Should They Be On Your Product Shelf? - Robert Ironside

The Exempt MarketRobert Ironside ABD Ph.D.© 2011 Knowledge Bureau, Inc.

The Exempt Market• Objectives:– Size & scope of the exempt market– Define the exempt market– Explain what an exempt market security is– State the main categories of prospectusexemptions– Understand the impact of NationalInstruments 31-103 and 45-106© 2011 Knowledge Bureau, Inc.3

Funds Raised in the ExemptMarket: 2010 – B.C.• Filed with BCSC: $16.2 Billion– Reporting issuers: 45% ($7.3 Billion)– Non-reporting: 55% ($8.9 Billion)– About 7 times larger than prospectus marketSource: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.4

2010: The Exempt Market – B.C.Source: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.5

Reporting IssuersSource: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.6

Non-reporting IssuersSource: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.7

Location of Investors: 2010Source: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.8

Exemptions Used: 2010Source: B.C. Securities Commission© 2011 Knowledge Bureau, Inc.9

Meet Ted• Ted is an entrepreneur• Ted has invented a new “DynamicInterfacing Relational Transistor”,also known as DIRT• DIRT has the potential to change theworld – but first Ted has to develop aprototype.10© 2011 Knowledge Bureau, Inc.

Stage One – Raid the Piggy Bank• Ted’s first source of financing is his ownmoney11© 2011 Knowledge Bureau, Inc.

Stage Two – Love Money• Once Ted has exhausted his own funds,he next turns to his friends & family – lovemoney12© 2011 Knowledge Bureau, Inc.

Stage Three - Angels• As Ted continues to grow &develop his business, his needfor funding continues . . .13© 2011 Knowledge Bureau, Inc.

Stage Four – Raising Money From thePublic• With a working prototype of DIRT now inhand, Ted is ready to move intoproduction.• But first, he needs money, lots of money!• The VC’s aren’tconvinced . . .• It is time to sell somesecurities14© 2011 Knowledge Bureau, Inc.

• Two choices:The Next Phase– IPO – Initial Public Offer– Exempt Market Distribution15© 2011 Knowledge Bureau, Inc.

I.P.O.: BC Securities Act• 61 (1) Unless exempted under this Act, aperson must not distribute a securityunless(a) a preliminary prospectus and aprospectus respecting the security havebeen filed with the executive director, and(b) the executive director has issuedreceipts for the preliminary prospectus andprospectus.16© 2011 Knowledge Bureau, Inc.

Fundamental Elements• Two fundamental elements of publicdistributions are:– The Prospectus Requirement• Investors have all relevant information, includingrisk factors– The Dealer Registration Requirement – tradesmust be conducted through a registered dealer• Ensures that dealers meet the integrity, proficiency& solvency requirements set by SecuritiesCommissions• Are intended to protect the public17© 2011 Knowledge Bureau, Inc.

The Exempt Market• An Exempt Market Security is one which isdistributed under an exemption from either:– The Prospectus Requirement– The Dealer Registration Requirement• The market where these instruments trade iscalled the Exempt Market• National Instrument 45-106 Prospectus andRegistration Exemptions (Sept 14, 2005)harmonized provincial rules18© 2011 Knowledge Bureau, Inc.

The Exempt Market• May be broadly classified according to:– The nature of the security– The nature of the investor– The nature of the trade19© 2011 Knowledge Bureau, Inc.

Accredited Investors• An accredited investor might be:– An individual– An institution– A registered investment dealer or advisor– A government– A company23© 2011 Knowledge Bureau, Inc.

Accredited Investors:Institutions• Institutions receiving the accreditedinvestor exemption include:– A Canadian financial institution– A Schedule III bank– Business Development Bank of Canada– A regulated pension fund25© 2011 Knowledge Bureau, Inc.

Accredited Investors:Governments• The Government of Canada• The Government of a province or territory ofCanada• Any crown corporation or agency• A municipality, public board or commission26© 2011 Knowledge Bureau, Inc.

Accredited Investors:Miscellaneous• A person, other than an individual or investmentfund, with net assets of at least $5 million on itsmost recent Financial Statements.• A registered charity:– Must obtain advice from an eligibility advisor orregistered advisor27© 2011 Knowledge Bureau, Inc.

Eligibility Advisor• An eligibility advisor is:– Registered investment dealer– In SK & MB, includes lawyers, CAs, CGAs &CMAs provided:• They have no relationship with the issuer• Did not act for the issuer or related persons withinthe last 12 months28© 2011 Knowledge Bureau, Inc.

