The exempt market explained

Generally, securities offered to the public in Ontario must be offered with a prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition – 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 investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition portfolios with assetAsset Something of value that a company or an individual owns or controls. Examples: buildings, equipment, property, a car, investments, or cash. Can also include patents, trademarks and other forms of intellectual property.+ read full definition classes other than stocks, bonds and cash.

5 things to know about the exempt market

1. Investments like debtDebt Money that you have borrowed. You must repay the loan, with interest, by a set date.+ read full definition, equityEquity Two meanings: 1. The part of investment you have paid for in cash. Example: you may have equity in a home or a business. 2. Investments in the stock market. Example: equity mutual funds.+ read full definition, asset-backed securities, investment funds and derivatives can be sold in the exempt market.
2. Prospectus exemptions can help businesses because it lets them raise money without the time and expense of preparing a prospectus.
3. 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 exemptionProspectus exemption An exemption that allows a company lawfully to sell securities without providing a prospectus.+ read full definition.
4. In many cases, a security sold under a prospectus exemption can only be resold if certain conditions are met.
5. 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:

1. Risk of loss. Investing in the exempt market is risky. You could lose your entire investment.
2. 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.
3. Locked-inLocked-in An account that you cannot take money out of until you retire. In most cases, you can’t get a cash payout. Your plan may make exceptions if you have a terminal illness, or a small pension benefit.+ read full definition 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 distributionDistribution A payment you get from a mutual fund or company stock. Funds must distribute any capital gains to shareholders at least once a year. This payment can take the form of cash or additional units. Some companies offer Dividend Reinvestment Plans (DRIPs).+ read full definition.

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 managerPortfolio manager An investment professional who manages your investment portfolio. For example, they buy, sell and monitor investments that fit their clients’ goals and tolerance for risk.+ read full definition (also known as a “registrantRegistrant A person or company that is registered with the securities regulator in the province or territory where they do business. They must be registered before they can legally sell securities or offering investment advice.+ read full definition”). 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 registrationRegistration A requirement for any person or company trading investments or providing advice in Canada. Securities industry professionals are required to register with the securities regulator in each province or territory where they do business.+ read full definition requirement.

Always check before you investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition. To check the registration status of a person or company, contact the Ontario Securities Commission. Learn more about checking registration.

Resale restrictions

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 regulatorSecurities regulator A government agency that enforces the securities act in jurisdiction it has authority over. This act is made up of laws that establish rules for issuing and trading securities. The Ontario Securities Commission is the securities regulator for Ontario.+ read full definition 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.

Key point

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.

Take action

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.