The exempt market is a relatively new term for investors and many aren’t even sure what it means. In the past we referred to it as the “private” or “alternative” market and many of the companies involved were doing real estate based investments. Other types of exempt market products include REITs, Hedge Funds, Flow Through Shares, Limited Partnerships etc.
To put it in simple terms, when Canadian businesses or the government of Canada raises capital, they generally do so through a prospectus. A securities regulator reviews the prospectus for completeness including a full disclosure of risk and a full disclosure of material facts. To sell securities under a prospectus is very costly and onerous and can deter smaller companies in their ability to raise capital. Many of these companies rely on “exemptions” from the prospectus requirements in order to raise capital for their projects. Common exemptions include:
In summary then, investments that are sold using one of these exemptions make up the Exempt Market.
The exempt or private capital market has been around for centuries as people have always raised private capital to fund their developments. Prior to the 2000's though, this market was largely inhabited only by the wealthy and not available to average investors. At that time, companies that didn't want to complete a full prospectus in order to raise capital used an "exemption" from prospectus. For example, raising money from only friends and family, having a $150,000 minimum investment amount or raising capital from accredited (wealthy) investors. In the 2000's, this all changed with increased use of the 4th common exemption - the Offering Memorandum. This document is a more condensed version of a prospectus and allows average investors to enter the Exempt Market with lower minimums and the ability to be an "eligible" instead of "accredited" investor. This is where the shift took place and gave average investors the ability to participate in a marketplace that previously was only available to the wealthy and those in the "know".
No, investments in this market are not available to everyone. There are different criteria based on the province that you live in. Click here to see if you are eligible to invest in the Exempt Market.
The Exempt Market offers sound companies and sound investment products. It's all well and good to offer a 12 - 15% annual return but it means absolutely nothing if the underlying company can't deliver it. Today's market is under intense scrutiny from the provincial securities commissions and so the standards are extremely high when choosing companies to offer to investors. Exempt Market Dealers perform very high levels of due diligence on each opportunity that is presented to them and based on that, they might choose 1 out of every 25 - 30 companies that meet all the qualifications of this diligence process. For investors, this means that the companies they are investing in have great management, strong track records and solid business plans to achieve the rates and terms that they are offering.
There are investments to suit any type of investor with many different types of products to choose from. Investors that are looking for income can choose monthly or quarterly payments. They can also decide between a fixed rate of return or a product that has both income and growth components - these might offer less income throughout the term and more capital appreciation upon completion. Some products offer interest income, some offer dividend income and some offer capital gains. There are also various terms available with some being short (1 - 5 years), and some being longer (5 - 10 years). Some terms are fixed and others have a projected range of when they will complete based on varying exit strategies.
Many issuers now offer early redemption features as well. There are generally fees and restrictions with early redemption but it can give investors more flexibility than was previously available with private investment opportunities.
You can invest with cash, corporate funds or registered funds like RRSP's, TFSA's, LIRA's and RESP's.
Investing in the Exempt Market is an easy process:
Something that I hear quite frequently when I meet with a new client is that they want higher returns but they're not sure about the Exempt Market. They've heard it's too risky. Maybe you've heard this too so it's a good time to discuss the risks involved and what has transpired over the last few years to make this a much safer place to be.
One of the main reasons that the Exempt Market is considered high risk is because the securities are not liquid. In other words you can't sell the securities in a short period of time and turn them into cash like you can with a stock or a mutual fund. If you commit to a 1-year term or a 5-year term, you have to expect that your money will be held for that length of time. There are some exceptions to this rule such as early redemption features, hardship clauses and selling your securities to other investors but these are not always easy or guaranteed so generally you must expect to stay in your investment until the term is up. This limited liquidity is typical and expected in these types of investments because of the nature of the market. Companies don't want a lot of liquidity because then you have to hold back a lot of capital from being deployed. If it's not deployed, it's not working for you and not providing the higher returns that investors expect in the Exempt Market.
Something else that added a lot of risk to the Exempt Market in recent years is the fact that the market was not well regulated. Prior to 2010, there were no Exempt Market Dealers, very little accountability for companies raising capital and very little training for the sales people raising that capital. In September/2010 that all changed and the Securities Commissions stepped in to provide some much needed structure and regulations.
Here's an overview of some of the changes that came into effect in September 2010 and why they are good for investors:
In summary, there are risks associated with any type of investment but with the changes that have taken place in the Exempt Market, it's become a very secure environment with numerous safeguards in place for everyone involved. For companies looking to raise capital from investors, it's become a very challenging process to meet the strict requirements of the EMD's and Securities Commissions. For investors themselves, it's become a much safer environment with some of the best issuers available offering well above average interest rates and strong security.
No they are not. Investments of any type come with varying degrees of risk and the same can be said for the Exempt Market. The security and terms put in place varies by issuer making some products much lower risk than others, but overall it's still considered a high risk market because of the lack of liquidity. It’s important for investors to fully understand an investment, including the risks involved, before committing their hard earned money.
