Disclaimer: The following information is intended only as general introductory information to address some common questions. It is not intended to be and must not be relied on as legal advice. Please refer to the specific provisions of Alberta securities laws. We encourage you to seek legal advice from legal counsel familiar with Alberta securities laws.
Saving and investing basics
If you are just getting started or are early on your savings and investing journey, you may have questions like:
- What’s a TFSA or RRSP? What’s a GIC or ETF?
- What do investment advisors do? Do I need one?
- How do I come up with a financial plan?
- What are the signs of fraud?
The ASC’s CheckFirst website has a number of resources to help you.
The government of Canada also provides general resources on savings and investments.
Investing in shares, bonds and other securities
If you understand the basics of savings and investing and are considering investing in shares, bonds and other securities, there are various factors to consider to help understand the risks and potential rewards, including:
- What are the terms of the securities you are buying? What rights do they give you? Are there restrictions on your rights?
- What is the track record of the people behind the business?
- What is the financial history of the business?
- Do management and key employees have the technical, management, sales and other skills necessary? Are there adequate incentives to retain key staff?
- What types of fees are being paid to those selling you the securities? How do they compare to other companies?
- If the business is raising money, how will it be used?
- What are the plans for the business and the key milestones? What are the major risks?
- What are the current general industry conditions? How could the current and future global/regional/local economic climate affect your investment?
- Is the disclosure clear, concise and plain or technical, vague or confusing?
- Is the information provided fair and balanced or overly promotional?
- How much money has previously been raised and how much more is needed? How will this impact your investment?
- How does this investment fit into your overall portfolio and your risk tolerance?
- Are you over-concentrated in certain industries or geographical areas or high risk investments?
- Will you need the money you are investing in the near term?
- How risky is the investment? Can you afford to lose all or part of the investment?
Investing in the private or exempt market
If you are considering investing in the private or exempt market in a business that is not publicly traded, there are additional factors that you will likely want to consider.
Securities legislation generally requires that an issuer trying to raise money through the sale of securities provide investors with a comprehensive disclosure document called a prospectus in order for investors to be able to make an informed decision about whether or not to buy those securities.
The accuracy of a prospectus is typically required to be certified by the CEO, CFO and two directors of the issuer and any underwriter involved in the sale. Investors who buy under a prospectus have certain special rights under securities legislation, including a two day right to cancel their investment for any reason, and a right to sue either to get their money back or for damages if there is a misrepresentation in the prospectus. A right to sue for damages is available not just against the issuer but also against the other parties that sign the prospectus. These rights are special in that an investor is not required to prove that they relied on the misrepresentation in making their investment decision.
As an investor under a prospectus exemption you will often not have the same rights that are afforded to an investor under a prospectus.
An issuer trying to raise money through the sale of securities under a prospectus is required to provide you with comprehensive disclosure in the prospectus, providing "full, true and plain disclosure of all material facts relating to the securities being distributed". Some examples of the required information include,
- details of the securities being offered for sale, including the rights they provide you, e.g.,
- voting rights
- rights to convert or exchange (including conversion prices or formulas and exercise periods)
- any limitations on redemption rights
- similar details on other outstanding securities
- details on how the proceeds of the offering will be used, including
- any fees and commissions
- information on payments to be made to related parties, and
- details on any funds to be used to repay outstanding indebtedness
- the key business objectives and milestones
- a description of material risks to the business e.g.,
- environmental or other liabilities
- significant litigation
- competition
- lack of management experience
- regulatory approvals needed, and
- cash flow and other financial challenges,
- information about management and directors e.g.,
- education and experience
- compensation
- security holdings
If you are investing under a prospectus exemption you will not receive a prospectus. You will need to consider whether you otherwise have access to all the important information necessary to make an informed investment decision and, if not, take steps to obtain that information before investing. You should not invest if you do not have the information needed to make an informed investment decision.
An issuer selling securities under a prospectus is required to provide investors with audited annual financial statements. The audit provides certain independent assurance with respect to the financial information presented.
