Investors in many private share offerings in British Columbia and Alberta are facing potential losses that could have been avoided if the offerings were subject to registration and prospectus requirements.

Among them are Liberty Inter-national Mineral Corp., run by faith healer Len Lindstrom of Kelowna, B.C.; Freedom Investment Club, run by self-described financial guru Michael Lathigee; and Gallowai Metal Mining Corp. and Bul River Mineral Corp., both owned by Calgary promoter Ross Stanfield.

These firms sold millions of dollars in shares privately to investors by taking advantage of exemptions provided in National Instrument 45-106 that make business cheaper and easier for issuers but also make life a lot riskier for investors.

B.C. Securities Commission enforcement director Lang Evans says exempt offerings are very popular but also the BCSC’s leading source of complaints and investigations.

Private issuers typically sell shares when the business is in the embryonic stage, before it goes public. These so-called “seed stock” deals are inherently risky. But there is also structural risk, as private companies are not subject to the same rigorous requirements as public companies.

Exempt issuers can sell shares without providing a prospectus, although BCSC staff routinely vet such documents to ensure they meet proper form and contain all the information investors require to assess the investment properly.

Furthermore, exempt issuers are not subject to continuous disclosure requirements, such as quarterly financial statements and news releases announcing material developments in their business affairs.

Adding to the risk, shares of private issuers do not have to be sold by registered brokers, who are obliged to review the investment and ensure it is suitable for their clients. Private issuers can use their own agents, who are under no such obligation and are often paid high commissions and offer poor advice.

And as privately issued shares are not listed on any exchange, they are not subject to daily scrutiny by market surveillance staff. Rather, they inhabit a twilight world of indeterminate value.

Finally, shares of private issuers cannot be resold until they are registered. That means investors cannot readily cash in their shares if the company’s fortunes rise, or cut their losses if they dwindle. This lack of liquidity can be a serious issue.

An example is Liberty Inter-national, which is run by Lindstrom, who acquired some mineral concessions in Liberia that he rolled into his B.C.-registered firm. He then raised money through the “accredited investor” and “friends, family and business associates” exemptions.

The first exemption permits private issuers to sell shares to anybody who has an annual income of at least $200,000 and net assets of at least $5 million. The thinking is that people in this bracket don’t need the protections afforded by registration as they have enough financial savvy or access to professional advice.

The latter exemption allows private issuers to sell shares to an unlimited number of friends, family and business associates.

BCSC compliance director Martin Eady acknowledges that determining if investors fall into one of these categories can be problematic.

Lindstrom’s shareholder meetings had an evangelical fervour. Instead of singing hymns, shareholders sang the corporate song, A Motherlode of Ore. He sold shares at “special offer” prices and told shareholders to hurry or they could miss the boat.

The marketing tactics worked. From 2004 until this past summer, he raised $18 million from hundreds of shareholders. But the mining efforts failed — and Liberty International defaulted on many of its mineral concessions and now owes millions to creditors.

On Sept. 15, the BCSC issued a cease-trade order on the grounds that some of Liberty International’s investors were not “friends, family and business associates.” Even without the order, investors could not bail out until the shares are registered for resale, now unlikely.

In another example, Vancouver-based FIC raised money under the “offering memorandum” exemption, which permits private issuers to sell stock to investors as long as they sign a statement acknowledging the risk. They are given an OM — an abbreviated prospectus that must be filed with the respective provincial regulator but is not vetted by commission staff. (This exemption is not available in Ontario.)

During the past five years, FIC has raised $50 million from more than 5,000 investors. Over time, it became less like an investment club and more like a mutual fund, albeit unregistered and without the attendant consumer protections. FIC invested shareholders’ money heavily into Alberta development property, which later plunged in value. FIC is now facing possible liquidation.

@page_break@When regulators developed the OM exemption, they never contemplated it would be used by a de facto mutual fund. Enforcement staff have been keeping a close eye on FIC and have frequently intervened.

Then, there’s Gallowai and Bul River, which, over the past 33 years, have raised more than $220 million from 3,765 investors, most of whom are in Alberta. Stanfield, who owns the firms, used an earlier version of the accredited investor exemption, which permitted private issuers to sell shares to investors who bought more than $97,000 worth of stock.

Many shareholders say Stanfield has repeatedly told them the firms’ property, 40 kilometres southeast of Cranbrook, B.C., is rich and the mine is on the verge of production; it has not yet gone into production.

Over the years, securities regulators intervened on several occasions but had little long-term effect on Stanfield’s fundraising activities. Publicly traded firms would have been held to account much earlier.

After so many years, shareholders want answers but can’t get them. A dozen dissidents have filed a minority shareholders’ oppression petition in the B.C. Supreme Court, which was to start on Oct. 26.

These experiences raise the question: if a company reaches a certain size — either in terms of shareholders or money — shouldn’t it be required to get registered?

Alberta Securities Commission spokesman Mark Dickey acknowledges that the exempt market presents enforcement challenges, but says the ASC has chosen not to force registration when an exempt issuer “reaches a certain arbitrary size.”

Eady says this is “an intriguing idea,” but any changes would have to be co-ordinated with the Canadian Securities Administrators. And since the CSA recently harmonized the exemption rules, he adds, it is not likely to reopen the subject. IE