Investing in the exempt market offers investors an opportunity to participate in early-stage companies. These are usually businesses that are not large enough to be a public company. It also provides investors with another option for diversifying their investment portfolios with asset classes other than stocks, bonds and cash. There are many types of prospectus exemptions that allow individuals to invest in the exempt market. However, this kind of investing also comes with risks. Learn more about what is involved.
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What is the exempt market?
The exempt market is a section of Canada’s capital markets where securities can be sold without a prospectus. A prospectus is a document that provides detailed information about a security and the company offering it. Generally, securities offered to the public in Ontario must have a prospectus. Exemptions to this rule are called prospectus exemptions. The exempt market allows you to invest in prospectus exempt securities. Prospectus exemptions can help businesses because it lets them raise money without the time and expense of preparing a prospectus.
Investments like debt, equity, asset-backed securities, investment funds and derivatives can be sold in the exempt market.
Some scammers pitch fraudulent investments as exempt securities. Learn more about investment scams.
What are the risks of exempt securities?
Prospectus exemptions can help businesses raise money and offer investors more choice. But you 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 are not required to provide the same amount of information as a public company. You may not be seeing the full picture.
- 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.
Do people selling exempt securities need to be registered?
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.
There is no requirement for companies to sell their securities through a registered dealer. However, a company selling their securities without a registered dealer must consider if its activities mean it is “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.
There are restrictions on resale of exempt securities. They can often only be resold if certain conditions are met. These resale conditions are designed to ensure 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.
Remember to 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, you should still check to see if they are registered.
What types of prospectus exemptions are there in Ontario?
There are several types of prospectus exemptions. Each type has its own rules about who can sell securities and who can buy securities under the prospectus exemption.
1. Accredited investor
The accredited investor prospectus exemption allows companies to sell their securities to individuals who have at least one of the following:
- Net income before taxes of more than $200,000 in each of the two most recent calendar years and expected net income of more than $200,000 in the current calendar year.
- Net income before taxes combined with a spouse of more than $300,000 in each of the two most recent calendar years and expected combined net income of more than $300,000 in the current calendar year.
- Financial assets, alone or with a spouse, of at least $1 million before taxes but net of related liabilities. Financial assets include cash and bank deposits but not the value of a house.
- Net assets, alone or with a spouse, of at least $5 million. Net assets generally include all of your assets after subtracting your debt.
Companies can also sell their securities to pension funds, charities and certain other entities under the exemption.
There are no limits on how much accredited investors can invest.
2. Self-certified investor
The self-certified investor prospectus exemption allows companies to sell securities to an individual who holds certain designations or degrees related to Canadian securities regulation, or who has relevant experience in the same industry or sector as the company.
The self-certified investor prospectus exemption is not available for purchases of securities of investment funds. The purchase price of all securities purchased by a self-certified investor or their permitted designate under the exemption in a calendar year cannot be more than $30,000.
The self-certified investor prospectus exemption is in effect until October 25, 2025.
3. Crowdfunding
The crowdfunding prospectus exemption allows Canadian companies, particularly start-ups and businesses in early stages of development, to sell securities online though a single portal that is registered with the Ontario Securities Commission (OSC).
Anyone can buy securities under this exemption but there are limits.
- Anyone can invest up to $2,500 per investment but not more than $10,000 in total for all investments under the crowdfunding exemption in a calendar year.
- An accredited investor can invest up to $25,000 per investment but not more than $50,000 in total in a calendar year.
- Certain very large investors, such as banks and governments, can invest any amount.
4. Existing security holder
The existing security holder prospectus exemption allows public companies listed on certain exchanges to sell securities to their existing investors.
Investors who already hold the security being offered by a company can invest up to $15,000 in a 12-month period using this exemption. However, the investment limit of $15,000 in a 12-month period may be exceeded if the investor has received advice from an investment dealer that it is suitable for the investor.
5. Family, friends and business associates
The family, friends and business associate’s prospectus exemption allows companies to sell securities to the executive officers, directors and controlling owners of a business and their immediate family members, their close business associates, and their close personal friends. There are no limits on how much investors can invest under the exemption.
6. Minimum amount investment
The minimum amount investment prospectus exemption allows companies to sell their securities to an investor who is not an individual person (such as a company) provided the purchase price of the security is at least $150,000 and is paid in cash at the time of the purchase.
7. Offering memorandum
The offering memorandum prospectus exemption allows companies to sell securities to a wide range of investors based on an offering memorandum being made available to investors. An offering memorandum is a document that follows a prescribed form and outlines a company’s business and affairs.
Anyone can buy securities under this exemption, but there are limits depending on whether they are an eligible or non-eligible investor.
To qualify as an eligible investor, you must have at least one of the following:
- Net assets, alone or with a spouse, exceeding $400,000.
- Net income before tax exceeding $75,000 in the previous two calendar years, with an expectation to exceed that level in the current year.
- Net income, alone or with a spouse, exceeding $125,000 in the previous two calendar years, with an expectation to exceed that level in the current year.
Limits on the amounts you can invest:
- For eligible investors:
- The purchase price of all securities purchased under the exemption in the 12 months before the purchase cannot be more than $30,000.
- For investors who receive advice from a portfolio manager, investment dealer or exempt market dealer that an investment above $30,000 is suitable, the price of all the securities purchased by the investor under the exemption in the 12 months before the purchase cannot be more than $100,000.
- For non-eligible investors:
- The purchase price of all securities purchased under the exemption in the 12 months before the purchase cannot be more than $10,000.
8. Rights offering
The rights offering prospectus exemption allows public companies to sell securities to their existing security holders. Rights to purchase securities are issued by the company and distributed to security holders on a pro rata basis.
Holders of rights can decide whether to exercise the right to purchase securities of the company by paying the subscription price of the securities. There are no limits on how much investors can invest under this exemption.
Information on withdrawal rights, disclosure documents and risk acknowledgement forms
Want to know more?
- Can you change your mind after you have signed an agreement to purchase the securities?
- What are the types of disclosure documents that you are entitled to receive?
- Do you need to complete a risk acknowledgement form?
For more information on the prospectus exemptions listed above, read this summary of key capital raising prospectus exemptions in Ontario from the Ontario Securities Commission.
Learn more about the exempt market.
The availability of a prospectus exemption to distribute securities does not mean there is a corresponding registration exemption. Always check before you invest.
Summary
The exempt market is a section of Canada’s capital markets where securities can be sold without a prospectus. Keep in mind:
- Investing in the exempt market offers investors an opportunity to participate in early-stage companies that are not large enough to be public companies. But it also carries investment risks such as the risk of loss, locked-in investments, and lack of information.
- A prospectus is a document that provides detailed information about a security and the company offering it. Prospectus exemptions can help businesses because it lets them raise money without the time and expense of preparing a prospectus.
- Generally, securities offered to the public in Ontario must have a prospectus. The exempt market allows you to invest in prospectus-exempt securities.
- Investments like debt, equity, asset-backed securities, investment funds and derivatives can be sold in the exempt market.
- There are resale restrictions on exempt securities. 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.
- There are several types of prospectus exemptions in Ontario, including the accredited investor, self-certified investor, and crowdfunding exemptions.
- Just because there is a prospectus exemption doesn’t mean there is also exemption from registration to sell investments. Always check the registration status of anyone selling you an investment.
