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The Exempt Market

Under provincial laws, an entity that issues securities (i.e. shares, partnership units, trust units) is required to prepare, file, and distribute a prospectus each time that the entity raises money. However, the cost of producing and distributing a prospectus is extremely expensive and is impractical in many cases. Consequently, regulators have introduced exemptions to the prospectus requirements to allow our businesses to start and grow.

Securities issued by entities pursuant to a prospectus exemption are called “exempt securities”. These distributions are called “private placements” or “exempt distributions”.

Market Size & Profile

The Exempt Market is extremely large and active and is an integral part of our financial system.

http://www.osc.gov.on.ca/documents/en/Securities-Category4/rule_20170615_45-715_exempt-market.pdf

http://www.osc.gov.on.ca/en/exempt-market.htm

Qualifying For an Exempt Market Investment

There are numerous exemptions that an investor may rely on to invest in exempt products. These are the most commonly used:

  • Accredited Investor Exemptions
    • Advisor or Dealer
    • Former Advisor
    • Financial Assets Test
    • Income Test
    • Individual Net Worth Test
    • Entity Net Worth Test
    • Entity Ownership Test
    • Trust Establishment Test
    • Separately Managed Accounts with Full Discretionary Authority
    • Minimum Amount
  • Offering Memorandum Exemption
  • Family, Friends and Close Business Associates
  • Private Issuer Exemption
  • Crowd Funding Exemption

Risks of Exempt Market Investments

All investments, whether prospectus or prospectus exempt, involve risks. It is important that every investor understand the risks associated with their investments. The following is a list of risks that are general to the Exempt Market; however, each investment will have specific risks.

  • Liquidity risk
    • There is no properly organized secondary market for exempt securities;
    • Most exempt securities have resale restrictions;
    • Liquidity may only be available through the issuer and on the issuer’s terms;
  • Transparency risk
    • Exempt security issuers are typically not subject to the more demanding information disclosure requirements of prospectus issuers;
    • Less information is typically disclosed to investors, dealers and the regulators;
  • Valuation risk
    • The accuracy of valuations and the incentive to mislead because of conflicts of interest are inherently higher for exempt securities;
  • Investment risk
    • Typically, exempt securities are issued by smaller companies, especially startup companies;
    • There is a higher risk of fraud;
    • There is typically higher “key person” risk than more widely held securities;
    • There is a higher probability of losing your entire investment;
  • Investor Right risk
    • There are fewer legal rights available for exempt security purchasers such as right of rescission, right of withdrawal, and secondary market civil liability;
    • Regulators do not review offering memorandums for completeness