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Executive Summaries Jan 22, 2019

The Exempt Market: a World of Possibilities

Large corporations of this world, like Google, Amazon, and Facebook, have all resorted to private capital to boost their growth before making the leap to public markets. Here is how Canadian companies, big and small, can also raise private capital on the exempt market.

Historically, access to private capital has been restricted by securities authorities, because securities of private companies are less regulated and are subject to fewer continuous disclosure requirements than those of public companies. However, high-net-worth individuals who meet certain minimum annual income criteria can, thanks to their high income and therefore their capacity to take financial risks, avail themselves of the accredited investor exemption to invest in private companies. This exemption means that a company has the right to raise capital from certain investors without having to provide a prospectus. A less wealthy investor who does not qualify as an accredited investor may, however, take advantage of the offering memorandum exemption and invest on a smaller scale in private companies that have prepared an offering memorandum. An offering memorandum is a disclosure document that summarises the company’s activities, how the capital raised will be used, and the terms of subscription for the company’s securities.

The securities of private companies may be sold on the exempt market through exempt market dealers. These dealers act as intermediaries between investors and companies and they are registered with the securities regulators of the provinces where they operate. Their clientele consists of investors wishing to invest in the exempt market and companies seeking to raise private capital.

Advantages of the exempt market for investors...

In these times of stock market uncertainty, it is opportune for investors to diversify their investment portfolios by buying securities of private companies. This strategy is not known to most individuals, who generally place all their investments in public markets. However, investing in private companies is routine practice for institutional investors, such as pension funds, insurance companies, foundations, etc.

For example, as at December 31, 2017, the Caisse de dépôt et placement du Québec had private investments representing 12.5% of its overall portfolio, which amounts to $37.3B of investment.

If the big players do it, smaller investors should also consider diversifying their investments by utilising the private market.

One of the advantages of holding securities of private companies is the relative price stability. The share price of a publicly-traded company will vary as a result of many factors that do not necessarily reflect the company’s intrinsic value. Conversely, the security of a private company will not fluctuate with the mood of the markets or according to supply and demand for its securities, but rather based on the real value of its assets and operations.

Moreover, many securities of private companies on the exempt market are eligible for deferred tax schemes, such as RRSPs, RESPs, and TFSAs. Investors can therefore subscribe for securities of certain private companies using money from their RRSP, just like for their investments in the stock market.

... and for the companies

It is advantageous for companies to turn to the exempt market to raise capital due to the easy access to capital this market provides. In general, Canadian securities laws require companies to publish a prospectus and satisfy numerous continuous disclosure obligations if they want to sell their shares to outside investors — a tedious and costly process. Meanwhile, the exempt market allows companies to raise money from outside investors without having to prepare a prospectus or comply with the same continuous disclosure requirements as those that apply to public companies.

Companies on the exempt market only generally need to prepare an offering memorandum and/or a subscription agreement to raise money from individual investors and provide them with their audited financial statements. Thus, the regulatory burden and the legal and accounting expenses are significantly reduced, which facilitates access to private capital.

In addition, the exempt market affords the companies greater flexibility by allowing them to issue corporate shares, bonds, convertible debentures, etc. Therefore the company has the option to raise capital in debt or equity form, depending on its preferences and its long and short-term needs.

In summary, the exempt market is a tool that is overlooked by many investors and companies, which are failing to exploit its full potential. Individuals looking to diversify their investments will find it to their advantage, as will companies that are looking to raise funds in amounts varying from a few hundred thousand to millions of dollars.


To learn more about the exempt market, sign up for our Strategic Forum on Corporate Financing, which will be held on Tuesday, February 19, 2019 in Montreal and Quebec City.