Over the past couple of weeks, I’ve been doing a bit of work in the exempt market dealer segment, a class of asset I didn’t even know existed until now. You don’t hear much, if anything, about it here on the East Coast, but it’s an increasingly active market in Western Canada.

I think it’s something we should be more aware of, given the need for capital among regional companies in the coming decades.

So what is the exempt market? It’s a market for securities of issuers who are exempt from releasing prospectuses. For the purposes of this column, we’ll consider them young companies that are raising capital.

Writing and filing a prospectus is time consuming and costly for a young company. Yet a company with sound growth prospects still needs capital, and investors can benefit from buying into solid young companies. The whole angel movement is founded on such a belief.

Over time, Canadian regulators have examined how these companies could sell stock to investors without the formal prospectuses. The result was National Instrument 31-103, a regulation written by the Ontario Securities Commission that laid down the rules for the exempt market securities and those who bought and sold them.

The rules say these securities can be sold to wealthy individuals, who in theory have the ability to distinguish between silver and snake oil. Specifically, the household should have financial assets of more than $1 million and net assets of at least $5 million, and the investor should have net income exceeding $200,000. Some of these investments are eligible for retirement savings plans and tax-free savings accounts.

These securities, which are not listed on an exchange, aren’t sold by traditional banks and investment houses but through networks of regulated exempt market dealers. Most (possibly all) sales are focused on Central and Western Canada, because there’s such a small group of people in Atlantic Canada who meet the investor criteria.

The only action on the exempt market dealer (EMD) market by the New Brunswick and Nova Scotia securities commissions has so far has been to advise investors to be cautious when considering such investments.

In Western Canada, the market is becoming far more developed. Not only are a range of companies issuing stock through the market and a number of EMD networks but research boutiques are also issuing reports. ExemptAnalyst provides independent third-party research on alternative investments and exempt market securities for EMDs and lists more than 70 issues that it has analyzed on http://www.exemptanalyst.com.

The attractions or demerits of these investments from the investors’ standpoint aren’t my main concern right now. I aim to neither praise nor bury Caesar with this column, simply to state that this market exists and young companies should be aware of it.

Why? Because Atlantic Canada’s success in growing young companies will soon require a hell of a lot of capital, and the exempt market, like angels, CEDIF, and CPCs, could be another way to raise it.

Let’s say there are about 500 innovative young companies in the region that will need, on average, $1 million in equity capital over the next five years. (Those estimates are conservative, partly because they don’t consider new companies entering the market, but indulge me for a moment.)

That means those companies will need about $500 million in investment capital, so they’ll have to start looking for new sources of funding. The exempt market is a great place to start.