Frequently Asked Questions

The exempt market is an essential component of our capital markets for entrepreneurs, small business, start ups, and investors. As it relates to business, our industry fills the financing needs of those who do not meet the criteria of the traditional brokerage world. As it relates to investors, our industry fills the need of lower cost, easy to understand, non-volatile investments.

An exempt market security is a security which is distributed under an exemption from the prospectus requirement. Being prospectus exempt means that there is less information disclosed to investors but there are typically less investor borne costs than associated with a public offering. Exempt market securities are generally illiquid, meaning that once the funds are put into the investment, there isn't a way for the investor to get their invested capital out if circumstances require. Having said that, exempt market securities are not subject to the fluctuations of the stock market. Basically, it's a function where an entrepreneur can efficiently, and cost effectively raise capital, meanwhile, investors can compromise some risk in lieu of lower costs, giving the freedom to invest in a variety of exempt securities.

The eligibility of who can purchase exempt market securities varies from province to province, however the following are purchase exemptions most common in Canada:

• Accredited investors
  
  • Investor must have financial assets of at least $1,000,000 or net assets of at least $5,000,000 OR have made at least $200,000 each year for the past two years (and is expected to next year) OR made $300,000 combined with their spouse's income in the past two years (and is expected to next year). It is presumed that a sophisticated investor would be wealthy enough to withstand a significant loss from the investment, opposed to someone with a smaller net worth.
    
    OR
• Family, friends, and business associates
  
  • An issuer can sell its securities to family, friends and the close business associates of its senior officers and directors as it is presumed that the issuer would be acting indefinitely in the best interest of any one of these parties.
    OR
• Offering Memorandum (OM)
  
  • A document that discloses the details of the securities that are about to be sold; similar to a prospectus but, is much less costly, is not reviewed by a securities commission and it discloses fewer details regarding the investment than you would see in prospectus. However, the OM does disclose the material facts and also the risks. This very effective tool is a financially viable way of distributing securities that is frequently used in Canada's Western provinces; It should be noted that investors and entrepreneurs in Ontario do not have the freedom to explore the efficiencies of this tool.
    OR
• Minimum investment
  
  • In Canada, to use this exemption the investor must commit at the very least $150,000 investment in a given issuers securities.

One can sell exempt securities if they are registered as an exempt market dealing representative (intermediary) working under an exempt market dealer (EMD). All registered and permitted individuals are available for the public to see on the Canadian Securities Administrators website at www.securities-administrators.ca

Other jobs and or registrations you have can affect your ability to sell exempt market securities as well; for example, investment dealers are permitted to trade in any security, therefore can trade in the exempt securities. Mutual fund dealers however must register as an exempt market dealer to trade in exempt securities.

A seller of exempt market securities could also be someone in one of the Provinces selling under the Northwest Exemption (read below for more information).

The Northwest Exemption is an exemption from the registration requirement available to those meeting the following criteria;

• The sale of exempt market securities are restricted to the Northwest Region (Manitoba, Saskatchewan, Alberta, British Columbia, Yukon Territory and Nunavut)
• Respective securities commissions must be notified that advantage of the Northwest Exemption is being taken by the filing applicable forms
• It is agreed that only the following 4/41 prospectus exemptions from National Instrument 41-106 can be used;
  • Accredited Investor
  • Family, friend, business associate
  • Offering Memorandum (OM)
  • Minimum amount
• The person or company relying on the exemption is not otherwise registered or required to be otherwise registered under the securities legislation of any province, territory or foreign jurisdiction (Mutual Fund Dealer, Floor Trader, Contracts Portfolio Manager etc.)
• A separate Risk Acknowledgement form is to be completed (which indicates that the seller is a non-registrant)
• Other than in British Colombia, the seller cannot provide financial services to the purchaser (Financial Planner, mortgages, insurance etc.)
• Seller must not provide suitability advice to a client
• If you are in the business of trading or advising of exempt market securities, you must register as either an advisor or dealer. Meaning that if you are a dealer or an exempt market intermediary and you regularly generate revenue from selling exempt securities, you must register.

As there is no real collective basin for the exempt market, it's hard to tell just how much money is raised in it on an annual basis. Some stats however are available.

In 2010, exempt market issuers raised approximately $8,500,000,000 from British Columbia investors. In 2010, BC based issuers raised an additional $7,700,000,000 from outside of their province as well. (Source: British Columbia Securities Commission)

Alberta-based exempt market issuers raised approximately $11,600,000,000 in 2010. Of this total, Alberta-based investors contributed approximately $3,200,000,000 (28%) of the financing while non-Alberta based investors contributed the remaining $8,400,000,000. (Source: Alberta Securities Commission)

Mining, oil and gas, real estate, and technology sectors are those that primarily utilize the exempt market however all industries may utilize the exempt market from time to time.

The industries that rely on the exempt market vary provincially as well based on the industries found in each province. For example, mining issuers account for approximately 50% of the funds rasied in the exempt market in British Columbia, while oil and gas based issuers account for approximately two thirds of the funds raised in the exempt market in Alberta.

One would typically look for many of the same things in the exempt market that they would when choosing any investment. While this list is not exhaustive, and it is strongly advised that both investors and intermediaries consult with a lawyer, accountant, or advisor, the following list is a goods start of things to consider when making a choice:

1. Experienced management team – Work with teams that have a track record at both the investment management level and at the operational level – there is NO substitute for a track record of successful investment and operation in the business area by the team you are trusting to act on your behalf.
2. Clear investment premise – The investment premise should be based on sound fundamental analysis that is simple to understand and clearly laid out in the presentation. Avoid momentum-based investments where the core rationale is effectively that "everyone else is doing it".
3. Tax efficient structure – Tax can have a major effect on your returns. Make sure that all reasonable and credible steps have been taken by the management team to manage tax obligations.
4. Management Incentive –Managements primary compensation should generally be upon the exit of a successful investment offering. As well, management have some of their own assets on the line next to investors so that they too have something to lose if things don't go as plan. Investors should typically avoid situations where the management team acquires the target assets first and then sells them to the fund for an upfront profit. Even if disclosed in the offering documents this is a poor practice and creates a mismatch between the economic interests of the management team and the interests of the investors.
5. Fees - While some level of compensation for day to day operations is reasonable, management should primarily be compensated at the back end. Management fees should be reasonably tied to the amount of time management has to put in on a day to day basis and not generally tied solely to the amount of assets under administration. Management should primarily be paid for their efforts and performance, not simply because they raised X amount of dollars. Management fees should not be tied to appraised or calculated asset value that is an unrealized gain. The only valuations that matter are the purchase price and the sale price. Management should receive the bulk of their fees based on gains that are actually realized for investors.

Exempt Market Securities are materially different from investments like stocks, bonds, mutual funds, and segregated funds. Liquidity is a major factor in the difference between Exempt Securities and other "traditional" investments, meaning that you cannot get your money out of an exempt market security whenever you want it. Generally speaking, the investment must mature before liquidity is possible. Having said this, exempt market securities do not fluctuate in value on a day to day basis based on market trends or emotion. It is recommended that you and your financial advisor or securities lawyer have a look at the deal in depth before committing to the investment.