Understanding Exempt Securities - 6 Things to Consider Before You Invest

One phrase that might describe the past 5 years for large segments of the investing public could be the opening line of Dickens’ 1859 classic, A Tale of Two Cities…“It was the best of times, it was the worst of times…”

With this year’s RSP season now in the rear view mirror, many investors have recently had a chance to review their current holdings to evaluate just how well their investments have done, and determine which of the two camps they fall into.

Since March 2009, the broader markets themselves have been, all things considered, relatively well behaved. Despite the short term gains of the past 18 months however, a closer look at the longer term ramifications of not one, but two major recessions since 2000 (the dot-com crash of 2001-02 & the financial crisis of 2008) paints a more sobering picture.

Between 2000 & 2010, for example, indices like the Dow Jones Industrial in the U.S. posted an overall return for the period of only 0.0069%. Other global markets including Canada’s TSX Composite Index, unfortunately, didn't fair much better.

Is it any wonder then that a growing number of investors are now skeptical, if not outright cynical, of the traditional investment establishment? If you happen to find yourself falling into this disgruntled investor category based on the lackluster performance and volatility of your stock, bond & mutual fund portfolio, you’re certainly not alone.

A growing number of investors who've become frustrated and discouraged are now turning to non-traditional investments referred to as Exempt Securities as the answer.  

With everything from exotic Hedge Funds to complex derivative products including Futures & Options, there’s never been a shortage of speculative investments to choose from for those individuals aggressive or sophisticated enough to venture into such waters.

But what about the more conservative investor? Are the bigger returns only attainable by those willing to risk it all using complex products or risky strategies?

Not necessarily. As real-estate based investments including Mortgage Investment Corps (MIC), Pooled Funds or Private Real-Estate Investment Trusts (REIT) have become more popular, some would argue the industry offers many legitimate alternatives worth considering – even for those who might categorize themselves as more cautious investors.

Without much fanfare, many of these strategies have quietly posted impressive long-term performance track records. As a result, many are gaining in popularity having successfully delivered consistent and stable returns, higher yields, and regular cash flow – regardless of whether the capital markets where going up or down.

In an effort to protect the investing public, Provincial Securities Commissions have introduced extensive legislation in recent years to better regulate, monitor, and oversee those issuers manufacturing, soliciting and/or distributing exempt securities.

Before investing in any exempt market product, be sure to consult with an adviser registered with an Exempt Market Dealer and consider the following:

1. Thoroughly review the investment’s Offering Memorandum (OM) – An executive summary document outlining the basic rules of engagement the fund and its managers must follow. 

2. Familiarize yourself with the investment’s management fees & redemption charges.

3. Most exempt securities are subject to resale restrictions. This means you may not be able to sell them for a certain period of time.

4. Even if no resale restrictions apply, there might not be a market for the securities you purchased, either because you would not be able to find any purchasers or they may not qualify to purchase the securities.

5. Some exempt securities are not liquid. Liquidity means that you can sell an investment in a short period of time and turn it into cash. Some exempt securities, therefore, may require longer periods to redeem.

6. If you buy an exempt security, you may not have the same statutory rights of rescission and damages as you do under a prospectus offering.

It should be stated that this approach to wealth accumulation is not for everyone. Using an independent broker - who represents multiple strategies and perspectives - is recommended to determine suitability and ensure investment objectives are first and foremost considered, long before product recommendations are offered.

Like any prudent investor, be sure to conduct your own due diligence to further increase the likelihood the investment you’re considering lives up to another of Dickens’ later novels fittingly titled - Great Expectations.   

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Uriah Kane, BA, CFP is President and CEO of Lakefront Capital Management, an independent Insurance Brokerage Firm with Offices in Victoria & the Okanagan. Uriah is also a Branch Manager and Dealing Representative specializing in Exempt Securities for Portfolio Strategies Corp, a Registered Mutual Fund & Exempt Market Dealer with Head Offices based out of Calgary, AB.

Article Originally Published in April 2011 in The Vernon Morning Star