Without a doubt every year, thousands of Canadians fall victim to fraud, losing millions of dollars. This has been particularly rampant in “exempt markets” that constantly suffer from abuse, as regulators say rule-breaking is common and warn that fraudsters or unscrupulous dealers can twist the exemptions to draw in more modest retail investors. The irony is that while most don’t think it could happen to them but fraudsters have used sophisticated ways to target people of all ages. History has proven that the impact of fraud on individuals, families and businesses can be devastating. Usually retirement savings, homes, businesses and in some cases, lives have all been lost to fraud “exempt market” dealers.
Lack of Liquidity
In most cases fraudulent “exempt dealers” dealers victimize vulnerable Canadians who may be at their lowest. Investors usually are forced to sign a “risk acknowledgment form,” which do not go far enough to protect them from unsuitably risky or fraudulent investments. Even the British Columbia Securities Commission (BCSC) has considered this market high risk for many reasons but primarily because of its lack of liquidity.
This literally means that there is no secondary market to sell your securities so it is very difficult to liquidate before the investment is complete. So in other words, if you invest for a 2-year term, you likely would not be able to redeem until that time and there’s also the possibility of an investment taking longer than planned. In a higher risk market, there is also a greater possibility of losing some or all of your money!
As the “exempt market” in Canada is known to raise billions of dollars every year, there are numerous issuers that strive to enter the market to raise capital for their projects, all with varying levels of experience and track records. While activities of these issuers must be regulated by the government, the reality of matter that the regulation framework is non-existent or at times so much looser. In most cases, the amount of financial documentation filed by “exempt market’ dealers are lower or at times not at all. In most cases, instead of quarterly statements, they might only issue you an annual document.
Another problem for investors is that there’s a common practice for poor diligence process before the investment products becomes available through an “exempt market” dealer in British Columbia. The worst part is that this process might differ from dealer to dealer. Thus, this has proven to be a major disadvantage to investors seeking investment opportunities in “exempt markets”.
“Exempt Market” Lacks Information
So, when you compare this practice to other regulated markets in where issuers usually produce periodic comprehensive due diligence reports, investors usually have the choice to choose from quality issuers with proven experience and a history of delivering on their funds or projects. There are even cases where government securities regulators also don’t review the offering memorandums (OM) of “exempt market” dealers prior to you investing your money!
Another important point to take note is that when you’re investing into traditional large companies like Google or you can become a part owner of the business in a matter of seconds. For example, if you have a brokerage account, you can simply go online, transfer some money from your bank account, and two seconds later you are a proud 1 % owner of Google or Starbucks. So this means that in a traditional firm, an investor’s holdings can be balanced out so that there are different percentages of low, medium and high risk within an account.
However, this not the case with investments made with an exempt dealer. In most cases, the whole account is effectively high risk. Then the question becomes, “should the firm allow clients to place all their investable assets in the exempt market”? During my research, I found that most Canadian investors get scammed when they may come through the door and hear about this or that “exempt market” products and feel that they want to catch the wave of promised unrealistic profitability.
And as we know that without the access to financial documents, financial metrics, and even forecasts by their “exempt market” dealers it’s almost impossible for any investor to see how certain business will perform in the future. Based on lack of information, investors are unable to make sound investing decisions and changes to their portfolios. To make matters worse, “exempt market” products are loosely regulated by the government.
What can you do if you are a victim?
Step 1: Gather all information about the fraud. This includes documents, receipts, and copies of emails and/or text messages.
Step 2: Report the incident to your local police. This ensures that they are aware of which scams are targeting their residents and businesses.
Step 3: Contact the Canadian Anti-Fraud Centre.
Step 4: Report the incident to the financial institution where the money was sent (e.g., money service business such as Western Union or MoneyGram, bank or credit union, credit card company or internet payment service provider).
Step 5: If the fraud took place online through Facebook or eBay be sure to report the incident directly to the website.
Step 6: Victims of identity fraud should place flags on all their accounts and report to both credit bureaus, Equifax and TransUnion.
From my research, the best way to fight these types of fraud practiced by Canadian “exempt market” dealers is only through awareness. The Royal Canadian Mounted Police (RCMP) that manages the Canadian Anti-Fraud Centre (CAFC) with the Competition Bureau or the British Columbia Provincial Police plays a crucial role in educating the public about scams and fraud within the “exempt market”. The establishment of the CAFC was intended to be Canada’s repository for data, intelligence and resource material related to fraud. It provides comprehensive information to assist citizens, businesses and law enforcement in Canada and also around the world.
Finally, keep in mind that criminal “exempt market” dealers are relentless in hounding people. There have been cases that some victims report receiving five or more calls a day, wearing down their resistance. And once a person has succumbed to this ruthless fraud, usually their name and number will likely go on a “list”, which is sold from one crook to another.