Private investment opportunities are traditionally exclusive to institutions and high-net-worth individuals. Over time, these opportunities have become increasingly accessible for the everyday investors. This article provides an overview of the exempt securities market and its compliance landscape to empower investors with the knowledge to confidently explore private investment opportunities.
What is the exempt securities market
The exempt securities market, also known as the exempt market or private capital market, is a specialized segment of the Canadian capital markets which offers securities that are exempted from the full requirements of prospectus disclosure (more on this in the following section). The exempt market acts as a primary market where investors can directly invest in private ventures such as real estate developments, mortgage funds, early-stage companies, etc. In contrast, stock exchanges like the TSX are secondary markets where investors can trade public securities without directly benefitting the issuing company.
For example, Morrison Financial offers investment opportunities in mortgage fund trusts, where investors’ capital is invested in mortgages in exchange for monthly returns (from interest payments).
What is a prospectus
A prospectus is a comprehensive legal document that provides potential investors with thorough information about the offered securities. These details include financial statements, business goals, and management info. The exempt market, which allows investments without a prospectus, is beneficial because preparing a prospectus is often time-consuming and costly, discouraging private companies or funds from raising capital.
What is an Exempt Market Dealer
An Exempt Market Dealer (“EMD”) is a securities dealer fully registered to sell exempt market securities under provincial securities laws. EMDs are regulated by their respective provincial securities commissions and are subject to certain dealer obligations. Many EMDs focus on certain market sectors as they are required to understand and approve the offering of private issuers that they work with prior to selling such securities to investors.
For instance, Morrison Financial collaborates with an EMD to distribute/transact our mortgage income funds to qualified exempt market investors.
EMDs not only enable private issuers to raise capital but also play a key role to protect consumers by ensuring that each investment is suitable for each respective investor.
Disclosure standards for exempt market dealers
The exempt market operates with more straightforward disclosure conditions than the public market, providing only the essential information required to make an informed investment decision. Thus, while offering a streamlined regulatory environment, investing in the exempt market involves a more selective process to ensure that only qualified investors can participate, thereby protecting investors’ security and safety.
Specifically, exempt market securities are not required to disclose a prospectus; however, investors may receive an Offering Memorandum (“OM”). The OM serves a similar purpose to a prospectus, albeit in an abridged format, and is designed specifically for private placement. It typically includes information such as risk and objectives, terms of investment, and a summary of the terms of the investment. This information allows investors to make an informed decision while easing the Fund Manager of the regulatory burden, time, and expense of preparing a prospectus.
What is a dealing representative
A Dealing Representative is a licensed professional who works for an EMD. They work closely with each investor to assess financial needs, provide investment advice, and facilitate transactions in private investments. Contact a dealing representative to explore the private investment space and participate in our offerings.
Benefits of the exempt market
In the current climate of heightened volatility within public markets and the underperformance of traditional asset classes in the face of inflation, the exempt market presents a compelling alternative. Investing in non-traditional assets offers enhanced diversification, which can help mitigate risk and reduce portfolio volatility. Additionally, these investments are less correlated to public markets, effectively providing a hedge against market downturns and offering the potential for superior returns during periods of underperformance in traditional markets. With the potential for greater control, direct impact, and tailored investment structures, the exempt market is an attractive avenue for investors seeking opportunities beyond traditional markets that fit their strategy.
Risks of the exempt market
Investing in the exempt market carries risks, often involving limited liquidity and less disclosure. Unlike public stocks, exempt market securities are illiquid because there is limited secondary market for investors to resell their securities. Private offerings may also seem riskier due to the perceived lack of information via a prospectus. However, to offer exempt securities, EMDs are licensed and regulated. In addition to this licensing and regulatory mandate, EMDs undergo audits, maintain minimum operating capital requirements, and provide clients with investment statements.
| Benefits of Investing in the Exempt Market | Risks of Investing in the Exempt Market |
|---|---|
| Diversification: Provides opportunities to diversify beyond traditional asset classes. | Limited Liquidity: There is very limited market for reselling securities, making them harder to liquidate. |
| Premium Risk-Adjusted Return: Private investments can yield higher returns than comparable traditional investments. | Less Disclosure: Lack of a prospectus can result in perceived information gaps. |
| Regulatory Safeguards: EMDs are licensed and regulated, undergo audits, and provide investment statements. | Limited Coverage: There is limited analyst coverage on private investments; investors are encouraged to review each investment in detail. |
While no investment can guarantee returns or offer a ‘risk-free’ experience, remaining informed and making educated decisions is crucial. Consulting with an exempt market dealer is a wise step to explore this investment opportunity that aligns with your goals. Contact our team today to discuss your options.
*This is not legal or financial advice and should not be taken as such*
