Almost every Canadian startup raises money from people it already knows, and almost none of them treat it as a regulated transaction. It is one. Section 53(1) of Ontario's Securities Act says no person shall trade in a security where the trade would be a distribution unless a prospectus has been filed and receipted. Nothing in that sentence carves out your brother-in-law.
The exemptions are workable and the paperwork is light. The problem is that founders routinely rely on the wrong one, and the error surfaces years later, in diligence, when a purchaser's counsel asks to see the authority for every share the company has ever issued.
The three exemptions, and how to choose
| Private issuer | Family, friends & business associates | Accredited investor | |
|---|---|---|---|
| Ontario source | OSA s. 73.4 | NI 45-106 s. 2.5 + s. 2.6.1 | OSA s. 73.3 |
| Holder limit | 50, excluding employees and former employees | None | None |
| Risk acknowledgement | No | Form 45-106F12, 2–3 signatures | Form 45-106F9 for most individuals |
| Report of exempt distribution | No | Yes, within 10 days | Yes, within 10 days |
| Fee | None | OSC activity fee plus system fee | OSC activity fee plus system fee |
A first-time founder should usually be trying to stay inside the private issuer exemption for as long as possible, because it is the only one of the three that costs nothing and files nothing.
The private issuer exemption, and the three things that break it
In Ontario the exemption is statutory — s. 73.4 of the Securities Act — and NI 45-106 s. 2.4(5) expressly switches off the national version. Most summaries cite "NI 45-106 s. 2.4" for Ontario. That is loose, and the definitions still come from the national instrument.
A private issuer is one that is not a reporting issuer or investment fund, whose securities are subject to transfer restrictions and are beneficially owned by not more than 50 persons, and that has only ever distributed to the prescribed list.
Three failure modes, in order of how often I would expect to see them:
The transfer restriction is not where it needs to be. It must be "contained in the issuer's constating documents or security holders' agreements." A board that simply refuses transfers in practice does not satisfy this. If your articles came off a self-serve incorporation site, check them.
The 50-holder count is misread. The only people excluded from the count are employees and former employees of the issuer or its affiliates. Not founders, not accredited investors, not family. And the rule pierces holding vehicles: a company created or used solely to hold your shares is counted through to each beneficial owner. One further trap worth knowing — non-convertible debt is outside both tests, so a straight promissory note neither counts toward 50 nor needs restricting, but a convertible note or a SAFE does.
Someone outside the list buys in. The prescribed purchasers include directors, officers, employees, founders and control persons; their spouses, parents, grandparents, siblings, children and grandchildren; close personal friends and close business associates of a director, executive officer, founder or control person; existing security holders; accredited investors; and the catch-all "a person that is not the public." One Ontario addition is new: amendments in force on 4 December 2025 added self-certified investors under Ontario Instrument 45-510 to the list.
"Close personal friend" is a defined term, and it is narrower than you think
This is where rounds actually fail. Companion Policy 45-106CP, s. 2.7, says a close personal friend is someone who knows the director, officer, founder or control person "well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment."
Then it lists who is not a close personal friend, and the list is unforgiving. An individual does not qualify solely because they are:
- a relative
- a member of the same club, organisation, association or religious group
- a co-worker, colleague or associate at the same workplace
- a client, customer, former client or former customer
- a mere acquaintance
- connected through some form of social media, such as Facebook, Twitter or LinkedIn
Read the first and third entries again. Being a relative is not enough on its own — a cousin is outside the enumerated degrees and does not become eligible by blood. Neither is a colleague. The person from your last company who liked what you were building is not, without more, inside this exemption.
And there is no friend-of-a-friend rule. The Companion Policy says the relationship "must be direct," and gives the example: the exemption is not available to a close personal friend of a close personal friend of a director. Which is exactly what happens when an enthusiastic early backer offers to bring in three people from his own network. That is the moment to stop and take advice.
One more line worth having in mind, from s. 3.7(1) of the same policy: there is no limit on the number of people you may sell to under FFBA, "however, an issuer selling securities to a large number of persons under this exemption may give rise to a presumption that not all of the purchasers are family, close personal friends or close business associates." Volume itself is evidence against you.
The Ontario form that catches people out
Since 5 May 2015, NI 45-106 s. 2.6.1 has added an Ontario overlay to the FFBA exemption: the person making the distribution must obtain a signed risk acknowledgement in Form 45-106F12, and must keep it for eight years.
The part founders miss is that it is not a one-signature form. It must be signed by the purchaser, by an executive officer of the issuer other than the purchaser, and by the specific individual through whom the purchaser qualifies — the director, officer, founder or control person who is the relative, the close personal friend or the close business associate. In a two-founder company, that means your co-founder personally attests to the relationship.
Two further Ontario points. The form is required for every FFBA distribution here, including to a spouse or a parent — unlike Saskatchewan, which requires it only where the qualification rests on friendship or business association. And s. 2.5(3) means a single distribution cannot be made under both the private issuer exemption and FFBA in Ontario. You choose, and the choice determines whether you file.
Accredited investors: the form is required, with one exception
The familiar thresholds are $1 million in financial assets, $5 million in net assets, or income above $200,000 individually or $300,000 with a spouse in each of the two most recent years. Section 2.3(6) requires a signed Form 45-106F9 from individuals qualifying on those grounds, obtained at the same time as or before the purchase agreement is signed, and kept for eight years.
