Inside Alberta’s Exempt Market
How companies are taking advantage of the province’s newest investment opportunity
by Geoffrey Morgan
The exempt market, where brokers sell shares of private companies to the public, was once considered the Wild West of the financial services industry.
Illustration by Janet Freysoldt
Unlike brokerages, which buy and sell shares in public companies, exempt market dealers were previously not required to be registered with the Alberta Securities Commission (ASC). And unlike their public counterparts, brokers in the exempt market were not required to pass the Canadian Securities Course or maintain similar accreditation.
That changed in September 2010, when new rules governing the exempt market came into effect across the country. The rules included a requirement for exempt market dealers to be registered with their provincial securities commission, to maintain minimum amounts of capital and insurance, to be audited and to issue annual financial statements.
Navdeep Gill, the ASC’s legal counsel on market regulation, says the new rules were intended “to improve investor protection and protect the integrity of Alberta capital markets.” He says the market is easier to regulate now that all the dealers are known to the commission.
In fact, the market has flourished since regulation. In Alberta alone, exempt market dealers raised $12.1 billion in financing in the first 10 months of 2011. There are currently 61 Alberta-based dealerships employing 1,306 brokers. When you add up dealers based in other parts of the country, the number of firms rises to 359, with 4,004 brokers doing business in Alberta.
Here’s a look at three companies operating in the exempt market, how their business has grown and the trends they see in the industry.
Pennant Capital Partners Inc.
Founded: September 2010
Staff: 50 brokers
The business: Pennant is an exempt market dealer earning $75 million per year and offers a mix of third-party products and financial investments the company has structured on its own. The company’s products are divided among real estate, energy firms and what president David Rankine describes as “special situations.” These include a new medical centre on Calgary’s Centre Street and a new Hilton hotel near the city’s airport. “At any given time, we might have five or six products on the shelf,” Rankine says. “Three would be Pennant [products] and three would be third-party.”
The industry: “People are bringing us better deals than we were seeing a year ago,” Rankine says of the industry’s growth. “There’s better structure and they’re tighter with their legal documents and their assets.” But then again, Rankine says, the change “could just be the fact that [the new rules] are doing what they’re supposed to be doing.”
Founded: January 2010
Staff: Three analysts, one project manager
The business: William McNarland was a chartered financial analyst working in asset management for 16 years before plying his trade in the exempt market. In January 2010, he started ExemptAnalyst, a company that provides independent financial review of exempt market products. Right now, the company serves four exempt market dealers, providing an opinion of how risky a third-party’s product would be to an investor, as well as the projected return on investment.
The industry: McNarland believes information will become increasingly important and lucrative as the exempt market continues to grow. For one thing, he says, “the regulatory environment is forcing it to happen.” McNarland believes information has become valuable in the exempt market, in part, because of previous investment failures. “I think because of some previous disappointment,” he says, “the recession caused a lot of products not to work as expected.”
Raintree Financial Solutions
Founded: February 2010
Staff: 65 brokers
The business: Raintree is strict about selling only third-party securities to investors. Nick Fournier, company president and one of three co-founders, says that while other exempt market dealers create their own securities, Raintree sells shares only in other companies. The company’s only revenue source is in a percentage of the commission of the offerings sold. Adam Derges, another Raintree partner, says the system ensures “there is no added incentive to sell one product over another.”
The industry: Both Fournier and Derges worked in the exempt market before the securities commissions instituted new rules in 2010. Both believe the change has been a good thing for the industry. Before the changes, the exempt market was focused almost entirely on real estate. Now, “we have been approached by everything from solar panels, to oil and gas, to fixed-income mortgage investments, to wine funds,” Derges says. “There was even a horse stud farm out of Kentucky that we looked at.”