What You Need To Know About Exempt Market Securities

ID-10017957Do you want to invest in commercial real estate but lack the funds needed to get a project into your portfolio? Exempt market securities are an interesting option available that will allow you to own a piece of commercial real estate without actually owning the entire property.

As a comparison, think of the difference between owning a business and buying shares of a particular business on the TSX. It’s almost like crowdfunding for commercial real estate except the backers actually benefit from the profits.

It’s important to mention that I’m definitely not an expert when it comes to exempt market securities but I have been suggesting to clients to consider it when thinking about the investment pools in which they keep their money. I’m not here to say it’s the way to go or that it’s better than any other form of investments but it is certainly an option worth considering.

What Are Exempt Market Securities?

Normally speaking if a Company wants to raise money they need to provide an investor with a prospectus, which is a disclosure document designed to protect the investor. The “exempt” market essentially exempts companies from this prospectus requirement and allows them to raise capital much faster.

The exempt market is intended to give qualified investors more options to grow their assets, while providing companies with a larger pool from which to attract crucial capital. It also provides a cost-efficient way for public and private businesses to raise money without the burden, expense and time required to assemble full disclosure prospectuses to list on the TSX or the TSX Venture Exchange.

Although most people understand the nature of public offerings and selling shares on stock exchanges, the exempt market is a substantial part of British Columbia’s capital market. For example, B.C. companies raised $6-billion in the province’s public debt and equity markets last year, compared to $33-billion in the exempt market for those operating inside and outside the province during the same time.

A report by the British Columbia Securities Commission found that from 2010 to 2013, companies in B.C. raised $79-billion from higher-risk securities in the private exempt market, compared to $25-billion in the public market.

While you need to meet certain criteria to be an “accredited investor”, I think exempt market securities are for just about anybody that is investing because it allows you to add another risk profile into your portfolio. Maybe you want to be in real estate but you don’t have enough money to go out and buy a commercial building or lack the proper contacts to make it happen.

With exempt market securities, you may find you can actually own a piece of a commercial building through exempt market securities, if that’s the portfolio you want to build. You might want to get farmland into your portfolio but lack the funds necessary to buy X number of hectares. Exempt market securities can give you the opportunity to own a piece of farmland or development land without needing to buy the whole thing.

Similar to stocks and bonds, there are lots of different ways exempt market securities can be held. They can be held in mutual funds, tax-free savings accounts, held in corporations or held personally.

Getting Educated On Exempt Market Securities

I believe the best way to get educated on this topic is by seeking out an exempt market securities dealer. It might sound obvious but they are actually fairly uncommon with only a few operating in Canada. There are a lot of brokers and many mutual fund dealers but not so much for exempt market securities.

You may also want to research information available from the National Exempt Market Association and the Private Capital Markets Association of Canada.

I tell my clients to take the time to go online and read about exempt market securities while remembering everything on the internet is not true, even though it’s written, and take the time to get educated in exempt markets.

Take the time to find an exempt market securities dealer, ideally through referrals, if at all possible.

Who Are Exempt Market Securities For?

I think part of the reason we don’t get a lot of education on exempt market securities is due to a stigma that comes along with this class of assets. It’s not something that’s only available for the rich and wealthy, anyone can get involved with commercial real estate through exempt market securities.

If you read up on exempt market securities online, you’ll see a lot of negativity and, in my opinion, it’s mostly untrue. There are benefits and risks like any other investment, the key is weighing them to see if it works for you and your risk tolerance.

The exempt market sounds threatening because of the name but they are regulated and because of their regulation, that adds some level of assurance compared to an unregulated investment.

Since this type of investment generally does have a higher risk profile, it is important to do your due diligence on the issuer, its business and management, about the type of securities you’re buying and how they’re being offered to you. Find out how long you need to hold the investment before it can be sold.

What’s The Benefit?

If you want to invest in farmland, you had better do an awful lot of research before you go out and buy your first plot of land. On the other hand, exempt market securities could be for you if you know that you want to be in the farmland business but want somebody else to do the research and legwork.

It’s just like when you buy stocks, bonds or mutual funds – you rely on an expert. Exempt market securities are no different in that sense. You’re relying on an expert who’s done their due diligence, probably at a much greater depth than if you were to buy the same assets and do the work yourself.

In summary, exempt market securities are an interesting way to consider diversifying your portfolio while balancing risk and liquidity. There must be something very attractive about this type of investment if the amount of funds raised in BC in exempt markets outpaced the public markets three to one.

Simply put, considered exempt market securities as another bucket you can put your money into. Based upon your own analysis of this opportunity, you will need to decide if you want it to be one of your buckets.

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