With the recent increase in public inquiries regarding investments in real estate securities, the Alberta Securities Commission (ASC) and the British Columbia Securities Commission (BCSC) are urging people who are considering this type of investment to do their homework before investing.

“Many of these investment opportunities are offered by private companies selling real estate securities in the exempt market,” advises David Linder, ASC executive director. Private companies are not required to give the same ongoing disclosure (financial statements, press releases or material change reports) as public companies do.

“If investors are considering investing in these opportunities, it’s important to understand that in the exempt market, you are largely on your own without many of the investor protection provisions that are mandated when investing in a public company,” says Linder.

The exempt market generally applies to the sale of securities to investors without a prospectus and the advice of a registered dealer. Some securities are sold under the offering memorandum (OM) exemption. OMs provide varying levels of information about the investment and, unlike prospectuses, they are not subject to a review by securities regulators.

These exemptions allow the sale of securities to investors who meet certain criteria — for example, investors who have a relationship with the company or principals and therefore have direct access to information about the investment, or investors who have sufficient financial resources to withstand a loss.

“Investors need to remember that these types of investments are often risky, and high returns are not guaranteed,” says Brenda Leong, BCSC executive director. “Sometimes the potential returns described are based on past history, not current market conditions. The securities are usually not listed on any stock exchange, which means your ability to resell them to liquidate your investment is extremely limited, if not impossible.”

Concludes Linder: “The most important piece of advice to give to people considering an investment described by an OM is to read the ‘risk disclosure’ in the OM. Then they should consult with a person who is not participating in the deal, such as a lawyer, banker, accountant, financial adviser or someone else with business acumen, before making any decision to participate in the investment.”

IE