September 26th, 2018
OSC Investor Education: The exempt market
4 things to know about the exempt market
- The exempt market includes investments like debt, equity, asset backed securities, investment funds and derivatives.
- Prospectus exemptions can help businesses because it lets them raise money without the time and cost of preparing a prospectus.
- While there are a few different prospectus exemptions, the three main ones are:
- The accredited investor exemption – This includes any individual who alone or with a spouse owns more than $1 million in financial assets or whose income exceeds at least $200,000 under specific conditions.
- The private issuer exemption – If a company qualifies as a private issuer, this exemption allows them to raise funds from up to 50 non-public investors.
- The $150,000 minimum amount exemption – This includes selling shares to anyone who invests a minimum of $150,000 paid in cash at the time of the trade.
- Some scammers pitch fraudulent investments as “exempt” securities. Learn more about investment scams.
The Ontario Securities Commission (OSC) plans to propose 4 new prospectus exemptions in early 2014 – these will be open to a 90-day comment period. The 4 new exemptions are:
- offering memorandum exemption,
- family, friends and business associates exemption,
- existing security holder exemption, and
- crowdfunding exemption, together with a registration framework for online funding portals.
The Canadian Securities Administrators currently have a comment period open to allow an existing security holder exemption in some of its jurisdictions. The comment period closes January 20, 2014.
3 risks of exempt securities
While exempt securities can help businesses to raise capital and offer investors more choice, investors should be aware of the risks:
- Liquidity risk – The risk that you can’t sell when you need or want to. Exempt securities aren’t publicly traded, so you might not be able to sell them quickly or at all.
- Lack of information – Exempt securities aren’t held to the same public reporting standards as listed ones.
- Startup risk – Companies who issue exempt securities are often new and looking for capital to grow. There’s a high risk a new company could go out of business, taking your money with it.
Companies can issue securities to raise money without the time and expense of filing a prospectus. This is called an exempt distribution.