Capital Raising: Private Issuer Exemption

Capital Raising: Private Issuer Exemption


Do Canadian securities laws apply when a private company issues securities to investors? The short answer is “yes.”

A common misconception is that Canadian securities laws only apply to public companies that are raising capital and do not apply to private companies issuing securities. However, private company owners must be aware that any time a private company distributes securities, the company must comply with Canadian securities laws.

This article will discuss (i) the prospectus requirement for a distribution of securities, (ii) exemptions from the prospectus requirement, and (iii) the private issuer exemption.

I.  Prospectus Requirement

A company can raise capital through the issuance of securities to investors. Some common examples of securities include common shares, preferred shares, SAFEs or convertible notes.

The default rule is that any time a company distributes securities to investors, it is required to have filed a preliminary prospectus and a prospectus with the securities regulator, and the securities regulator must have provided receipts for them.[1]

A prospectus is a disclosure document which is intended to provide “full, true and plain disclosure of all material facts” relating to the securities to be issued. It is typically a lengthy document which provides a detailed description of the company and its business, management team, financial information, existing securities and securities being offered. A prospectus is generally produced for the benefit of less sophisticated retail investors for whom it would provide a valuable source of information.[2]

II.  Exemptions from Prospectus Requirement

Notwithstanding the prospectus requirement, not all distributions of securities require the filing of a prospectus. A company may distribute securities under an exemption from the prospectus requirement and, therefore, not be required to file a prospectus with the securities regulator. Distributions of securities which rely on an exemption are often referred to as “private placements,” “exempt distributions” or “exempt offerings.”

Various exemptions from the prospectus requirement exist under Canadian securities legislation.

The general rationale behind prospectus exemptions is that securities laws aim to strike a balance between investor protection, on the one hand, and the efficient functioning of capital markets on the other. There may be a situation where the cost of producing a prospectus would be extremely onerous for a company but the benefits to potential investors fairly minimal. In such a scenario, the benefit would not justify the cost.[3]

However, not all exemptions are justified on a cost-benefit analysis. Some exemptions attempt to reduce prohibitive costs for smaller companies seeking to raise capital while sacrificing an element of investor protection that could be provided by a prospectus.[4] The policy rationale for such exemptions may be to facilitate capital raising by smaller enterprises.[5]

 III.  Private Issuer Exemption

The prospectus exemption most commonly relied on by smaller, closely-held companies when raising capital is the private issuer exemption.

In order for a company to qualify as a “private issuer,” it must meet the following criteria:

1. It is not a reporting issuer or an investment fund.

2. Its constating documents (e.g., articles) or security holders’ agreement restrict the right of security holders to transfer its securities.

3. Its securities are beneficially owned by not more than 50 persons, not including employees and former employees.

4. It has distributed securities only to exempt purchasers described in the private issuer exemption provision.[6]

If a company meets the above requirements of qualifying as a private issuer, it may distribute securities to certain exempt purchasers without the need to file a prospectus with the securities regulator.

The exempt purchasers to whom securities may be distributed under the private issuer exemption include the following persons:

(i) a director, officer, employee, founder or control person of the issuer,

(ii) a director, officer or employee of an affiliate of the issuer,

(iii) a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person of the issuer,

(iv) a parent, grandparent, brother, sister, child or grandchild of the spouse of a director, executive officer, founder or control person of the issuer,

(v) a close personal friend of a director, executive officer, founder or control person of the issuer,

(vi) a close business associate of a director, executive officer, founder or control person of the issuer,

(vii) a spouse, parent, grandparent, brother, sister, child or grandchild of the selling security holder or of the selling security holder’s spouse,

(viii) a security holder of the issuer,

(ix) an accredited investor,

(x) a person of which a majority of the voting securities are beneficially owned by, or a majority of the directors are, persons described in (i) to (ix),

(xi) a trust or estate of which all of the beneficiaries or a majority of the trustees or executors are persons described in paragraphs (i) to (ix), or

(xii) a person that is not the public.[7]

In addition, the exempt purchaser must purchase the securities as principal (i.e., not on behalf of another person).[8] And, no commission or finder’s fee may be paid to any director, officer, founder or control person in connection with the distribution of securities except in the case of a distribution to an accredited investor.[9]

You will notice that most of the exempt purchasers on the list above are persons who have some close personal or business connection to the issuer or to its directors, officers or founders. The two exceptions are accredited investors and a “person that is not the public.”[10]

The determination of whether a purchaser is an accredited investor is based on certain income or asset tests.

The applicable Canadian securities legislation does not define “a person that is not the public.” However, Canadian securities regulators have commented that “[w]hether or not a person is a member of the public must be determined on the facts of each particular case.”[11]


Private company owners, including startup founders, must be aware that their companies will need to comply with Canadian securities laws when distributing securities. Assuming a company qualifies as a “private issuer,” the company may rely on the private issuer exemption when issuing securities to certain permitted investors and, thus, not be required to produce and deliver a prospectus.


This article is for informational purposes only and does not constitute legal advice.

This article is limited in scope to the distribution of securities by non-offering federal or Ontario corporations (i.e., private companies; non-reporting issuers) that are distributing securities to Ontario residents in accordance with the Securities Act (Ontario) and the prospectus exemptions set out in National Instrument 45-106: Prospectus Exemptions.

This article does not discuss the registration requirements which apply to those persons engaged in the business of trading or advising on securities.

For more information about private placement transactions, contact David Kim of Crescendo Law at [email protected]. To learn more about Crescendo Law, visit our website at

[1] Securities Act (Ontario), s. 53(1).

[2] Johnston, David, Rockwell, Kathleen D. and Ford, Cristie. Canadian Securities Regulation, Fifth Edition. Markham, LexisNexis Canada Inc., 2014, p. 206.

[3] Nicholls, Christopher C. Securities Law, Second Edition. Toronto, Irwin Law Inc., 2018, p. 196.

[4] Gillen, Mark R. Securities Regulation in Canada, 4th Edition. Toronto, Thomson Reuters Canada Limited, 2019, p. 454.

[5] Ibid, p. 485.

[6] National Instrument 45-106: Prospectus Exemptions (“NI 45-106”), s. 2.4(1).

[7] NI 45-106, ss. 2.4(2) and 2.4(2.1).

[8] Securities Act (Ontario), s. 73.4(2); NI 45-106, s. 2.4(2).

[9] NI 45-106, s. 2.4(3).

[10] Nicholls, supra note 3 at p. 216.

[11] Companion Policy 45-106CP: Prospectus Exemptions, s. 3.6(1).