As an investor under a prospectus exemption, you may not be provided with audited financial statements. If any financial information is provided you may have no independent assurance with respect to it. You will need to determine whether audited financial statements are important to your investment decision and whether you will require that these be provided before investing.
Securities legislation does not generally require that issuers provide financial projections and other forward-looking information in a prospectus. However, because of the potential unreliability of this type of information, if it is provided, to establish a defence to liability an issuer would generally need to provide cautionary language that
- indicates that actual results may vary from the forward looking information,
- states the material factors or assumptions used to develop forward-looking information, and
- identifies material risk factors that could cause actual results to differ materially from the forward-looking information.
Securities legislation imposes liability for misrepresentations but, in respect of financial outlooks and future-oriented financial information, provides a defence where the information specified above is provided and the underlying assumptions are reasonable in the circumstances e.g., made only for a period that can be reasonably estimated.
As an investor under a prospectus exemption you will need to assess whether the assumptions and risk factors underlying any financial outlooks and future-oriented financial information are sufficiently clear and whether forward-looking information provided seems reasonable.
In a prospectus offering, the special liability that directors and management have creates an incentive for them to ensure that the prospectus contains full, true and plain disclosure. Similarly, the special liability that applies to any underwriters (the dealers that either sell the securities as agent for the company, or buy the securities from the company with a view to reselling them to the public) typically incentivizes them to conduct due diligence, i.e., investigate or review information about the issuer and its principals to try and identify material risks and confirm, "to the best of their knowledge, information and belief" the information in the prospectus.
If there is no underwriter or similar party conducting this due diligence, it will be very important for you to consider these matters yourself and to understand the risks when determining whether or not to invest. If you have little or no experience in conducting due diligence, you are strongly encouraged to seek training in conducting due diligence and/or seek assistance from qualified professionals before investing.
Examples of some of the factors that you should consider include:
- the number and type of securities outstanding and the prices at which they were sold as compared to the price at which the securities are being now offered and the development of the issuer's business since the prior offering(s)
- the rights associated with other outstanding securities as set out in the issuer's articles of incorporation, any shareholder agreement, escrow, voting trust or similar agreements e.g.,
- special voting rights
- preferential rights to dividends or distributions
- preferential rights to the issuer's assets in the case of a liquidation
- preferential rights to disclosure, rights to convert, exchange or redeem securities
- rights to participate in future financings
- the implications of these rights to you and your investment
If the business that you are planning to invest in has reported a financing to the ASC, you can find information about that from the ASC Financing Dashboards. The Financing Dashboards can also provide comparative information about financings by other companies.
Examples of some of the factors that you should consider include:
- the issuer's financial position, including by reviewing and assessing any historical financial information and assessing the reasonableness of any financial projections
- agreements material to the issuer's business (e.g., key employment agreements, key supplier agreements, major sales agreements, insurance contracts)
- the experience, qualifications and character of management and key employees and dependence on certain personnel
- the issuer's organizational structure, its governance, and internal controls
- the compensation, benefits and other payments to executives, employees and any related parties
Examples of some of the factors that you should consider include:
- the material risks related to the business e.g.,
- competition
- lack of experience
- inadequate funds
- material assets and the rights and risks related to those assets e.g.,
- title to assets
- status of leases
- extent of intellectual property protections
- existence of required governmental, regulatory or other approvals
- indebtedness
- environmental liabilities
- existing or potential litigation
If you were to invest under a prospectus, the issuer you invested in would be or would become a reporting issuer (public company) and would be obligated under securities legislation to continue to provide disclosure about its business including such as
- audited annual financial statements and managements discussion and analysis
- quarterly interim financial statements and management’s discussion and analysis
- news releases announcing material changes such as relating to changes in directors and executives, significant acquisitions or dispositions, significant liabilities or litigation, material contracts and loss of significant contracts
- board composition and governance policies
- executive compensation disclosure
If you invest in an issuer that is not a reporting issuer, the issuer may have no obligation under securities legislation to provide you with any ongoing information. Consequently, you will need to determine what ongoing reporting you want from the issuer and negotiate by contract to obtain it. You will need to consider the possibility that the issuer may fail to continue to provide you with that information and what rights you have under that contract and whether they can be effectively enforced.
