A Summary of Ontario’s Exempt Market Report: Institutional versus Retail Investors

From a review of the Ontario Exempt Market Report, 2018 (OSC Staff Notice 45-716) one can see that retail investors’ interactions with the exempt market are different than institutional investors. Individual investors contribute only 2% of the total capital in the exempt market but are a large proportion (77%) of its 28,500 investors.


$54 billion of the $91.6B of the total capital raised in the exempt market in 2017 was provided by institutional investors to foreign (predominantly US-based) issuers. The foreign issuers were mostly large and well-established U.S.-based issuers in the financial and non-financial sector placing fixed income securities with institutional investors. Retail investors contributed a significantly higher proportion of their invested capital in real estate or mortgage-related issuers than institutional investors. Of the total capital invested by retail investors, 39% was in real estate or mortgage-related issuers whereas only 10% of institutional funds went to such issuers. Instead, institutional investors allocated most of their capital to financial issuers (53%).


In addition, retail investors were sold equity investments (about 90% of capital invested) whereas institutional investors invested mainly in debt or other fixed income securities (almost 70%). Both institutional and retail investors investing  in real estate and mortgage-issuers were doing so largely with non-reporting issuers. Institutional investors also invested more in more traditional sectors whereas retail investors were attracted to agriculture or crop production as a result of the legalization of cannabis.


While the accredited investor (AI) exemption continues to be the predominate exemption used to raise capital, the Family Friends and Business Associates (FFBA) and Offering Memorandum (OM) exemptions were also used by individual investors. Individual investors sold exempt market investments in reliance on the AI exemption amounted to 65% of the individual investors (almost 90% for institutional) whereas 35% of retail investors invested in reliance on the OM and FFBA exemptions (or 7,600 individuals) (5.5% of institutional investors). Small Canadian issuers (those with assets less than $5 million) accounted for 37% of all Canadian issuers but less than 1% ($194 million) of capital raised by all Canadian issuers, mainly from equity securities and bundled units and primarily from individual investors (77% of investors).


The use of the newer exemptions has increased in 2017. Of the four prospectus exemptions introduced in 2015 and 2016, the FFBA and OM exemptions have been the most frequently used (doubling to $327 million in 2017) and almost entirely by Canadian issuers raising capital from individual investors. There has been no reported use in 2017 of the crowdfunding exemption although registered portals have raised capital from accredited investors in the amount of $100 million. Most issuers use the AI exemption in conjunction with the OM or FFBA. Only 60 issuers relied on the FFBA alone and only 40 issuers relied only on the OM. Those using the FBBA tend to rely also on the AI exemption (9 out of 10 issuers). 3 in 5 issuers that used the OM also used the AI exemption. The OM exemption is used predominantly by real estate and mortgage investment entities (70% of capital invested under the OM) while 57% of money raised under the FFBA was by real estate and mortgage investment entities

December 03, 2018