Q:  What is a Prospectus-Exempt Security? 

A:  A prospectus-exempt security, also called an exempt-product, is an investment issued by a private corporation that is sold in the Private Capital Market, not the Public Market.  In the Public Market, companies must issue a prospectus to sell shares and there are large costs associated with being public.  In the Private Capital Market, instead of a prospectus, companies real on prospectus exemptions issued by the Canadian Securities Administration, such as National Instrument 45-106, which permit private corporations to sell shares without a prospectus.  Examples of these exemptions are the Accredited Investor (AI) Exemption, the Minimum Amount (MA) Exemption, and the Offering Memorandum (OM) Exemption. 

In the Public Market, shares in companies are publicly listed and can be bought and sold on a stock exchange.  In the Private Capital Market, there is no stock exchange.  The shares are purchased through an Exempt Market Dealer (EMD), making it a private sale.  A prospectus is a very lengthy document, while and Offering Memorandum is much lighter, which means investors should do much due diligence as they can when buying exempt-market securities.  When a company raises capital in the Private Capital Market, the costs are lower as compared to going public.  Cost savings and managerial efficiency are the main reason why companies elect to sell their shares in the Private Capital Market. 

Q:  What is an example of an Exempt Market Product or Security? 

A:  Some examples include Non-Public funds such as hedge funds, venture capital funds, private equity funds, asset-backed securities, Real Estate Investment Trusts (REITs), shares or units of Mortgage Investment Corporations (MIC’s) or Mortgage Trusts, and shares or units of a Land Development Limited Partnership.

Q:  What is an Exempt Market Dealer? 

A:  An Exempt Market Dealer (EMD) is a company or a person registered in at least one jurisdiction in Canada who is licensed to underwrite and sell securities that are prospectus-exempt, as defined in the National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations.  Through their Dealer Representatives (DR’s), an EMD distributes shares or units of these products through the Subscription process. 

Q: What are the responsibilities of an Exempt Market Dealer? 

EMDs are required to submit each investment scenario through a rigorous due diligence process, which includes a Know Your Client (KYC) test and a Know Your Product (KYP) test, and to assess whether the investment is suitable for their client.  

They are required to have sufficient knowledge about the products they deal in, and to have a good knowledge of the potential investor’s situation, including their ability to handle risk. 

They must maintain good standing with the securities regulators of the jurisdictions that they are registered to do business in. This includes being responsive to the inquiries of these securities regulators, and to ensure that their business practices benefit and protect the client, and to preserve the reputation of both the Exempt Market Dealer and the capital markets as a whole. 

Q: What are the benefits of investing in the Exempt Market? 

The Exempt Market, or Private Capital Market, allows certain types of investors to access investment products that are usually only allowed for large-scale, institutional investors.  

Provided one qualifies as an Eligible or Accredited Investor, certain products that are not available in the retail market can be made available for a qualified investor to subscribe to and benefit from.

On the other side, smaller businesses and issuers that may not have the resources to go public but also need to raise money for expansion, operation, and innovation may benefit from the Exempt Market by connecting with Eligible or Accredited Investors.