When companies (issuers) sell securities such as stocks, options or bonds, they are generally required to file a prospectus. A prospectus is a document that describes the investment and the associated risks to the investor. In certain cases, securities can be sold without a prospectus.  These are called ďexempt market securities.Ē The sale of exempt market securities is called a private placement or an exempt distribution.

When buying without the benefit of a prospectus you donít get the same amount of information to base your decision on.  Without this information you may be taking more risk with your money.  

Other risks include:

  • You may not have the same legal rights as you do under a prospectus.

  • You may not be able to sell the exempt market securities for a certain period of time.  This is called a resale restriction.

  • You may have a difficult time selling the securities. You may not be able to find any purchasers or they may not qualify to purchase the securities.

  • Most exempt market securities are not liquid. An investment that is not liquid canít be sold in a short period of time and turned into cash. 

  • If the issuer does not use a registered dealer as an agent, you may not get the same protection you would get when you buy from a registered dealer.

Exempt market securities are risky and are not for everyone.  There are strict rules about who can buy exempt market securities.  Unfortunately, some issuers abuse the system by selling their securities to unqualified investors who donít understand the requirements, risks and resale restrictions that often apply to securities sold without a prospectus.

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