The Cost of Raising Capital in the Exempt Market

“If you want the truth, follow the money.”

Nancy Bacon

The views expressed here are not necessarily of ‘Educate and Explore’, but of Nancy Bacon, Managing Director of Chase Alternatives. It is important to consult with the appropriate professional when looking at engaging the exempt market.  The information below is not exhaustive in terms of what to research before engagement.

The Cost of Capital can aptly be defined as “a company’s calculation of the minimum return that would be necessary in order to justify undertaking a capital budgeting project.  The term cost of capital is used by analysts and investors, and is always an evaluation of whether a projected decision can be justified by its cost.  Investors may also us the term to refer to an evaluation of an investment’s potential return in relation to its cost and its risk”. (see footnote 1)

This however is a general defined term, and while it still applies to what is perceived as cost of capital in the exempt market, there are other layers to peeld back to fully understanding how much of your actual dollar goes into the asset vs how much goes into upfront costs.

For the purposes of this article, we will focus on one particular area within the exempt market – retail issuers who rely on the offering memorandum (“OM”) exemption.


Like with many other industries, issuers (who predominantly rely upon this exemption) will also be met with what is known as the J-Curve (see footnote 2).  These are the upfront costs of the investment that are borne by the investors, thus early analysis on expected cost of capital is crucial, and should be a question every investor asks prior to looking at any investment.

Issuers will build in strategies based on Quantitative principles – relying on the numbers made available to determine the viability of the fund with intent of return.  Issuers will also use Qualitative means based on interpretation or opinion of the viability – this, while valuable, can also become an area of concern when looking at the J-Curve. Especially if the interpretations are produced internally.

“While it may sound counter-intuitive, raising capital may not be the greatest challenge to your ambitions as an Issuer. That challenge could well come from the level of discipline and control you maintain over your cost base”. - John McIsaac, Liahona Capital Inc.


As discussed in other articles, the exempt market offers market participants, commonly small medium sized businesses (“SMEs”), a more efficient means to capital. SMEs represent the largest creators of jobs, and thus are essential to our economy.  This said, they are also non-reporting issuers (whereas publicly traded funds are required to report).

It’s important to note that issuers who are not registered as an Investment Fund Manager or Portfolio Manager commonly are unable to produce a net asset value (“NAV”) to reflect the J-Curve as it could be considered a material conflict of interest (similar to a corporation internally preparing their own financial statements), and also would not be held to the same regulatory scrutiny of our provincial regulators.

“Cost of capital is ongoing and deceptive at best”.  - Jason Park, Rethink & Diversify Securities Inc.

Therefore, how is one then to understand the cost of capital in order to make an investment decision should the issuer not be registered, and thus not have a moving NAV to reflect the J-Curve.  How is one to assess suitability on behalf of an investor, or even prepare to raise capital in the exempt private markets?

(Confused yet?)

Some Industry Advice


First and foremost – read the OM.  The OM is a disclosure document that follows a template found here Form 45 106 F2 - Offering Memorandum for Non-Qualifying Issuers

Then consider this:

I recently received a donation request from a friend for his birthday.  Without hesitation, I clicked the ‘donate’ button, however I also (without hesitation), went straight to the financials of the noted charity.

It is so incredibly important to know, how much of your actual dollar goes to the cause… well as with your investment.

On the surface, it can seem exceedingly enticing to invest (or donate).  A morally suasive argument, a brilliant concept, can quickly become less than ideal when you look under the hood.

In the case of my friend’s charity – his heart was in the right place.  In reality, last year this charity had raised $1.7MM, yet only $172,000 went to the actual initiative.  I am sorry to say that this is common, thus why cost of capital is so remarkably important to address.

Registrants (Dealing Representatives) who assist with an investor’s suitability assessment are bound by regulation to ensure that the OM is not only read, but interpreted. They are also bound to have a broad understanding on expected cost of capital.  However again, as an investor, it is exceedingly important that they to do their own due diligence.

What are the:

  • Sales Commissions
  • Is the Management Fee annual or one time
  • Marketing Fees (are these open ended, or defined/capped)
  • Overall Fees
  • Did I mention Fees?

How much of my dollar is going into the asset?  How much does the fund have to return before I even break even?


If you are an issuer in industry, in particular a new issuer, having assistance in terms of how to navigate through the required and expected costs is essential.  This mostly as the range in terms of what you can be charged is considerable.

Legal fees for example.  If the legal firm does not have a significant amount of experience in the exempt market given a previous preferred direction in the public market - issuers can see fees go well into 6 figures for the OM alone.

“We have personally seen fees for an OM range anywhere from $50,000, all the way up to $450,000”.

A similar range of expenses can be seen with the fund’s accounting firm.

“Dependent upon the size of the fund, and similar to legal fees, issuers can see a considerable ratio in accounting fees”.

Despite being non-reporting issuers, they are required to produce audited financial statements, thus auditing fees could very well increase over time, and so choosing your accountant is essential when understanding the capital budget.

And like investors, issuers need to assess responsible:

  • Sales Commissions
  • Trailers
  • Is the Management Fee annual or one time
  • Acquisition Fees
  • Disposition Fees
  • Profit Sharing
  • Budget for due diligence fees (incurred by exempt market dealers)
  • Marketing Fees
  • Etc.


The cost of capital is a crucial aspect to one’s own due diligence process.  The regulators have even adopted added regulation in the recently released Client Focused Reforms (see footnote 3) to address understanding on fees when assessing suitability.  Something all market participants should familiarize themselves with.

The exempt market hosts many remarkably good investment opportunities.  It is an industry that offers essentiality to our economy, and also our own portfolio diversification.  But, like many industries, there are risks.  Look past the glossy photos, and the well thought out pitch on what looks to be a brilliant strategy.  Instead... just follow the money.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views or opinions of Olympia Trust Company, Olympia Financial Group Inc., or any of its affiliates. The author’s views and opinions are based upon information they consider reliable, but neither Olympia Trust Company, Olympia Financial Group Inc. nor any of its affiliates, warrant its completeness or accuracy, and it should not be relied upon as such.

Nancy Bacon
Managing Director of Chase Alternatives

Nancy Bacon is currently the Managing Director of Chase Alternatives, a boutique independent consulting firm with a focus on global private markets. Ms. Bacon additionally sits as director of the Private Capital Markets Association of Canada (PCMA), Co-Chairs the Dealing Representative Advisory Committee, and proudly sits on the Alberta Securities Commission Exempt Market Dealer Advisory Committee (EMDAC). Ms. Bacon brings over 20 years of professional experience in the capital markets, the last 16 of which have been devoted entirely to private markets.