When Warren Buffett, Francis Chou and other great value investors started their investment funds decades ago, there was little in the way of securities regulation. Since those times, however, members of the public have fallen victim to a plethora of scams from less honest entrepreneurs. As such, securities regulations have evolved to a state where some of the great investors we recognize today may never have gotten their start had these rules existed back then. In order to protect the public from themselves, here are just some of the requirements* of those who are looking to raise capital from the public for investment:

  • File a prospectus which includes various required categories of information such as financial statements, management discussion, articles, certificates etc.
  • Hire an auditor to certify financial statements reported
  • Pay to the regulator $2500 annually for the right to apply to register
  • Pay to the regulator $250 for each officer of that company
  • Maintain a minimum working capital of $100,000
  • Place a bond with a financial institution for $200,000 for insurance purposes
  • Pass several securities courses, as specified by Instrument 31-601
  • Work for five or seven years at a firm that is already registered

Not all of these stipulations are required for all companies looking to raise capital. Also, the entrepreneur could farm out part of this process to dealers that are already registered, however it is safe to say the fees would be prohibitive except for those which are part of well-capitalized companies.

Regulators do recognize, however, that some of these requirements are over burdensome for many companies. Therefore, there are exemptions available when, in the regulator’s opinion, investors do not need the same level of protections as are outlined above. (For example, most hedge funds take advantage of exemptions in order to avoid much of the regulatory pain.) We’ll explore some of these exemptions in future posts.

* These are requirements for funds based in my jurisdiction of British Columbia, but are very similar to those in jurisdictions across North America.