The Exempt Market in a Nutshell

It’s Time to Demystify the Private Capital Market

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There are often common misconceptions and confusion surrounding the exempt market. What is it? What are exempt market securities? Is it called the exempt market, private capital market or private placement? Well, it’s all the above. The exempt market is a niche space in the Canadian capital marketplace where exempt market securities can be sold to raise money for entrepreneurs and their businesses without the use of a prospectus.  A prospectus is a detailed legal document that includes information for potential investors about the securities being offered, management details, financial statements, goals of the business and much more.  Prospectuses are expensive and time-consuming to prepare and often deter small and medium-sized business owners from raising capital.  Because entrepreneurs often lack the capital required to start, maintain or grow their business, raising money in the exempt market is a cost-effective solution for small and medium-sized business owners to acquire the capital they need to meet their business goals and objectives.

Exempt market securities are financial instruments that give owners an interest in an entity and the opportunity to profit.  Shares, bonds, debentures, promissory notes, asset-backed securities, investment units and derivatives are examples of the types of securities offered in the exempt market.  The most common way exempt market securities are sold in the private capital marketplace is through Exempt Market Dealers, commonly referred to as EMDs.  An EMD is a firm that is licensed and registered with securities regulators in one or more province or territory to sell exempt market securities.  Some EMDs exclusively sell products for issuers that they are related or connect to.  This could include the issuer and EMD having common officers and directors or connection in some way where adequate disclosure would be required within the offering memorandum to describe the relationship.  Other EMDs sell products for issuers that meet their due diligence criteria.  Each EMD has their own due diligence process used to filter through the many products available for distribution.  They select the exempt market products to have on their “shelf” and their registered Dealing Representatives (DRs) distribute those products to clients.  When a DR successfully sells an exempt market product to a client, it is called a subscription.

Unbeknownst to them, most Canadians are qualified to purchase exempt market securities.  To become an exempt market investor, individuals need to qualify for the prospectus exemption requirements that are applicable to the distribution of the exempt market product.  Working with an EMD and their DRs can help individuals determine if they are qualified to invest and if certain exempt market products are suitable for them.  While there may be many exempt market products available to invest in, each one carries a different level of risk that some individuals may have difficulty tolerating.  An EMD can provide a list of investments that can assist potential investors with understanding the securities offered by each issuer, which products are suitable for them and what to look out for.  EMDs can also help their clients diversify their portfolio to mitigate risk.

EMDs are subjected to rigorous regulatory duties and must fulfill many requirements before it can be considered an “EMD” by securities regulators.  DRs are required to be knowledgeable about the products they sell and are obligated to know their client, their risk tolerance and the suitability of exempt market products for their clients.  EMDs are regulated, managed and, if necessary, disciplined by securities regulators. When selecting an EMD or DR, it is important to check their registration.  Because EMDs are required to know their products, they should have a plethora of knowledge when it comes to information about the organization issuing the securities, the management and the securities being offered.

Unlike public stocks, securities sold in the exempt market are considered illiquid because there is no market available to investors to resell their securities. Exempt market securities are not publicly traded and there are limited requirements for businesses to provide investors with ongoing reporting about how the business is doing; therefore, investments in the exempt market are deemed high risk.  Most exempt market products are considered to be medium to very high risk by regulators.  Investors that purchase securities are not guaranteed a return on their investment and could result in total loss. Business ventures with sound management, solid business plans and environmental factors that are positive can result in substantial returns for investors.
Many issuers include a redemption clause in their offering memorandum.  This provides the investor an opportunity to redeem their securities under certain terms and conditions the issuer has set out; however, it is important for investors to understand that inclusion of a redemption clause still does not guarantee a return on investment.

 Most small businesses that are starting out or trying to grow have innovative ideas but lack the capital to jumpstart their goals and objectives.  Investing in the exempt market provides investors unique opportunities to diversify their portfolio and take part in these companies’ growth with the possibility of a substantial return on profit.  While investing in the exempt market can be risky, the profits that can be gained from investing in successful products can surpass the profits made in returns from traditional investments in the public market.

While the exempt market can be an overwhelming world of new knowledge, it can be easily navigated by doing proper research and speaking to industry experts.  The exempt market offers a world of accessible capital for businesses that require funding that may not be available to them through traditional methods.  Alternatively, individuals looking to broaden their investment portfolio have the ability to invest in unique products that are not available through the public market. Although investing in the exempt market carries a risk, there’s also risks involved in investing in the public market or investing in general. No matter where an investor is putting their money, there is never a guarantee on a return of investment.  The best thing for any investor or entrepreneur to do is to stay informed and make educated investment decisions.


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.

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