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OSC Investor Education: The exempt market

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The Globe and Mail | GetSmarterAboutMoney.Ca | Feb 10, 2014

Investor Education Fund OSC Initiative - OSC Investor Education:  The exempt marketSecurities must be issued with a prospectus – a document that provides detailed information about the investment. But there are a few exceptions to this rule – these are called prospectus exemptions.

4 things to know about the exempt market

  1. The exempt market includes investments like debt, equity, asset backed securities, investment funds and derivatives.
  2. Prospectus exemptions can help businesses because it lets them raise money without the time and cost of preparing a prospectus.
  3. 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.
  4. 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.

View:   The Importance of Crowdfunding Background Checks

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:

  1. 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.
  2. Lack of information – Exempt securities aren’t held to the same public reporting standards as listed ones.
  3. 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.

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