The Exempt Market Explained.

You might be new to the Exempt Market. It is a term created by securities regulators in Canada to define a private capital marketplace where companies, trusts, funds and other financial organizations can offer investors an opportunity to participate in private investments.

This is distinct from the public market, where shares are sold on a stock market, or what is called a secondary market.

The exempt market uses a different information document than the public market does, but it is still regulated by the CSA and respective securities commissions with a set of rules and regulations, and entities are audited.

As an Exempt Market Dealer, Harbour Park Capital Partners Ltd. (HPCPL) underwrites and distributes private investment offerings. These investments are called “exempt” because they are exempt from the standard regulatory requirement to issue a prospectus, which entities on stock markets or other secondary markets (public markets) must provide. Exempt market offerings are often sold using an Offering Memorandum document.

  • 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, which can be expensive and time consuming.  In the Private Capital Market, instead of a prospectus, companies rely on prospectus exemptions issued by the Canadian Securities Administration, such as National Instrument 45-106, which permit private corporations and entities to sell units without a prospectus. In the private marketplace, “units” are used as opposed to “shares”. 

    Examples of these exemptions are the Accredited Investor (AI) Exemption, the Minimum Amount (MA) Exemption, the Eligible Investor Exemption (EI), 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 (the secondary market).  In the Private Capital Market, there is no stock exchange.  The units are purchased through an Exempt Market Dealer (EMD), making it a private sale. 

    Because a prospectus is a very lengthy document, and an Offering Memorandum (OM) is much lighter, investors should do as much due diligence as they can and examine the OM when buying exempt-market securities. 

    When a company raises capital in the Private Capital Market, the costs are lower as compared to doing so on a public market.  Cost savings and managerial efficiency are the main reason why companies elect to raise capital in the Private Capital Market.

  • Some examples of exempt market products 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.

  • Each product undergoes a rigorous evaluation and quality control test, has a suitable investor model created for who is most suitable for the product, thresholds established for suitability that potential investors must surpass, an evaluation of the offering memorandum, subscription agreement and all of the marketing materials for investment and information accuracy and compliance before being suitable for discussion by dealer reps with potential investors. Then training for selling the product is undertaken by dealer reps. This is commonly known as KYP, or Know Your Product training.

  • An Exempt Market Dealer (EMD) is a company registered in at least one jurisdiction in Canada, 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 units of these products through the Subscription process.

  • EMDs maintain registered connection to the security regulators and act as an independent evaluator of suitability of the investment for the investor, on behalf of the investor.  This includes the use of tangible tools and interviews with investors to measure understanding of investing, individual investing goals and objectives, understanding of the investment itself, understanding of the process of the investment and all details in the OM, risk tolerance and capacity for each investor, financial details and resources and personal information of each investor.

    Exempt market dealers must maintain good standing with the securities regulators of the jurisdictions they are registered to do business in. This includes being responsive to the inquiries of these securities regulators, and to ensure 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. 

    Exempt Market Dealers must also register and train all their Dealer Reps on an ongoing basis, ensuring that they are also fully compliant and trained with all new developments in the industry and with all of the products. Training also requires updates to ongoing KYC practices and new regulations.

    The Exempt Market Dealer must maintain all records with respect to investments (including investments not completed) and notes and discussions with all investors. They are also responsible for applying Fintrac anti-money laundering policies and adhering to all AML laws.

    Exempt market dealers may carry more than one product on their shelves and from different issuers, as long as they are all exempt market products.

    Exempt market dealers are also audited annually.

  • The Exempt Market, or Private Capital Market, allows certain types of investors to access investment products that are traditionally 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 other investors to participate in under the Offering Memorandum Exemption. This is particularly noticeable in British Columbia where the rules are very investor-friendly, and many people in the region know much about real-estate. Real estate investments make up a great deal of the exempt market products.

    This allows an opportunity for more investors to invest in areas that they are familiar with, on a simpler, and often pooled basis, without having to go to a secondary marketplace like a stock market. The exempt market may be more of a passive investment for investors, without the daily volatility of a stock market.

    The exempt market is a less-expensive and straightforward way to not only register and raise capital for some businesses, but it can save time and resources early on, while addressing a wider range of investors.