Wealth Up Investments | Your Exempt Market Specialists
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Exempt Market in General

What is the Exempt Market?

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:

  • Issuing an Offering Memorandum.
  • Selling only to accredited investors.
  • Selling only to family friends and business associates.
  • Selling a minimum of $150,000.00 per transaction.

In summary then, investments that are sold using one of these exemptions make up the Exempt Market.

Why haven’t I heard of the Exempt Market before?

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".


Exempt Market Investments

Can anyone invest in the Exempt Market?

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.

Are there good investments and quality companies 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. 

What types of investments are available in the Exempt Market? Are all of the investments long term?

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.

Can I only invest with cash?

You can invest with cash, corporate funds or registered funds like RRSP's, TFSA's, LIRA's and RESP's.

How Do I Invest?

Investing in the Exempt Market is an easy process:

  • Make sure you meet the requirements of an eligible investor.
  • Choose some investments that interest you.
  • Contact me for more information.  I can send information by email, we can talk on the phone, I can let you know about upcoming presentations in your city or we can set up a personal appointment at your convenience.
  • Fill out a "Know Your Client" Form.  This form will give me a clear picture of your risk tolerance, your investment knowledge and your current financial position.  It also allows me to offer you investments that are most suited to your personal financial situation.
  • Decide if you want to invest with cash or registered funds.
  • Fill out the appropriate paperwork.
  • I will be involved in the whole process to make sure that everything goes smoothly and I will also be available afterwards to send you updates and answer any questions or concerns along the way.


Risks and Rewards

Is the Exempt Market too risky?

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:

  • For the first time in the history of the Exempt Market in Canada, advisors now require a license.Prior to the new regulations, basically anyone could raise capital for Exempt Market investments and there were varying levels of expertise and training. Sometimes you met with a skilled advisor but most companies hired their own sales staff and many had no prior training with Exempt Market products.
    WHY THIS IS GOOD FOR INVESTORS: The licensing process is onerous and difficult and gives the salesperson an excellent education to advise you about Exempt Market products and their suitability for you and your portfolio. Investors can take comfort that the Exempt Market is safe as all the professionals operating within its borders are licensed individuals whose backgrounds have been through a thorough vetting process.
  • In addition to the licensing requirements, sellers must now be employed under an Exempt Market Dealer (EMD).
    The EMD in turn must report to and comply with all of the regulation requirements from the Alberta Securities Commission.WHY THIS IS GOOD FOR INVESTORS: Exempt Market Dealers employ Managers as well as Chief Compliance Officers that are licensed and have specific duties they must perform in accordance with the new regulations. What this means for the investor is that they will be dealing with a licensed individual and a licensed organization whose purpose is to qualify customers and match those who do qualify to appropriate products. 
  • In order to raise capital from investors, Exempt Market companies must now have their project housed under an Exempt Market Dealer.As mentioned before, each EMD uses an in-house Chief Compliance Officer who goes through every project presented to them with a fine tooth comb. Each dealer has their own package of strict criteria that must be met and only when the project is accepted can funds be raised for it from investors.
    WHY THIS IS GOOD FOR INVESTORS: Exempt market companies can no longer raise their own capital, which removes the bias factor. If the Exempt Market Dealer accepts their project, the dealer's own advisors have the ability to represent it to their 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.

Are Exempt Market investments guaranteed?

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.

Should I invest all of my available capital in the Exempt Market?

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.

Should I do my own due diligence on each product I want to invest in?

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.

How Can I Build REAL Wealth in the Exempt Market?

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.

I’ve Lost Money Before in the Exempt Market… Why Should I Invest There Again?

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.


Investing With Registered Funds

What is the benefit of investing registered funds in the Exempt Market?

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.

How do I invest with registered funds?

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:

  • We use Olympia Trust Company for all of our clients that want to use registered funds to invest.  We will fill out the documents to open you up a self-directed account through Olympia Trust if you do not have an account already.
  • Once the account is open, you can make a new contribution, transfer existing funds from another institution or a combination of the two.
  • Once the required funds are in your account at Olympia Trust, we will fill out the subscription documents which will then direct these funds towards your investment.
  • Olympia Trust charges $150.00 annual fee and a $75.00 investment purchase fee so the total is $225.00 + GST.  You can pay their fees separately or include them with your transfer.

If I invest with registered funds do I have to pay taxes when I use this money to invest?

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.