OSC warning against RRSP scams

(November 19 – 11:15 ET) – The
Ontario Securities Commission warns
investors, eager to access money
tied up in registered plans such as
RRSPs or RRIFs to be wary of often
illegal investment schemes.

Potential investors should
exercise extreme caution when
considering whether to cash in
money held in a registered plan in
order to pay for shares in a
company that offers to turn around
and loan – or refund – some of the
money back to the investor, says
the OSC. Such transactions may
breach the Ontario Securities Act,
could lead to financial harm as
well as unexpected tax liabilities
to the investor.

Such transactions involve a
number of steps, says the OSC. The
investor will be required to use
funds held in a registered plan to
buy shares in a company. The
company will accept full payment
for the shares and then refund part
of the share purchase price back
to the investor. Or the company
will accept full payment for its
shares and then loan an amount of
money to the investor equal to
only a portion of the share
purchase price paid by the
investor.

In any event, the result is that
the company will retain a
significant amount of the
investor’s money either in the
form of a transaction fee or in
the form of a down payment on the
share purchase price. The investor
will be obliged to pay back the
loan, or satisfy the outstanding
balance owing on the share
purchase, depending on the
circumstances.

Such RSP related scams are
contrary to the public interest
and harmful to investors for the
following reasons:

• If the shares that are sold to
  the investor are a direct issuance
  from the treasury of the company,
  or if the sale of the shares is a
  secondary market trade which is
  deemed to be a distribution
  pursuant to the Act, then the
  sale or trade will be an illegal
  distribution if a prospectus has
  not been filed and a receipt
  obtained as required by the Act.


• Advising and trading in
  securities is an activity which
  is illegal unless performed by a
  company or person who is
  registered under the regulations
  under the Act, subject to certain
  limited exceptions. If the person
  or company selling the shares is
  not registered and does not benefit
  by any exemptions under the Act,
  the person or company has avoided
  regulatory scrutiny which
  otherwise exists to protect the
  public interest.


• In the event that the shares
  are not freely tradeable shares,
  the shares will be illiquid in the
  hands of the investor which will
  directly impact on the inherent
  value of the shares.


• Although the shares to be
  purchased by the investor are
  likely touted by the lender as
  having good or great growth
  potential, the shares are more
  likely to be shares in the capital
  stock of a company which may have a
  short and weak earnings history,
  few if any assets, and an uncertain
  potential for growth. For many
  investors who are investing as a
  means to further a retirement
  plan, such speculative shares are
  wholly unsuitable as an investment.
  


• In the event that the company
  becomes bankrupt before the
  investor has satisfied his or her
  debt, the company’s creditors will
  likely call upon the investor to
  repay such debt even though the
  shares of the company are
  worthless.