Exempt Securities

Exempt securities are issued by companies who are exempt from regulatory requirements to file a prospectus. A prospectus is a disclosure document that describes the company, its business and the security offered. Exempt market securities are often high risk as there are no secondary markets where you can sell the securities and are often illiquid. These type of securities are often sold by Exempt Market Dealers.

Prospectus

When a company offers securities to the public, it has to prepare a prospectus. A prospectus is a disclosure document that includes specific details about the company, its business and the security that is being offered. The prospectus must provide full, true, and plain disclosure of all material facts relating to the securities issued or proposed to be distributed. If securities are to be sold within different provinces, a prospectus must be filed with each province in accordance with securities law in that province.

  • Long Form Prospectus
    • Long form prospectus is often filed when a company is looking to go public via an initial public offering (IPO). A long form prospectus is the most detailed as it contains company operation details, financial information, risk factors, and how funds raised are to be used.
  • Short Form Prospectus
    • Short form prospectuses are often issued by public companies listed in Canada who have already filed a long form prospectus. Certain information may be omitted or referenced. Short form prospectus is often called the “red herring” because red ink found on the front page indicates information such as the price and size of the offering, is subject to change.
  • Shelf Prospectus
    • A shelf prospectus is often filed when the company does not intend to sell securities at the present time. Many companies often file a shelf prospectus if they wish to get the process started beforehand and qualify to offer securities to the public ahead of time. When they’re ready, they’re able to quickly access funds when needed or when market conditions improve.
Exempt Securities
Exempt Securities are often bought by accredited and wealth investors who are looking for revenue streams outside normal course of action.

Exempt Securities Market Dealers

Exempt securities are distributed by Exempt Market Dealers (EMD). These are firms who are licensed to distribute securities that are exempt from prospectus requirements mentioned above. These exempt market dealers are registered in their respective provinces that they conduct business in and must follow the rules and regulations of that province.

Although Exempt Market Dealers have prospectus exemption, they still have regulations that they must follow such as capital, conduct and compliance requirements. In addition, they are subject to Know Your Client and suitability requirements that apply to licensed advisors.

Before you invest in an exempt securities, be aware of the following risks:

  • Risk of Loss
    • Exempt securities are for individuals who have a higher risk tolerance as there is a chance that you could lose a large portion or all of your investment. Be aware of the risk factors that come with exempt market securities.
  • Lack of Disclosure
    • Exempt market dealers are not obligated to provide interested parties with detailed information about a particular investment. The individual purchasing exempt market securities should have enough knowledge themselves and be able to do research on their own.
  • No Secondary Market
    • There is no secondary market for exempt market securities thus making it difficult to sell. Be aware that these type of securities may have a locked-in period which may keep you from selling the investment. Many securities are not publicly traded as well which may force you to hold the security longer than you wish.

Types of Exempt Securities

Exempt securities are private capital investments that qualified investors can purchase in order to add extra diversification into their portfolios. They include a range of debt and equity instruments such as bonds, mortgages, real estate partnerships, income funds, labor sponsored funds, oil and gas flow-through shares and hedge funds. Below, we’ll list the most common type of securities that you might run into in the exempt market.

  • Hedge Funds
    • Hedge funds are alternative investments that pool investors’ dollars and invest them into various financial instruments. Hedge funds try to generate positive return, regardless of market direction by taking advantage of arbitrage opportunities, using long and short strategies and utilizing options, to name a few.
  • Asset-Backed Securities
    • Asset backed securities are complex investments that are backed by an underlying financial asset. These financial assets are a group of illiquid assets which are unable to be sold individually. Common asset backed securities include credit card loans, mortgage, loans, auto loans, home equity loans, etc.
  • Real Estate Partnership Units
    • Investors can invest in real estate which is a broad market. This can range from buying a property to more complex such as Real Estate Limited Partnership Units. (RLPU). Real Estate Partnership Units is typically when a group of investors buy real estate for the purpose of generating a cash flow. and long term appreciation. Interested investors would participate in the project and be rewarded if the project or investment is successful, either on the back-end or on the disposition of the asset.
  • Private Placements
    • Private placement is when a company raises money through a non-public offering. They’re typically offered to a small number of investors which includes friends, family, accredited investors and institutional investors. Private placements are attractive to wealthy and knowledgeable investors as they typically allow for the purchase of stock at discounted prices while offering warrants to purchase additional stock in the future.
  • Venture Capital
    • Venture capital is a form of private equity financing that is provided to early stage, start up and emerging companies who are believed to have the potential for growth.
  • Commodities
    • Investors can invest in commodities through futures contracts or exchange traded funds. Commodities include agricultural products such as corn, wheat, soybeans, pork bellies, etc. Precious metals such as gold and silver are commodities as well. Trading commodities involves taking a position whether the price of a specific commodity will rise or fall. Be aware that trading commodities is high risk and not for a novice investor.
  • Flow Through Shares
    • Flow through shares provide a tax incentive to investors who acquire them. Companies in the mining, oil and gas and renewable energy are allowed to issue flow through shares to help finance their projects. These companies typically struggle to raise capital to finance their exploration and development activities which is why flow-through-shares are attractive.