Q&A: Exempt securities

Question: A friend of mine is dissatisfied with the performance of his current investments and is looking at something called an “Exempt Market Product”. I’ve never heard of this before and I wondered if you could tell me a little about them and if they would be suitable for a more conservative investor, someone with a growing family. – Greg E.

Gordon Pape answers: No, these would not be suitable for a conservative investor. In fact, they are highly risky. The word “exempt” tells all — these securities are not subject to the usual scrutiny that is required of any investment that is publicly traded. They do not trade on any exchange and the companies are not required to provide investors with regular financial disclosures. Investors must be “accredited” or family, friends, or associates of the company.

The lack of regulatory approval means that anyone considering investing in such a security must perform a lot of due diligence – something most people are ill-equipped to do. The bottom line is that this is a market that is suited only to very sophisticated investors who are willing to risk money on companies that cannot meet the qualifications for an approved initial public offering.