Exempt Market: Securities distributed without a prospectus, relying on exemptions in NI 45-106 such as accredited investor or $150,000 minimum amount.

Exempt Market

Securities distributed without a prospectus, relying on exemptions in NI 45-106 such as accredited investor or $150,000 minimum amount.

Definition

The exempt market is the segment of Canadian capital markets where securities are distributed without a prospectus, relying on the prospectus exemptions enumerated in NI 45-106. The most common exemptions tested on the CIRE include: accredited investor (s.2.3) for high-income, high-asset, or institutional purchasers; $150,000 minimum amount (s.2.10) for any single transaction at or above that threshold to a non-individual purchaser; family, friends and business associates (s.2.5); and offering memorandum (s.2.9) for issuers using a prescribed disclosure document. Exempt-market securities cannot be marketed to the general public and have liquidity restrictions on resale. Distribution of these securities is the core business of Exempt Market Dealers. Investment dealers under CIRO can also sell exempt-market products provided their dealing representatives meet the required proficiency and the dealer satisfies KYP and suitability obligations. Common exempt-market products include MICs, private REITs, private debt funds, hedge funds, oil and gas LPs, and exempt-market private placements.

Source

NI 45-106 §2.3 (accredited investor), §2.5, §2.9, §2.10 (minimum amount); CSA companion policy 45-106CP

Where this shows up on the CIRE

Outcome 7.1

Test yourself

Two real CIRE-bank questions on this exact outcome. Click to reveal the answer and the rule citation.

1
A client submits a written complaint alleging that a registrant recommended an unsuitable investment that caused a $15,000 loss. Under CIRO's complaint-handling requirements, which of the following is the dealer member's obligation?
Outcome 7.1 · click for answer
A.The dealer member must refer the client immediately to OBSI without conducting any internal review.
B.The dealer member must acknowledge receipt of the complaint, conduct an investigation, and provide the client with a substantive response within the prescribed time frame set out in CIRO rules.Correct
C.The dealer member may decline to investigate because the client signed a risk disclosure document at account opening.
D.The dealer member must only respond if the claimed loss exceeds a minimum dollar threshold established by CIRO.
CIRO's complaint-handling rules require dealer members to have documented procedures for acknowledging, investigating, and responding to client complaints within prescribed time frames. The firm must provide a substantive response explaining its findings and, where applicable, inform the client of their right to escalate to an independent dispute resolution service such as OBSI. Signing a risk disclosure document does not waive complaint rights, and there is no minimum dollar threshold that exempts a firm from responding.
2
A client asks their RR to explain the difference between an asset's 'liquidity' and its 'credit risk.' The RR uses the example of a 90-day Government of Canada Treasury bill versus a 90-day commercial paper note issued by a mid-sized private company. Which statement correctly distinguishes the two risks?
Outcome 7.1 · click for answer
A.The Government of Canada T-bill has essentially no credit risk (backed by the federal government) and high liquidity (actively traded), while the private company commercial paper carries credit risk (the issuer may default) and typically lower liquidity because fewer market makers exist for private-issuer instruments.Correct
B.Commercial paper is always safer than government T-bills because it offers a higher return.
C.Liquidity risk and credit risk are the same thing; both reflect the probability of not recovering the full amount invested.
D.Both instruments have identical risk profiles because they mature in the same period.
Credit risk is the risk that the issuer will fail to repay principal or interest. Government of Canada T-bills carry negligible credit risk as obligations of a sovereign with taxing power. Private company commercial paper carries meaningful credit risk because the issuer could default. Liquidity risk is the risk of being unable to sell an instrument quickly at a fair price. T-bills trade in deep, liquid markets. Private commercial paper is less liquid because the market is thinner and fewer counterparties will readily bid. The two risks are distinct; an instrument can be liquid but risky (e.g., a junk bond traded on a liquid exchange) or illiquid but safe (e.g., a government GIC).

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