$150,000 Exemption• Technical name is the “minimum amount investmentexemption”• Applies when all of the following are satisfied:– The person buys the security as principal (not as an agentfor somebody else)– The securities have an acquisition cost of not less than$150,000– Paid for in cash at the time of the trade– Trade is for the security of a single issuer• Each investment fund is a separate issuer. Cannot allocatefunds across several investment funds, even if managed bythe same fund manager.29© 2011 Knowledge Bureau, Inc.

Offering Memorandum Exemption• Not available in Ontario• In BC, NB, NS & NL, the exemption is available when anissuer distributes its own securities to a purchaser if:– The person buys as principal, and– At, or prior to the signing of the purchase agreement,the issuer:• Delivers an Offering Memorandum, in prescribedform, to the purchaser, and• Obtains a signed risk acknowledgement, inprescribed form, from the purchaser– No ceiling on the amount of the purchase30© 2011 Knowledge Bureau, Inc.

Offering Memorandum Exemption• In AB, MB, NT, NU, PE, QC & SK, inaddition to the above conditions, there is aceiling of $10,000 on the acquisition costunless the purchaser qualifies as aneligible investor.31© 2011 Knowledge Bureau, Inc.

Eligible Investors• An eligible investor includes a person whose:– Net assets, alone or with a spouse, exceeds$400,000– Net income, before tax, exceeds $75,000 in each ofthe two previous calendar years and expects thesame this calendar year.– Net income, before tax, alone or with a spouse,exceeded $125,000 in each of the two previouscalendar years & expects the same this year.– Obtained advice regarding the suitability of theinvestment from an eligibility advisor32© 2011 Knowledge Bureau, Inc.

Dealer Registration Exemptions• Prior to NI 31-103 (RegistrationRequirements and Exemptions), there wasusually a dealer exemption for eachprospectus exemption.– Did not have to be registered as a dealer to sellexempt market securities• NI 31-103 changes include:– Business trigger for registration– Harmonization of all registration requirements &categories– Creation of new firm & individual categories33© 2011 Knowledge Bureau, Inc.

National Instrument 31-103• Dealer & advisor registration is requiredwhen:– A firm or individual conducts trading or advisingactivities as a business• To determine whether registration is required:– First, determine if activities consist of trading oradvising– Then determine - are these activities carried out as abusiness?34© 2011 Knowledge Bureau, Inc.

National Instrument 31-103:NorthWest Exemption• AB, BC, MN, NWT, Nunavut & Yukon exempt firmsand individuals from the dealer registrationrequirement when trading in securities distributedunder the following prospectus exemptions listed inNI 45-106:– Accredited investor– Family, friends & business associates– Offering Memorandum– Minimum $150,000 purchase (one security, onetransaction)35© 2011 Knowledge Bureau, Inc.

National Instrument 31-103:Dealer Registration Exemption• To rely on the dealer registration exemption, anindividual or firm must:– Not be registered in any category of registration inany jurisdiction– Not provide suitability advice– Not hold or have access to the purchaser’s assets– Provide risk disclosure to the purchaser (in theprescribed form)– File an information report with the securitiesregulatory authority36© 2011 Knowledge Bureau, Inc.

Representatives ofExempt Market Dealers• NI 31-103 prohibits a representative from trading onbehalf of an exempt market dealer unless he/she has:– Passed the Canadian Securities Course, or– Passed the Exempt Market Products Course, or– Has earned a CFA Charter and has 12 months ofrelevant investment management experience in thepreceding 36 months, or– Has received the Canadian Investment Managerdesignation and has 48 months of relevant industryexperience, 12 months of which were in the preceding36 months37© 2011 Knowledge Bureau, Inc.

Importance of the Exempt Market• The exempt market is a form of venturecapital• The exempt market has:– Higher risks (sometimes)– Lower costs– Faster time to market– Reduced formalities38© 2011 Knowledge Bureau, Inc.

Contact Info:• Robert Ironside ABD, Ph.D.robert.ironside@kwantlen.caPhone: 604-575-0022Mobile: 778-822-270139© 2011 Knowledge Bureau, Inc.

• As Canada’s leading financial educational institution,The Knowledge Bureau teaches an inter-advisoryapproach to Real Wealth Management,• Our goal is to enable professionals to make betterfinancial decisions with their clients in the area of tax,investment, retirement, estate and business services.• For more information, please visitwww.knowledgebureau.com.© 2011 Knowledge Bureau, Inc.