Who decides what exempt market investments are worthy of being distributed to the public and to whom? Before the exempt market was formalized, there really was no entity that made that decision. It was ultimately the market that decided.
Although the market is efficient in raising capital, it’s not really efficient in protecting investors from unscrupulous issuers. Any snake oil salesmen could come around and sell the latest get rich quick investment, without any third party validation.
Thus, the regulators created a new category of investment dealerships called the Exempt Market Dealer, or EMD for short. This then created three main dealerships that solicit investment in Canada.
1) The investment dealerships, or IIROC regulated dealerships focus on providing investment distribution for individual securities, such as stocks and bonds.
2) Mutual fund dealers sell, surprise surprise, mutual funds. They are self-regulated by the Mutual Fund Dealers Association (MFDA)
3) The newest member of the dealers club is the EMD, whose sole focus is to distribute offerings, which are exempt from prospectus. These investments are offered to investors who meet strict criteria such as a certain net worth and/or income.
EMDs create opportunities for businesses’ to raise capital, when other channels are too expensive, take too long, or are generally not available to them. Capital could be used to expand the business, buy assets like real estate, or purchase a competitor.
There is always a need to strike a balance between fostering the opportunities for companies to raise capital, while ensuring the general public is protected from shady investments. That tug a war will continue to exist.
In my last video discussion, we spoke to two EMDS who distribute some interesting projects. Please click below to see the video.
Marty Gunderson is a self proclaimed Exempt Market professional. He has served in a variety of leadership positions in the industry, from sales to issuer to dealer. He is the founder of www.BetterReturns.ca, a site that highlights a few quality exempt market offerings. To contact Marty, please email marty (at) idealeader.ca