The exception is precise and worth knowing: paragraph (j.1) of the definition — an individual with more than $5 million in financial assets — is not on the list in s. 2.3(6). That investor needs no F9. Everyone qualifying under (j), (k) or (l) does. We have written separately on what makes someone an accredited investor and on running a raise on that exemption.
The filing, and the fee that grows
An FFBA or accredited investor distribution requires a Form 45-106F1 report of exempt distribution, filed through SEDAR+ no later than 10 days after the distribution, in every jurisdiction where a purchaser resides. One investor in Toronto and one in Vancouver is two filings.
In Ontario the activity fee under OSC Rule 13-502 is $350, plus a system fee. The number that should concentrate the mind is the late fee: $100 for every day the form is outstanding, to a maximum of $5,000 in the year. A founder who did not know the obligation existed and finds out eighteen months later is at the cap for each year involved.
The private issuer exemption requires none of this. That is its whole advantage, and it is the reason to structure the first round to fit inside it.
What actually happens if you got it wrong
Let me correct a claim that circulates in startup blogs: Ontario does not give a purchaser an automatic statutory right of rescission simply because a distribution was made without an available exemption. Section 133 of the Securities Act is about failing to deliver a prospectus that was required, which is a different thing.
What exists is worse in some ways and slower in others.
- An offence. Contravening Ontario securities law is an offence under s. 122(1), carrying a fine of up to $10 million or imprisonment for up to five years less a day.
- Administrative penalties. Section 127(1) allows a penalty of up to $5 million for each failure to comply, plus disgorgement of amounts obtained.
- Court-ordered rescission. On an application by the Commission under s. 128, the court may rescind any transaction relating to trading in securities, including an issuance.
- Personal exposure. Section 129.2 deems directors and officers who authorised, permitted or acquiesced in the contravention to have contravened it themselves.
- A civil claim, where you handed over a deck. If what you gave investors amounted to an offering memorandum and it contained a misrepresentation, OSC Rule 45-501 extends the s. 130.1 right to FFBA and private issuer distributions — damages without proof of reliance, and rescission against the seller.
In practice, the thing that bites first is none of these. It is diligence. A blown exemption is a finding that stalls your next financing or your sale, and the cure — a rescission offer to people who are now your shareholders and still your friends — is a conversation nobody enjoys having.
What to actually do
Put the transfer restriction in the articles or the shareholders' agreement before the first share is issued, not after. Keep a list of every holder with the exemption relied on beside each name, written down at the time and not reconstructed later. Get the F12 or F9 signed before closing, and keep it for eight years because that is what the rule says. Diarise the ten-day filing deadline the moment you agree terms, not the moment you get the money.
And be honest about the relationship test. If you find yourself building an argument for why someone counts as a close personal friend, you have already answered the question.
This is the second in a series on funding a Canadian startup. Next: what is actually market in a Canadian angel term sheet, and what a SAFE does to your cap table.
Common questions
Do I need a lawyer to raise money from friends and family?
You need an available prospectus exemption, and the three realistic ones each carry different conditions, forms and filings. The cost of getting advice at the outset is small next to the cost of discovering during diligence that shares were issued without authority. At minimum, know which exemption you relied on for each investor and have the record to prove it.
What is the private issuer exemption?
In Ontario it is s. 73.4 of the Securities Act. It lets a company that is not a reporting issuer, whose shares are transfer-restricted in its constating documents or a shareholders' agreement and are held by no more than 50 people (excluding employees and former employees), sell to a prescribed list of purchasers. It requires no risk acknowledgement form, no report of exempt distribution and no fee.
Who counts as a “close personal friend” under securities law?
Someone who has known the director, officer, founder or control person long enough and well enough to assess their capabilities and trustworthiness. Companion Policy 45-106CP expressly says a person does not qualify merely by being a relative, a member of the same club or religious group, a co-worker, a client, a mere acquaintance, or a LinkedIn connection. The relationship must also be direct — there is no friend-of-a-friend.
Does Ontario require a form for a friends and family round?
Yes. NI 45-106 s. 2.6.1 requires Form 45-106F12 for every FFBA distribution in Ontario, signed by the purchaser, by an executive officer of the issuer who is not the purchaser, and by the individual through whom the purchaser qualifies. It must be kept for eight years.
How many investors can a startup have before it needs a prospectus?
There is no single number. The private issuer exemption caps beneficial holders at 50, excluding employees and former employees. The FFBA and accredited investor exemptions have no cap, but selling to a large number of people under FFBA may itself suggest that not all of them were genuinely family, close friends or close business associates.
Do I have to file anything after a friends and family round?
If you relied on the FFBA or accredited investor exemption, yes: Form 45-106F1, through SEDAR+, within 10 days of the distribution, in each jurisdiction where an investor resides. If you relied on the private issuer exemption, no report is required.
What happens if I raise money without an exemption?
Contravening s. 53 of the Securities Act is an offence under s. 122(1) with a fine of up to $10 million; s. 127(1) allows administrative penalties up to $5 million per failure plus disgorgement; the court can rescind the issuance on an application under s. 128; and directors and officers can be personally liable under s. 129.2. The more common practical consequence is that the defect is found during diligence on your next round.
Can I use a convertible note or SAFE in a friends and family round?
Yes, but note two things. A convertible instrument is itself a security, so it needs its own exemption at the time it is issued and again on conversion. And unlike straight non-convertible debt, a convertible note or SAFE counts toward the 50-holder limit and must be transfer-restricted if you are relying on the private issuer exemption.