Most founders think of a private placement as one thing with one set of rules. It is not. It is a series of individual sales, and each sale has to qualify on its own. Sell to five people in one round and you may be relying on three different exemptions, with three different forms, all due on the same day.
The choice matters because the exemption is not a formality you can fix afterwards. If a sale did not fit an exemption when it was made, the investor may have a right to unwind it, and the company has made an illegal distribution. Regulators expect the issuer, not the investor, to take reasonable steps to confirm the investor qualifies, and a signed checkbox in the subscription agreement is no longer enough on its own.
The private placement exemptions side by side
| Exemption (NI 45-106) | Who can invest | Limit per investor | Investor form | Report within 10 days? |
|---|---|---|---|---|
| Accredited investor (s. 2.3) | Investors over the income, financial-asset or net-asset thresholds, plus institutions | None | Form 45-106F9 for most individuals | Yes |
| Family, friends and business associates (s. 2.5) | Close family, close personal friends and close business associates of a director, officer, founder or control person | None | Form 45-106F12 in Ontario; Saskatchewan has its own | Yes |
| Offering memorandum (s. 2.9) | Anyone, with caps that depend on investor status and province | In Ontario: $10,000 a year; $30,000 for an eligible investor; $100,000 with suitability advice | Form 45-106F4 risk acknowledgement | Yes, and the OM itself is filed |
| Private issuer (s. 2.4; s. 73.4 of the Securities Act in Ontario) | Accredited investors, family and friends, existing holders and a few others, while the company stays under 50 holders | None | None in most cases | Generally no |
| Minimum amount (s. 2.10) | Companies, trusts and other non-individuals investing $150,000 or more in cash | Minimum, not maximum | None | Yes |
The accredited investor exemption: the one most rounds use
An individual qualifies by clearing one of four thresholds: net income before tax over $200,000 in each of the last two years ($300,000 with a spouse) and expected again this year; financial assets over $1,000,000 net of related debt; net assets of at least $5,000,000, house included; or financial assets over $5,000,000. "Financial assets" means cash, securities and similar holdings — your house does not count toward the $1,000,000 test, though it does count toward the $5,000,000 net-asset test. The full accredited investor tests are explained here.
Individuals relying on the first three tests must sign Form 45-106F9, a two-page risk acknowledgement that says, in bold, that they could lose all the money they invest. The company keeps it for eight years. Investors with more than $5,000,000 in financial assets do not sign it.
The accredited investor exemption has no dollar cap and no disclosure document. That is why it carries most angel and seed rounds in Canada. Its weakness is the size of the pool: most of the people who already believe in your business — the former colleague, your sister, the client who asked to invest — do not clear any of the thresholds.
Friends, family and business associates: the relationship is the test
Section 2.5 lets a company sell to the close family, close personal friends and close business associates of its directors, executive officers, founders and control persons. There is no income or asset test and no cap. In Ontario the exemption arrived in 2015, and Ontario investors must sign Form 45-106F12, a risk acknowledgement that the founder or director whose relationship is relied on also signs.
"Close" does the work, and regulators read it narrowly. Being a relative, a co-worker, a member of the same club, a former client or a LinkedIn connection does not, by itself, make someone a close friend or close business associate. The question is whether the person knows the director well enough, for long enough, to judge their abilities and trustworthiness. The friends and family round guide covers how to document that before you take the cheque.
The offering memorandum exemption: open to anyone, for a price
The offering memorandum (OM) exemption is the only one that reaches ordinary investors with no relationship to the company. The price is a disclosure document in the form set by Form 45-106F2, financial statements that meet the accounting standards in NI 52-107 (which generally means audited annual statements), a Form 45-106F4 risk acknowledgement from every investor, and an obligation to update the OM when something material changes.
In Ontario and several other provinces the amount each person can invest is capped: $10,000 in any 12 months for most investors, $30,000 for an eligible investor, and $100,000 for an eligible investor who receives suitability advice from a registered dealer. An eligible investor has net income over $75,000 in each of the last two years ($125,000 with a spouse) or net assets over $400,000. Caps differ by province, so a round that crosses provincial lines has to be checked jurisdiction by jurisdiction.
For a small company the OM is usually the most expensive exemption to use, because the audit and the document cost the same whether you raise $200,000 or $2,000,000.
