What is the exempt market?
The exempt market (or the private market) is the market in which securities are issued to investors through an exemption to the prospectus requirement. In Canada, issuers must prepare a prospectus in order to distribute their securities to the public, unless an exemption to the prospectus requirement is available.
A prospectus is a document that follows a prescribed form and contains full, true and plain disclosure of all material facts about an issuer. It allows potential investors to make an informed investment decision; however, its preparation involves significant cost and regulatory requirements for the issuer. For some small and medium-sized issuers, these costs and requirements may be prohibitive, and these issuers often prefer to issue their securities under an exemption to the prospectus requirement, i.e. in the exempt market.
Examples of exemptions to the prospectus requirement include:
- the accredited investor exemption
- the offering memorandum exemption
- the friends, family and business associates exemption
The sale of a security under an exemption to the prospectus requirement is often called a private placement.
What is an exempt market dealer?
An exempt market dealer (“EMD”) is a firm involved in the business of trading or advising in securities in the exempt market in Canada. Exempt market dealers must be registered with the Canadian securities regulators unless they qualify for an exemption to the registration requirement.
The individuals who trade or advise on exempt securities on behalf of an exempt market dealer must be registered as dealing representatives.
Exempt market dealers and dealing representatives must meet prescribed standards for proficiency, integrity and solvency, and must comply with “know-your-product”, “know-your-client” and suitability obligations. They are subject to regulatory oversight and have reporting obligations.