The exempt market explained
Securities must be issued with a prospectus – a document that provides detailed information about the securities and the business issuing the securities. But there are a few exceptions to this rule – these are called prospectus exemptions.
4 things to know about the exempt market
- Investments like debt, equity, asset-backed securities, investment funds and derivatives can be sold in the exempt market.
- Prospectus exemptions can help businesses because it lets them raise money with less time and cost than preparing a prospectus.
- While there are many different prospectus exemptions, two of the most commonly used are:
Some scammers pitch fraudulent investments as “exempt” securities. Learn more about investment scams.
- The accredited investor exemption – This exemption allows businesses to raise money from investors who have certain characteristics, such as the ability to withstand financial loss and the financial resources to obtain expert advice. Such investors include any individual who alone or with a spouse owns more than $1 million in financial assets net of any related liabilities or whose net income before taxes exceeds at least $200,000 under specific conditions.
- The $150,000 minimum amount exemption – This exemption allows businesses to sell shares only to companies (but not individuals) that invest a minimum of $150,000 paid in cash at the time of the sale.
3 risks of exempt securities
Prospectus exemptions can help businesses raise money and offer investors more choice, but investors should be aware of the risks associated with investing in the exempt market, including:
- Risk of loss – Investing in the exempt market is risky. You could lose your entire investment.
- Lack of information – Businesses raising money through prospectus exemptions may not be required to provide the same amount of information as a public company.
- Locked-in investment – The risk that you can’t sell when you need or want to. Exempt securities often aren’t publicly traded, so you might not be able to sell your investment quickly or at all. This is also known as liquidity risk.
Businesses can issue securities to raise money without the time and expense of filing a prospectus. This is called an exempt distribution.
Crowdfunding is a way for start-ups or early stage businesses to raise amounts of money from a large number of people, typically through the internet. Examples of different crowdfunding models include:
- Donation-based crowdfunding is strictly charitable, allowing people to give money to fundraise for a cause or assist someone in need with no expectation of receiving anything in return.
- Reward-based crowdfunding sees individuals or organizations providing rewards in exchange for people contributing to their projects. These projects can range from creating a new type of kitchen gadget to publishing a cookbook, and successfully-funded campaigns may provide backers with exclusive products, such as an early edition of the gadget or a first-run copy of the book.
- Equity crowdfunding allows people to invest in a business. In return for their money, investors are given a small stake in the company.
With equity crowdfunding, the goal is to raise money by selling stakes in a business to investors, usually in the form of shares.
Participating as an investor in equity crowdfunding is extremely risky, but it can also be a way to support innovation and become part of a community of entrepreneurs.
Learn more about equity crowdfunding.
Take action – check registration
In Canada, anyone who sells securities or advises other people or businesses on securities must be registered with the securities regulator in each province or territory where they do business, unless an exemption applies. Selling securities without a prospectus does not mean there is no registration requirement. If someone is trying to sell you an investment and tells you that they’re exempt from registration or that the products they offer are exempt, go to AreTheyRegistered.ca
to check if they are registered.
Date modified: 2016-01-25