Ontario Securities Act Exemptions: Private Issuer and Accredited Investor Rules

Every time an Ontario company sells shares, notes, or other securities to raise money, it is distributing a security under the Securities Act (Ontario). Distributing securities without a prospectus — the long, expensive public-offering document most companies will never file — requires a statutory exemption.

Understanding the private issuer exemption and the accredited investor exemption is not optional for founders raising capital. Getting it wrong can mean your investors have the right to demand their money back, and you may face regulatory consequences from the Ontario Securities Commission (OSC).

This article explains how each exemption works, who qualifies, what conditions must be met, and what happens after you close the deal.

Why Exemptions Exist

A prospectus protects investors by requiring companies to disclose everything a reasonable investor would want to know before investing — financial statements, risk factors, management background, and use of proceeds. Preparing one takes months and costs significant legal and accounting fees.

Most private companies will never need a prospectus. Exemptions allow them to raise capital from specific categories of investors who either have access to information through their relationship with the company or are sophisticated enough to protect themselves financially.

The core principle: exemptions replace prospectus-level disclosure with specific conditions. Understand the conditions; do not shortcut them.

The Private Issuer Exemption

Who qualifies as a "private issuer"?

Under Ontario securities law, a company qualifies as a private issuer if (as of writing — verify current rules with the OSC):

• Its securities are not listed on any stock exchange.
• Its constating documents (articles, shareholders' agreement) restrict transfer of shares — meaning shareholders cannot just freely sell to anyone.
• It has no more than 50 security holders (excluding current and former employees who hold securities under an employee benefit plan).

Most small private Ontario corporations satisfy these conditions automatically, but the 50-holder cap is one to track as you grow. Once you exceed it, you lose the exemption for future raises.

Who can you sell to under this exemption?

A private issuer may sell only to a defined list of eligible purchasers, which includes (as of writing — verify with the OSC):

• Founders, directors, officers, and current employees of the issuer.
• Family members — spouses, parents, siblings, and children of the above.
• Close personal friends — this is a facts-and-circumstances test. Securities regulators look at the nature of the relationship: longstanding, direct, genuine. An acquaintance from LinkedIn does not qualify.
• Close business associates — again, a facts-based test. A person you have had substantial business dealings with in a professional context over time, not a new contact at a pitch event.
• Accredited investors (discussed below).
• Existing security holders of the issuer.

The "close personal friend" and "close business associate" categories are the ones most frequently misused. If you are uncertain whether your relationship qualifies, treat it as if it does not, and use the accredited investor exemption instead.

The Accredited Investor Exemption

The accredited investor exemption is available to a broader group but requires the investor to meet prescribed financial thresholds. As of writing, common categories of accredited investors under National Instrument 45-106 include individuals who (verify current thresholds with the OSC before relying on them):

• Have a net income before taxes exceeding a set threshold in each of the two most recent calendar years, with a reasonable expectation of exceeding that amount in the current year.
• Have a net financial assets exceeding a set threshold — net of liabilities.
• Have net assets exceeding a higher set threshold.
• Are registered dealers, advisers, or fund managers in any Canadian province.
• Are certain types of institutions, pension funds, or government entities.

Because the dollar thresholds are set by regulation and subject to change, always confirm the current amounts with the OSC or a lawyer before proceeding.

What does "accredited investor" documentation look like?

The investor signs a subscription agreement that includes a representation that they meet the accredited investor criteria. You should also have them complete an accredited investor certificate or schedule specifying which category they rely on.

You cannot simply take someone's word for it. The exemption requires that you have a reasonable basis to believe they qualify. Keep signed documentation in your corporate records.

Reporting Requirements After Closing

Using an exemption does not mean no paperwork with the OSC. For most exempt distributions in Ontario, you must file a Report of Exempt Distribution (Form 45-106F1) with the OSC within a set period after each closing. As of writing, the filing deadline is typically within 10 days of the distribution date — confirm the current deadline on the OSC website.

The report discloses:

• The issuer's identity and business.
• The amount raised and the exemption relied upon.
• Information about the purchasers (not names — aggregate data).

Failure to file is a regulatory violation. The filing itself is administrative; it does not mean the OSC is reviewing your offering.

Common Mistakes

Relying on personal friend exemption too broadly

Meeting someone at a business conference last month is not a "close personal friend." Taking money under this category from a stranger creates real rescission risk — the investor can demand their money back if the exemption does not legally apply.

Exceeding the 50-holder cap without noticing

Once you have 50 or more security holders (including holders of options, warrants, and convertible notes, depending on how they are counted), you may no longer qualify as a private issuer. Monitor your cap table carefully as you issue instruments.

Forgetting to file the exempt distribution report

The report is easy to overlook after a busy closing. Build it into your post-closing checklist.

Not restricting share transfer in the articles

The private issuer exemption requires that your constating documents restrict share transfers. If your original articles of incorporation did not include this restriction, you need to amend them before relying on the exemption.

Frequently asked questions