After a couple of high-profile blowups in British Columbia with nearly half a billion dollars of investor money on the line and the widespread problems uncovered by a recent regulatory sweep of the “exempt market” issuers by the British Columbia Securities Commission (BCSC), regulators have raised concerns about the exempt market. These recent negative developments within the Canadian capital market have regulators considering narrowing and tightening the profile of investors who qualify to operate in “exempt market”.
When introduced it was hoped that investing in the exempt market would offer investors an alternative opportunity to participate in early stage companies with innovative products that were not large enough to be a public company. Canadian policy makers was hoping that “exempt market” can provide investors with another option for diversifying their investment portfolios with asset classes other than stocks, bonds and cash. With that, came the birth of “exempt markets”. Basically, the “exempt market” describes a section of Canada’s capital markets where promissory note or securities can be sold without the protections associated with a prospectus.
Fraudsters Active in “Exempt Markets”
Within this unregulated market, there is no requirement for companies to sell their securities through a registered dealer. So it is of no surprise that in the last 5-years alone Canadian regulators with the extensive investigation have unraveled the following fraudulent investors that issue fake promissory notes in “exempt markets:
1. Michaels Wealth Management
Primary Business: Advising on the sales of securities to investors
2. First Leaside Group of Companies
Primary Business: Purchasing properties in Canada and the U.S. and selling debt and equity securities in real estate limited partnerships and funds.
3. Fisgard Capital Corporation
Primary Business: Raising capital from investors and subsequently issues real estate-secured loans to borrowers and charging interest on the loans.
4. New Solutions Group
Primary Business: Making and administering loans to various businesses, backed by receivables purchased from companies at a discount.
In normal practice, these companies should have issued promissory notes or securities offered to the public with a prospectus- a document that provides detailed information about the security and the company offering it. Unfortunately, companies such as New Solutions Group and Fisgard Capital Corporation use certain exemptions to this rule to its advantage and allowed promissory notes or securities to be offered without a prospectus, or also termed as prospectus exemptions. Usually, in financial terms, a promissory note is a form of debt – similar to a loan or an IOU – that a company may issue to raise money. Typically, an investor agrees to loan money to the company for a set period of time. In exchange, the company promises to pay the investor a fixed return on his or her investment, typically principal plus annual interest.
However, in the case of the New Solutions Group and Fisgard Capital Corporation, the initial issuance of promissory notes was tailored as legitimate investments but when it marketed broadly to individual investors it turned out to be scam! After months of investigation, the British Columbia’s regulators finally relented to public pressure by releasing a statement… “BCSC and state securities regulators across the nation have joined forces to combat the fraudulent sale of promissory notes to investors. But we can’t stop every fraud as the “exempt market” is far too complex.”
Spotting Fraud Promissory Notes
Fraudsters such Fisgard Capital Corporation and Michaels Wealth Management have recently begun to use promissory notes as vehicles to defraud investors out of hundreds of millions of dollars. Most of their promissory note scams follow predictable, fraudulent fact patterns such as:
- Investigation papers clearly implicate fraudsters including Leaside Group of Companies, New Solutions Group and Fisgard Capital Corporation may or may not be affiliated with the company – persuade agents to sell promissory notes, luring them with lucrative commissions of up to twenty or even thirty percent. Often these agents often do not have a license to sell securities.
- Investors purchase the promissory notes issued from companies such as Fisgard Capital Corporation were enticed by the promise of a high, fixed-rate return – up to fifteen or twenty percent – with a very low level of risk. Finally, the promissory notes appeared attractive but the seller falsely claimed that they’re “guaranteed” or insured.
- When investigated companies such First Leaside Group of Companies and Fisgard Capital Corporation were found to have used some of the proceeds to support an elaborate “Ponzi” scheme in which money coming in from the sale of new notes pays the interest on older notes. The complaints received from existing investors that for a time they continued to receive interest payments but they rarely get their principal back.
Though thousands of investors have already lost or in the midst of losing their entire life savings on these fraudulent promissory notes, the above tips may help future investors spot this scam. That’s why as an investor you should ask tough questions – and demand answers – before you consider investing in a promissory note issued by fund management companies such as First Leaside Group of Companies or Fisgard Capital Corporation. Be sure you understand how they work and what risks they pose!
From reports released by British Columbia Securities Commission, can be said that most promissory note or securities scams originating from Canadian “exempt markets” often target the elderly, bilking them of their retirement savings at a time when they can least afford to lose it. But no one is immune. Fraudsters rarely discriminate when it comes to separating investors from their money. And most investors don’t even realize their investment dollars are at risk until it’s far too late.
So What To Do If You Run into Trouble?
If you believe you’ve invested in a promissory note scam, act promptly. By law, you only have a limited time to take legal action. Contact the British Columbia Securities Commission Office of Investor Education and Advocacy.
-DAVENPORT LAROCHE, Headquartered in Hong Kong