Generally, securities offered to the public in Ontario must be offered with a prospectus – a document that provides detailed information about the security and the company offering it. However, there are some exemptions to this rule that allow securities to be offered without a prospectus – these are called prospectus exemptions.
Investing in the exempt market offers investors an opportunity to participate in early stage companies with innovative products that are not large enough to be a public company. It also provides them with another option for diversifying their investment portfolios with asset classes other than stocks, bonds and cash.
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5 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 without the time and expense of preparing a prospectus.
- There are a number of different prospectus exemptions, and each has its own rules about who can sell securities and who can buy securities under the prospectus exemption.
- In many cases, a security sold under a prospectus exemption can only be resold if certain conditions are met.
- Some scammers pitch fraudulent investments as “exempt” securities. Learn more about investment scams.
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. Companies raising money through a prospectus exemption may not be required to provide the same amount of information as a public company.
- Locked-in investment. You may not be able to resell an exempt market security when you need or want to. Exempt securities typically 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.
Companies can issue securities to raise money without the time and expense of filing a prospectus. This is called an exempt distribution.
Who needs to register to sell exempt securities
Individuals, firms or online portals that are in the business of trading or advising in securities are required to register as a dealer or portfolio manager (also known as a “registrant”). Learn more about registration categories.
Although there is no requirement for companies to sell their securities through a registered dealer, a company selling their securities without the use of a registered dealer must consider whether its activities result in it being “in the business” of trading in securities. A company that is “in the business” of trading in securities, would generally be subject to the dealer registration requirement.
Exempt securities can often only be resold if certain conditions are met. These resale conditions are designed to ensure that there is sufficient disclosure available for a subsequent purchaser to make an informed investment decision. If you purchase a security sold under a prospectus exemption, be aware that it may be difficult to sell, or you may not be able to sell it at all.
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.
Exempt market securities offer investors more choice of products to help them achieve their financial goals, but they should be aware that there are many risks associated with investing in the exempt market.
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.