has led the BCSC to develop two key initiatives to enhance the surveillance of B.C.'s private placement market, and help companies to stay compliant with capital raising rules:

• In January 2014, the BCSC launched a private company risk model that supports staff's surveillance efforts.  The risk model uses fielded data from all exempt distribution reports since January 2011 together with data from a variety of internal and external databases and analyzes each new exempt distribution report using a set of 38 risk indicators to identify high-risk companies. In the first three months, 50 cases were opened on unregistered finders, as well as five enforcement cases related to issuers.

• In November 2013, BCSC staff launched the Capital Raising for Small Business program. The goal of this program is to reach entrepreneurs who are in the early stages of building a business, and who could unintentionally run afoul of capital raising rules. Staff developed a guide, made a number of presentations to small business groups, and produced a webinar and a video. During the year ended March 31, 2014, staff reached over 100 small businesses live, and thousands online.

Overall, the PPRP revealed that most companies intend to comply with the rules.  However, staff found that companies have a poor understanding of the exemptions, do not keep adequate records of their private placements, and use professional advisors who do not have specialized knowledge of the securities industry and the private placement market.

The BCSC's monitoring and regulation of the private placement market through the PPRP, together with its continuing education and outreach efforts, should help to raise the level of understanding and compliance in the private placement market.

About the British Columbia Securities Commission (www.bcsc.bc.ca)

The British Columbia Securities Commission is the independent provincial government agency responsible for regulating capital markets in British Columbia through the administration of the Securities Act. Our mission is to protect and promote the public interest by fostering:

• A securities market that is fair and warrants public confidence
• A dynamic and competitive securities industry that provides investment opportunities and access to capital

Learn how to protect yourself and become a more informed investor at www.investright.org

SOURCE: British Columbia Securities Commission

Media Contact: Richard Gilhooley, Media Relations, 604-899-6713; Public inquiries: 604-899-6854 or 1-800-373-6393 (toll free)