The private issuer exemption: the quiet one
A private issuer is a company whose shares are subject to transfer restrictions in its articles or a shareholder agreement, and whose securities are held by no more than 50 people, not counting employees and former employees. While it stays within those limits it can sell to accredited investors, close family, friends and business associates of its principals, existing security holders and a few other listed categories without filing a report in most provinces. Ontario sets out its own version in section 73.4 of the Securities Act, so check the Ontario wording for Ontario investors.
The exemption is easy to lose without noticing. One sale to someone outside the permitted categories, or a 51st holder, and the company is no longer a private issuer for the next distribution. It is well suited to the first few rounds of an owner-managed company. It is the wrong tool once the cap table starts to fill.
The $150,000 minimum amount exemption
Section 2.10 exempts a purchase of at least $150,000, paid in cash at closing, by an investor buying as principal. Since 2015 it has been closed to individuals. It remains useful for a holding company, family trust or fund that wants to invest without proving accredited status, though most such investors also qualify as accredited investors on the $5,000,000 net-asset test.
What every exempt sale has in common
A report. Sales under the accredited investor, family and friends, OM and minimum amount exemptions must be reported on Form 45-106F1 within 10 days, through SEDAR+, in every province where a purchaser lives. The report of exempt distribution guide covers what goes in it and what late filing costs.
A hold period. Shares of a company that is not a reporting issuer cannot be freely resold. Under NI 45-102 they stay restricted until four months after the company becomes a reporting issuer, which for most private companies means indefinitely. Investors usually exit through a sale of the company or another exemption, not by selling their shares on the open market.
A record. Keep the evidence of how each investor qualified: the questionnaire, the signed risk forms, any income or asset confirmation, and notes of the relationship for a friends and family sale. If a regulator or an unhappy investor asks, the record is what shows the sale was exempt.
Choosing the exemption for your round
Start with the investor list, not the exemption. Sort each name into the category it actually fits, then see how many exemptions the round needs. A seed round of eight investors commonly runs on two: accredited investors for most of the money, and friends and family for the founder's closest supporters. The OM makes sense when the plan is to raise from many people with no prior connection, and the cost of the audit is small relative to the raise.
If you plan to bring in American investors too, the US rules are separate and the thresholds do not line up with Canada's — see Canadian versus US accredited investors.
The exemption you pick decides who you can take money from. It is usually easier to choose it before the term sheet than to explain it after closing.
Common questions
What is a prospectus exemption in Canada?
A prospectus exemption is a rule in National Instrument 45-106 (or provincial law) that lets a company sell securities without filing a prospectus. Each sale must fit an exemption. The common ones for private companies are the accredited investor, family and friends, offering memorandum, private issuer and $150,000 minimum amount exemptions.
Which private placement exemption is most common in Canada?
The accredited investor exemption in section 2.3 of NI 45-106. It has no cap on the amount invested and needs no disclosure document, which is why most angel and seed rounds rely on it.
Can I raise money from friends and family in Ontario?
Yes. Ontario adopted the family, friends and business associates exemption in 2015. Ontario investors must sign Form 45-106F12, and the company files a report of exempt distribution within 10 days. The relationship must be close; a co-worker or acquaintance does not qualify on that basis alone.
How much can a non-accredited investor invest under the offering memorandum exemption?
In Ontario, up to $10,000 in any 12-month period. An eligible investor can invest up to $30,000, or $100,000 with suitability advice from a registered dealer. Limits differ in other provinces.
Do I need to file anything after a private placement?
Usually. Sales under the accredited investor, family and friends, offering memorandum and minimum amount exemptions require a Form 45-106F1 report of exempt distribution within 10 days after the distribution, filed through SEDAR+ in each province where a purchaser lives. Sales under the private issuer exemption generally do not.
Can an individual use the $150,000 minimum amount exemption?
No. Since 2015 the minimum amount exemption is available only to non-individuals, such as corporations, trusts and partnerships, investing at least $150,000 in cash.
Can investors resell shares bought in a private placement?
Not freely. Shares of a non-reporting issuer are subject to a hold period under NI 45-102 that runs until four months after the company becomes a reporting issuer. In practice investors exit through a sale of the company or another exemption.
Can one round rely on more than one exemption?
Yes, and many do. Each sale is assessed separately, so a round can combine accredited investors with family and friends investors. Each investor needs the forms that apply to their exemption, and the report of exempt distribution lists the exemption relied on for each purchaser.