It’s never a good idea to put all of your eggs in one basket so the Exempt Market doesn’t have to make up your entire portfolio. You can diversify your portfolio by adding Exempt Market investments and also diversify within the Exempt Market. Adding Exempt Market products to your existing portfolio is a great way to add some higher, consistent returns to your mix of stocks, bonds and mutual funds. It's also a good way to become acquainted with the market and get a feel for what is available here. It generally becomes a much bigger part of many investors’ portfolios once they have some exposure to it and then they can continue to mitigate risk by investing in several products within this market. This is now an easier proposition with one Exempt Market Dealer offering an array of issuers - all with their diligence levels met.
Many investors shy away from this market because of the words "due diligence". Investors know they should do it - they shouldn't invest in a company without knowing all about its history, track record, management and financials. The trouble is, they don't know exactly what to look for, how to find it or understand what it all means when they have it. That alone is one of the key reasons that WealthUp Investments aligned with WhiteHaven Securities Inc. as our Exempt Market Dealer. Their Chief Compliance Officer does extensive diligence on every issuer and project they are considering. If the issuer passes their rigorous diligence, they then educate their Dealing Representatives so that they can pass all of this knowledge on to their clients. Now, I’m certainly not saying, “don’t perform any due diligence” – of course you can. You can do as much research and investigating as you want before you decide to invest your hard earned money. Speaking with a Dealing Representative that is well versed in the project is a great place to start though and can give you a great overview of what “due diligence” means and how to perform it.
Many people believe that if they make regular contributions to mutual funds, they will eventually have enough to retire on at a decent age. Hopefully this strategy will prove successful over the long term but aside from beating inflation and providing a small nest egg - it's generally not an effective strategy to build real wealth.
Now, I'm not saying, don't ever invest in mutual funds - they have their place in your portfolio. What I am saying is that if the last 10 years are any indication, you will need a very long hold period to make any kind of decent return.
So back to the original question...how can you build real wealth? What have wealthy people done that is different from what you're doing? The big secret is, they've invested in equity. By equity, I don't mean stocks. I mean they've invested in real estate, they've invested in their own businesses and built up the value or they've invested in the private (exempt) market.
I've mentioned in the past that up until a few years ago, Exempt Market projects and investments were available almost exclusively to higher net worth or accredited investors. If investors didn't have accredited status, then they had to know someone personally in order to participate in their project or fund.
To make a long story short, the majority of these investors, even when they were just getting started, invested their money in equity projects. They were patient as the project completed and then they reaped the rewards as the project gained in value and was sold.
Let me give you an example to illustrate my point. If you invest in a project with a bond/share structure, you earn interest on a bond and then also share in the profits with your shares once the project is completed and sold. In the Exempt Market, many companies offer this profit sharing option which can provide double digit returns once the project comes to fruition. Reinvesting again and again can compound these returns which can exponentially increase your wealth.
Now, (no disclaimer needed as I'm sure you know what I'm about to say) - none of this is guaranteed and it is all dependent on a successful project. You're very lucky though because in today's Exempt Market, the companies available to you have years of experience and proven track records. They take great strides to mitigate the risks, complete their projects and offer great rewards to their investors.
The mid 2000’s saw a real boom in the Exempt Market in Alberta. Many new companies came into existence with varying levels of experience and track record and there was very little monitoring by the provincial securities commissions. During the recession, many of these companies failed or lost money, which caused a lot of investors to be gun shy when it comes to private investments. Fast-forward to today and the Exempt Market is a completely different landscape. There are new rules and regulations, and close monitoring by both Exempt Market Dealers and provincial Securities Commissions. The changes are numerous and have made it a very investor-friendly place to be.
The majority of people don’t have a lot of extra cash sitting around to invest but they have contributed regularly to their RRSP/TFSA accounts. If you’re in this majority, you’ve probably also noticed that your money has been sitting stagnant for years in these accounts with very little growth (other than your regular contributions). Using these funds, building your money substantially and then being able to defer the tax (RRSP) or not pay it at all with a TFSA is a terrific bonus for investors. I alwaystell my clients, don't think of it as a TFSA - think of it as a TFIA (Tax Free Investing Account). As of this year (2016), you can have $46,500 to invest in this account with that amount continuing to grow every year. Investing in a product that offers profit sharing can be very lucrative and really jump-start your retirement savings.
Almost all Exempt Market products allow you to invest using registered funds. This includes, but is not limited to, RRSP’s, TFSA’s, RESP’s, RIF’s, LIRA’s and LIF’s.
Here Is The Process:
A common misconception among investors is that they will have to pay taxes on their registered funds if they use them towards an exempt market investment. This is not the case at all as the funds are transferred between registered accounts and never leave the registered umbrella.