Resources for investors

Generally, investing in the private markets (exempt market) means investing in businesses that do not have shares which are publicly traded on a stock exchange and that have not prepared and filed with securities regulators a comprehensive legal document referred to as a “prospectus” that discloses all material which provides information about the business and its shares.

A prospectus must provide “full, true and plain disclosure of all material facts relating to the securities issued or proposed to be distributed” and is publicly available. In private markets, prospectus disclosure is not required, and so audited financial statements of the business will not be available, for example. This means it could be difficult for investors to compare a potential investment to others. In addition, in private markets there are no ongoing disclosure requirements.

More information about the exempt market can be found here: The exempt market explained | GetSmarterAboutMoney.ca

Investors in the private markets (exempt market) typically have a high risk tolerance and are aware of risks associated with investing in exempt market securities. These investors are generally sophisticated, possess financial knowledge and experience that helps them make informed investment decisions, and may have the financial circumstances to withstand losses.

Before investing in the exempt market, it is crucial that investors know and understand the risks associated with this kind of investing, particularly where businesses may be in the start-up or early-stages. Below are some of the risks that investors should be aware of:

• Significant risk of loss.

  Investing in the exempt market, particularly in early-stage businesses is risky.
  Statistically speaking about 30-40% of small businesses do not survive past five years.
  If you invest in a business that does not succeed, you can lose all the money you invested. Even if a business you invest in is successful, you will need to consider how you can sell your investment because there are usually restrictions on how you can sell your securities and to whom, and there may not be a market for these securities. 

• Rights associated with the shares.

  The rights associated with your investment shares may be very different than the class of shares held by the founders or controlling shareholders. It is possible that there may be no voting rights.

• Lack of information.

  You should expect to receive significantly less information about your investment than you would with products purchased under a prospectus. Businesses selling securities in the exempt market under the accredited investor or self-certified investor can do so without having to provide required disclosure documents about the business. For example, there is no requirement to provide audited financial statements and there’s no obligation for the business to provide you with any ongoing disclosures. In addition, early-stage businesses may have little or no historical performance and have no established market for their product or service. Without information, it may also be difficult for you to determine the appropriate value of the business’ shares or the business.

• Locked-in investment / Resale restrictions.

  There is a good chance that you will not be able to resell an exempt market security when you need or want to. There are typically restrictions on how you can sell your securities and to whom. Businesses may also include restrictions on the resale of shares in the shareholder agreements in order to manage the transfer of ownership and protect the company’s interests. Additionally, exempt securities typically aren’t publicly traded, so there may not be a market of other buyers and you might not be able to sell your investment quickly or at all. You will likely have to hold onto your investment until there is a change with the business – for example, if it goes public on a stock exchange. This may take many years to happen, or it may never happen. Data from the past five years shows that it takes an average of 17 years for an Ontario business to exit (source: Deloitte analysis for the OSC, based on CB Insights data form 2018-2022). Until then, your money may be locked in the investment. 

• No income.

  Most businesses rarely pay dividends or interest while they are in their start-up, early-stage, ramp-up or growth stages. If you are investing for income, exempt market securities are likely not for you. 

• Few protections: no approval and limited legal rights.

  These investments are not reviewed or approved by a securities regulator. You won’t have the same legal rights that you would have had you purchased under a prospectus.

• Suitability determination.

  Unless you buy the securities through registered dealers, such as an exempt market dealer, or a crowdfunding portal that is operated by an investment dealer or an exempt market dealer, you won’t be provided with information about whether the investment is suitable for you as an investor. Consider seeking the advice of a financial advisor or other professional advisor (e.g., securities lawyer) before making an investment decision or do your own due diligence to determine whether the investment is right for you (in light of your personal and financial circumstances, risk tolerance and risk capacity, time horizon and the other types of investments you hold). 

• Potential for fraud or mismanagement.

  Despite any review or due diligence conducted on the business, its associated individuals or the investment opportunity by you, you may not be able to identify individuals that may poorly manage the business or have ill-intentions. 

• Dilution risk.

  Businesses could issue new shares to raise more money or compensate employees. This comes at the expense of existing shareholders.  The percentage ownership of the business held by existing shareholders decreases when additional shares are issued by the business to new shareholders. 

For more information about risks, please refer to the OSC’s Get Smarter About Money website: Understanding risk | GetSmarterAboutMoney.ca