The Changing Exempt Securities Market Climate in British Columbia: Part 3

Note: The rules and law may have changed since this article was first published. It is provided for archival purposes but you should consult with your lawyer for the current state of the law

In the last two posts, we explored two features of the regulatory changes in the British Columbia exempt securities market: Part 1 looked at the higher level of disclosure required by the new B.C. reports of exempt distribution and Part 2 discussed the proposed revocation of the Northwest Exemption by the B.C. Securities Commission (the “BCSC”).

Another interesting move by the BCSC involves assuming a “watchdog” role over exempt market financings. The BCSC has been determined to crack down on fraud and misrepresentation through several different avenues including publishing information filed with the BCSC, imposing unprecedented fines and using social media.

As we saw in Part 1, the BCSC proposed that its new Form 45-106F6 be published in full on its website. The BCSC backed down from this position, however. Only information connected to non-individual purchasers (that is, purchasers who are not people) would be published on the website and information regarding individuals would only be available to the public at the BCSC offices and only for a person’s own investment research on the issuer. The BCSC then changed its position again with the BC Instrument 45-532 Exemption for use of information by representatives of the media. This instrument allows media representatives to disclose information contained in Form NI 45-106F6 for “journalistic purposes”, which includes material having the character of news, current affairs or a documentary. Therefore, if the BCSC suspects that an issuer has committed fraud or misrepresentation, the media could access and disclose the issuer’s name and its investor, insider and promoter information.

The BCSC also recently imposed unprecedented damages awards. For example, in December of 2010, the BCSC ordered investment dealer Sung Wan (Sean) Kim to pay $47 million in penalties after defrauding Vancouver investors. He had to pay back the $15.7 million he took from investors and an “administrative penalty” of $31.4 million. The BCSC also permanently banned him from purchasing or trading securities or engaging in investor relations activities. Other large fines have been imposed by BCSC panels. In addition to damages the BCSC has also been more apt in recent years to pursue criminal prosecutions against alleged fraudsters and is making more aggressive efforts to collect on penalties.

Lastly, the BCSC is using social media in its campaign against fraudsters. Like most securities commissions across Canada it posts notices of hearings on its website, but it also posts complaints and “investor alerts” that warn BC residents not to purchase securities of certain issuers that it has flagged as suspect.

The BCSC has initiated an online anti-fraud campaign and has created its own investor education arm called InvestRight. InvestRight includes a website and investor education program which is aimed at teaching BC residents how to be informed investors, assess risk tolerance, navigate the exempt securities market and identify investment schemes. The investor education aspect of this program is clearly a positive thing. However, InvestRight’s Be Fraud Aware website and app also have whistle-blower functions. The site encourages visitors to report investment opportunities that they suspect to be schemes, provide names of all of the people involved and help avoid letting “the scammer get you twice”. It also provides a web form to report suspected activity anonymously.

While cracking down on fraud and misrepresentation is a benefit to investors and legitimate issuers alike, the pervasive use of whistle-blowing and the almost-fear-mongering tone used by InvestRight may suggest that every exempt market financing is a scam. This could negatively affect the ability of legitimate issuers to raise funds. In addition, all of the above factors taken together might mean a disgruntled investor could report a legitimate issuer as a fraudster and the claim may be made public by the BCSC and maybe even by the media. Such a claim could be a death knell for a legitimate issuer, especially with today’s technology.

In any event, the above actions taken by the BCSC, along with the topics explored in Part 1 and Part 2 show a marked change in the approach to the exempt securities market in B.C. in only a few short years. The steps taken by the BCSC all head in the same direction and forecast increased regulatory scrutiny and obstacles for any player dealing in the exempt market in that province.