Statistics indicate that many early stage businesses fail. You could lose your investment. However, even if a business you invest in is successful, you will need to consider how you will realize any return from your investment. If you buy securities, such as common shares, of a non-reporting issuer you will need to identify whether there is a realistic “exit strategy” for you, an opportunity to sell your securities and potentially obtain a return and whether the timing of that potential opportunity aligns with your investment time horizon.
If the issuer is not a reporting issuer, there is no assurance that it will ever become one and even if it does, that could take many years. There is also no assurance that the issuer will be acquired by another entity. You could be forced to hold the securities indefinitely.
If you are buying debt securities or preferred shares, consider whether the issuer has a realistic prospect of being able to pay you the interest, dividends or yield that is offered and what rights you will have if they default on such payments or do not declare dividends. If you buy redeemable securities, consider whether the issuer has a realistic prospect of being able to redeem the securities. Consider the limitations on or conditions to your ability to redeem.
If you invest under a prospectus, the securities you acquire are typically able to be immediately resold in the secondary market e.g., on an exchange. Because you are investing under a prospectus exemption, your ability to resell the securities them is limited.
If you acquire securities of a reporting issuer under a prospectus exemption, you are typically subject to resale restrictions for a period of four months during which you can generally only realistically resell them under a prospectus exemption.
If you acquire securities of an issuer that is not a reporting issuer, under a prospectus exemption, you will typically be subject to resale restrictions that continue indefinitely. Unless the issuer becomes a reporting issuer, securities legislation prohibits you from reselling those securities except under another prospectus exemption or under a prospectus.
Further, even if you can comply with securities legislation, there will be no market to help identify parties that might be interested in buying the securities from you. It may not be possible to find a willing buyer. You may not be able to sell your investment quickly – or at all.
If you acquire securities, such as common shares, under a prospectus, the issuer will be a reporting issuer and the securities will typically be available for resale on a secondary market. In the case of a mutual fund, the securities will typically be redeemable on demand based on the net asset value, which is required to be calculated and disclosed on an ongoing basis. This publicly available information helps to establish a value for the business. If you acquire securities under a prospectus exemption, and the issuer is not a reporting issuer, you will likely not have this type of information. It may be difficult to establish a value for the business or the securities.
Securities legislation prohibits parties selling securities from making statements that they know or reasonably ought to know are, in any material respect, and at the time and in light of the circumstances in which they are made, misleading or untrue or do not state a fact that is required to be stated or that is necessary to make a statement made not misleading, where one would reasonably expect that statement to have a significant effect on the market price or value of a security.
Securities legislation also prohibits unfair practices in connection with the sale of securities, such as unreasonable pressure to buy, sell or hold or imposing harsh, oppressive or excessively one-sided terms.
Even when you are seeking to invest under a prospectus exemption, these prohibitions against misleading statements and unfair practices still apply to the parties selling you securities. They are not exempted from these fundamental provisions.
Scammers may disappear with your money. It is important to protect your money by being alert to the signs of investment fraud and scams before you invest. See https://www.securities-administrators.ca
Conducting due diligence on a potential investment requires significant effort.
If a registered dealer or adviser (a registrant) is involved, they can assist with this as they are required to conduct certain investigations or due diligence called “Know-your-product” to understand what they are selling to you.
A registrant is also required to collect certain information about you in order to comply with their obligation to “Know-your-client”. They need to ask questions to understand your financial and personal circumstances, investment objectives and risk tolerance. The registrant will use the information collected from the Know-your-product and Know-your-client processes to make a recommendation as to whether or not the investment is suitable to you.
For more information on the information a registrant will need to collect from you and on your relationship with a registrant, see this document.