Hundreds of British Columbia investors who invested in a highly speculative cranberry farm project a decade ago are waiting for a financial harvest that may never come.

Typical of those investors is Sarah Cross. In the fall of 1997, she was invited to a dinner at the Sutton Place Hotel in Vancouver by Jill Bock, a broker with Vantage Securities Inc., a now-defunct brokerage firm that sold an array of high-risk offerings that were exempt from registration and prospectus requirements.

Guests were served cranberry sorbet, Cabernet cranberry coulis and cranberry crème brûlée. But the main offering was Opus Cranberries Limited Partnership, which proposed to develop and operate a cranberry farm on leased land on Barnston Island near Vancouver.

The farm would be managed by National Cranberries Inc., whose directors included promoters Stephen McCoach and Hugh Cartwright, and two associates, Joe Rogers, who served as president, and Maurice Levesque, who served as chairman.

Guests were invited to invest $35,000 in the partnership. They would have to pay half from their own pockets and could borrow the other half from a related company, Opus Cranberries Financial Corp.

Investors would use the loan proceeds to buy a bond issued by the related company, which in turn would invest the proceeds in the farm. The loan would come due in 10 years. Investors were told the farm would generate sufficient cash flow to redeem the bond and repay the loan. Meanwhile, they could utilize RRSP deductions and write off farming losses. Promotional brochures described it as a “sweet investment.”

Cross bought the sales pitch, but the investment hasn’t worked out as advertised. Technical problems have delayed production, and cranberry prices have fallen so dramatically they are still well below the levels used to calculate cash flow projections. To reduce costs, the landowner agreed to waive lease payments in return for 40% of future profits and losses, which effectively dealt away a large chunk of the farm’s future.

Meanwhile, Vantage Securities dissolved amid controversy and Bock was hauled before the B.C. Securities Commission for selling unsuitable investments, including the cranberry deal, to clients. A hearing has been held and a decision is pending.

On Nov. 30, 2006, the promissory note and the bond came due. National Cranberries’ Rogers told investors they must pay the promissory note before Opus Cranberries Financial would redeem the bond. Investors don’t like this order of business; they want the bond redeemed first so they can use the proceeds to pay off the loan.

Rogers has also told investors the bond will not be redeemed in cash. Rather, it will be redeemed with a combination of cash and Class C non-voting shares. Exactly how much cash investors will get, or when, has not been specified.

In addition, Rogers has informed shareholders that about 30% of the principal amount will be retained to buy the cranberry farm land, which is reportedly available for purchase at a favourable price.

However, in an interview this past December, he insisted that, if investors ask, they can get all their principal back in cash. Rogers says he didn’t advise investors about this option in writing because he wants to “encourage” people to participate in the land purchase.

“I agree our correspondence is not the clearest,” he admits, adding that any investor who wasn’t aware of this latter option could retroactively avail themselves of it. However, several investors say they have asked Cartwright and Rogers for a full return of their bond principal, but haven’t yet received any response.

At this stage, most investors appear to be paying up, perhaps because they aren’t aware they have options. Some are walking away, hoping the company will not sue them for defaulting on their promissory note. Cross is so confused that she initially sent a cheque to pay off her loan, then issued a stop payment on it.

This sort of conundrum is not unusual in such offerings. Farming is risky business, especially when starting from scratch. The corporate structures are typically very complex. Overhead, which usually includes generous management fees, can create a serious drag on profits. And severe resale restrictions mean that, if the ship is sinking, investors often go down with it.

That certainly has been the case with several other exempt offerings that Cartwright and McCoach have created and marketed, including Imperial Ginseng (a ginseng farm in Kamloops) and Pearl Seaproducts (an oyster farm on Vancouver Island), both of which have turned into nightmares for investors.

@page_break@These types of investments are obviously not for amateurs. But, paradoxically, the BCSC has made it easier for promoters to sell them to small retail investors. The Opus investment was sold under a B.C. Securities Act provision that exempts such offerings from registration and prospectus requirements on condition they are sold in minimum amounts of $25,000 and only to “sophisticated” investors with a net worth of at least $400,000 and net income of at least $75,000.

The problem is that the people who meet these financial thresholds are not necessarily sophisticated. Also, such offerings may be sold by non-registrants, which means salespeople do not have to adhere to “know your client” and investment suitability rules. Furthermore, salespeople are paid generous commissions, which induce them to underplay the risks.

In 2001, the rules were changed, not necessarily for the better. The financial thresholds applying to sophisticated investors have been removed. Now, promoters — still using non-registrants — can sell their offerings to anybody, regardless of their financial circumstances.

The trade-off is that investors had to sign an acknowledgement making it crystal clear that they could lose all their money; as well, investors have broader powers to sue officers and directors if the offering memoranda contain misrepresentations.

But few people read or heed risk warnings, and civil redress is better in theory than in practice. As Toronto securities lawyer Julia Dublin noted in the January issue of Investment Executive, there is “a widely held misconception that civil remedies are a realistic means for individual investors to obtain compensation for losses.” She also noted that litigation is arduous and expensive, the results are uncertain and, in most cases, there is no source of recovery. IE