Just how is the average investor expected to distinguish between a bona fide prospectus-exempt offering and a straight-up fraud? In light of both a new report highlighting the lack of credible data on investment fraud and regulators’ recent efforts to expand exempt-market investing, it’s a question that demands an answer.
In mid-August, the Canadian Foundation for Advancement of Investor Rights (a.k.a. FAIR Canada) published a report on investment fraud. That report concludes there is a lack of reliable data on the incidence of investment fraud, making it difficult to evaluate how well investors are being protected. It’s also impossible to assess whether new fraud-fighting strategies are improving things or not.
Although FAIR Canada sees an overall need to improve data collection and research into investment fraud, the investor advocacy group also suggests that the role of the exempt market as a possible haven for fraudsters should be examined. Indeed, as the report points out, the regulators’ central fraud-protection message for investors – that they must check registration before they invest – is diluted by the existence of an entirely legitimate, albeit risky market segment that is free from those requirements.
FAIR Canada’s report suggests that the exempt market “may open the door to fraud” and proposes that a possible connection between the legitimate exempt market and investment fraud be explored.
The day after the report was released, the B.C. Securities Commission released a decision that makes the same point. It found that a former fund salesman committed a $65-million exempt-market fraud by advising hundreds of investors, mostly seniors, to sell their mainstream securities and use the proceeds, along with leverage, to buy exempt securities; so far, losses have totalled more than $40 million. The rep had been suspended from the securities industry, but maintained an insurance licence.
Given that securities regulators are contemplating ways of further expanding the exempt market through the creation of new prospectus exemptions, as well as the introduction of equity crowdfunding to Canada, FAIR Canada’s question should be answered first.
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