A new tool recently launched by a Calgary-based company is helping exempt market dealers conduct more thorough due diligence on the alternative investments they distribute.

ExemptAnalyst has pioneered a formal rating system for common types of exempt market securities and alternative investments, such as mortgage investment corporations, real estate development projects, limited partnerships, private preferred shares and bonds.

Similar to the bond and credit ratings used in the traditional markets, ExemptAnalyst assesses both quantitative and qualitative aspects of each investment, with a particular focus on the expected rates of return and risk levels. Each investment is assigned a rating based on this information.

The new tool aims to foster more transparency in the growing exempt market dealer category, at a time when numerous Ponzi schemes and other types of frauds have been uncovered in the industry.

“Loss of investor capital is a direct result of improper or ineffective due diligence,” says William McNarland, founder of ExemptAnalyst. “Our research strives to weed out fraudulent or unnecessarily risky opportunities and identify those opportunities with attractive risk-adjusted returns.”

The company has already discovered cases of serious fraudulent activity, misuse of investor capital, and Ponzi-like activities. In one instance, ExemptAnalyst says it discovered a company promoting an investment in which over 60% of investor capital went to management fees and offering costs in the first year of the investment term.

ExemptAnalyst’s rating system provides exempt market dealers with an additional layer of security and confidence around the products they offer clients, and helps them identify superior investment portfolios for their clients, according to the company.

“There are many opportunities with excellent profit potential,” says McNarland, but he adds that thorough due diligence is critical. “These firms must delve much deeper than the offering documents to fully understand all the risks involved.”

The exempt market has been attracting a growing amount of investor capital, and has come under greater regulatory scrutiny in recent years. Through National Instrument 31-103, the Canadian Securities Administrators have beefed-up due diligence rules, proficiency requirements and know-your-product obligations.

“Many newly registered Exempt Market Dealers do not have the internal bandwidth or resources to conduct the type of due diligence now required,” says McNarland. “ExemptAnalyst provides an opportunity to outsource this cumbersome but crucial process.”

IE