A source of diversification
The exempt market can present a great opportunity to expand one's range of services to more affluent clients. However, firms and advisors must adhere to certain rules to operate in this market.
The Regulation 45-106 of the Canadian Securities Administrators (CSA), governing the exempt market, allows that certain securities can be offered without a prospectus. "These securities are generally used in small amounts to diversify investment portfolios and provide access to investments with potential attractive returns or interesting tax benefits," explains Yvan Morin, Vice-President of Legal Affairs at MICA Cabinets de services financiers.
"These securities are generally used in small amounts to diversify investment portfolios and provide access to investments with potential attractive return or interesting tax benefits." — Yvan Morin
However, investments in the exempt market come with certain risks. The prospectus exemption means that it can sometimes be more difficult to obtain complete information about these products and their issuers. Some issuers may also be new to the market and offer little historical data. These are also non-liquid investments. "There is no secondary market to sell these securities, and some come with restrictions, such as minimum holding periods," explains Yvan Morin. Additionally, these investments are not guaranteed and are not covered by organizations like the Canada Deposit Insurance Corporation.
Due to these risks, only certain types of investors can acquire these securities. They are described in Regulation 45-106 of the CSA. The two most common categories are accredited investors and qualified investors. "These products are aimed at investors who have a high-risk profile and a strong financial situation to withstand a significant loss," says Yvan Morin. They must also possess sufficient knowledge to understand what they are buying.
Therefore, the advisor must pay particular attention with regards to the KYP and KYC requirements. Moreover, the client-focused reforms have strengthened obligations in terms of understanding the client, understanding the product, and suitability. "These enhanced obligations also apply to registered firms placing securities in the exempt market," reminds Sylvain Théberge, Director of Media Relations at the Autorité des marchés financiers (AMF).
A process to follow
To offer exempt market products, one must register as a dealing representative or an exempt market dealer. "Issuing companies that directly place securities through prospectus exemptions with investors may trigger the obligation to register as a dealer," warns Sylvain Théberge. They must then complete the necessary steps with the AMF to register in the appropriate category.
Professionals, on the other hand, must meet the minimum education and experience requirements of their registration category as outlined in Articles 3.9 and 3.10 of NI 31-103 on registration obligations and exemptions from the AMF. The dealing representative in the exempt market must have passed the exam on trading in securities in Canada from the Canadian Securities Institute or the exam on exempt market products from the Investment Funds Institute of Canada, or meet the education and experience requirements imposed on advising representatives. They must also register with the National Registration Database.