Private company investing
Private company exemptions
Private companies 
can sell their securities in what is called the exempt market . It is called the exempt market because the companies rely on exemptions from the requirement to file a prospectus with the regulator and to sell the securities through a registrant . These exemptions allow company owners and directors to raise money at a lower cost than if they had to comply with registration and prospectus obligations. Companies do not have to apply to the regulator to use any of these exemptions, but must ensure that they meet all the conditions of the exemption.
Find out if the person selling you the securities is receiving a commission or other benefit for recruiting investors. Be wary of any pressure to buy, especially if you are encouraged to invite friends and family to invest as well.
Eligibility
If approached to invest in a private company, it’s important to ask what exemption the company is using to sell the securities. Ask why they are offering you this investment. Some exemptions are only available to potential investors who already have a pre-existing relationship with the company or its management (e.g., family or business associates) or who are wealthy enough to absorb financial loss (e.g. accredited investors). See discussion of specific exemptions below.
The exempt market is an important source of venture capital financing in British Columbia. Most private companies use one of the following four exemptions to offer shares to investors:
Family, friends, and business associates: a company may sell its securities without an Offering Memorandum (OM) to you, if you are a close relative, friend, or business associate of one of the company principals. You can only be a close personal friend if you know one of the principals well enough and for a long enough period of time to be able to assess their capabilities and trustworthiness. You can only be a close business associate if you have had sufficient prior business dealings with the principal to make the same assessment.
Offering memorandum : a company may sell its securities to you as long as you receive an OM. An OM is a legal document that is shorter and less detailed than a prospectus. It must contain a detailed explanation of the company’s business, audited annual financial statements, risks of the investment, and how the company plans to use the money raised.
Accredited investor : a company can sell its securities to you, as an individual accredited investor, without an OM or other disclosure, if you have:
- At least $1 million in financial assets (cash and marketable securities), or
- A net income before taxes of more than $200,000 consistently over the past three years ($300,000 when combined with your spouse’s net income), or
- Net assets of at least $5 million
$150,000 investment: a company may sell its securities to you without an OM or other disclosure, if you invest $150,000 and pay cash at the time of the trade. You must invest the whole amount and can not pool your investment with others to reach the $150,000 level.
Research
Before deciding to invest in a private company, find out how the company makes its money, and if it is profitable or potentially profitable.
Request the names of directors and senior officers. Check to see if they have experience in this particular type of business. Find out if directors and senior officers are also investing in the company. One way to find this information is to review the exempt distribution report the company files when it makes a private placement. Purchaser information is also available to the public at the BCSC, except for contact and financial information. Furthermore, ask if they have ever declared bankruptcy.
If the company is reluctant to give you any of this information, think twice before investing. If the company refuses to provide any documentation, report it to BCSC Inquiries.
Check the CSA Disciplined Persons List to see if the individuals involved have ever been disciplined by Canadian securities regulators, the Mutual Fund Dealers Association (MFDA), or the Investment Industry Regulatory Organization of Canada IIROC).
Check to see:
- Where the company says it is incorporated
- If you can verify that it is incorporated in that jurisdiction
- If you can verify that it is in good standing with the corporator administrator in the jurisdiction in which it is incorporated
If it is a BC-incorporated company, it will be subject to the Business Corporations Act and must be registered at the BC Corporate Registry. You can search for any corporation registered in BC for under $20 and you can verify if the company is in good standing for $50.
Before you decide to invest, ask for a second opinion from someone qualified to assess a private company (and not connected with the company in question), such as a lawyer, accountant, investment advisor, or business associate.
For more information, see InvestRight's Private companies page and our Worksheet for investing in private companies 
Future Expectations
Securities sold in the exempt market are generally subject to resale restrictions that require shareholders to hold on to their shares for a minimum amount of time. Find out about the hold period. It could be indefinite. Find out if there are any other conditions for resale.
Be careful of companies that say they will soon be listed on a stock exchange. Going public is a long and expensive process. Many that apply are not accepted, and even if they are, no company can predict the future value of its shares. Some companies may make false claims that they plan to go public; this is illegal.
Ask how the company will keep you informed. Make sure they are prepared to send you annual financial statements and interim financial reports, newsletters, email updates, and shareholder meeting notices. Document what they commit to do. Even if a company promises to send regular updates, and even if you convince the company to make such updates a condition of your share purchase, it may be difficult for you to enforce these conditions against a company if it does not meet its promises about updating you.