A cheque from a relative or a former business partner still counts as selling a security, and Canadian securities law has a specific, narrow exemption built for exactly that relationship — not a blanket pass because the money is informal.
Key takeaways
The exemption most people reach for first is the accredited-investor category, and for most friends-and-family investors it is the wrong tool. National Instrument 45-106 s. 1.1 sets the individual tests in absolute dollar terms: an individual who, alone or with a spouse, holds financial assets with a value that, before taxes and net of related liabilities, exceeds $1,000,000; or whose net income before taxes exceeded $200,000 in each of the two most recent calendar years ($300,000 combined with a spouse), and who reasonably expects to exceed that level again this year; or who, alone or with a spouse, has net assets of at least $5,000,000. A retired aunt with home equity and a pension does not clear any of those bars, even though she may be exactly the person willing to fund a first acquisition.
The instrument carries a separate, purpose-built route: s. 2.5. It permits a distribution, without a prospectus, to directors, executive officers and control persons of the issuer or an affiliate, to specific listed family members, to close personal friends, to close business associates, and to founders and their own family, friends and business associates. The relationship is the qualifying fact, not a net-worth number. A cousin who has known the founder for fifteen years and understands the business fits this exemption in a way that a stranger with $5,000,000 of net assets, ironically, needs a different exemption to fit.
The instrument is specific about what “close personal friend” and “close business associate” are meant to exclude: a relationship built on a mailing list, a cold approach, or a general solicitation does not qualify. The point of the exemption is that the investor already has enough first-hand knowledge of the founder and the business to make an informed decision without a prospectus doing that work for them — not that any personal connection, however thin, will do.
NI 45-106 s. 2.6.1 changes the mechanics in Ontario specifically: the general s. 2.5 exemption does not apply there unless the issuer is not an investment fund and a written risk-acknowledgement form is signed by the purchaser, by an executive officer of the issuer other than the purchaser, and by the specific director, executive officer, control person or founder who has the qualifying relationship with the investor. That signed form then has to be retained for eight years. Saskatchewan runs a parallel, though not identical, requirement under s. 2.6. A raise built around a template that assumes the same rule applies everywhere in Canada will miss this in the two provinces where it actually matters most.
The practical effect is that the paperwork discipline this exemption asks for looks a great deal like the paperwork discipline around a formal offering — not because the law distrusts family money, but because the risk-acknowledgement form is the mechanism the regulator uses to make sure the investor actually understood what they were signing, given that no prospectus or offering memorandum is doing that job here.
NI 45-106 s. 2.5(2) is explicit and easy to miss: no commission or finder's fee may be paid to any director, officer, founder or control person of the issuer or an affiliate in connection with a distribution made under this exemption. A founder who structures a $10,000,000 raise from a network of relatives and offers a cousin a 2% finder's fee for introducing three of the other investors has just stepped outside the exemption for that portion of the raise, whatever the family relationship looks like otherwise. If a finder's role is genuinely needed, that person has to be outside the excluded categories, and their own compensation arrangement checked separately.
The instrument also caps how the structure can be used defensively. The private-issuer route (s. 2.4) that pairs naturally with this exemption limits the issuer to not more than 50 beneficial security holders, not counting employees, and requires transfer restrictions in the constating documents or a security-holders’ agreement. An acquisition vehicle raised on family money is almost always well inside that limit on its own, but a sponsor stacking several small raises into one entity over time should keep count.
Family-and-friends equity is rarely the whole capital stack; it is more often the piece that fills the buyer-equity requirement a lender is going to ask for regardless of where the rest of the financing comes from. The federal Canada Small Business Financing Programme does not itself restrict how equity was sourced, but it does set hard limits on what the loan can be used for: the programme cannot finance a share purchase or assets acquired by a holding company, only the eligible assets of the target business, financed at the lesser of the purchase cost and the appraised value. A buyer who has raised family capital into a holding company sitting above the operating entity should confirm the closing structure still lines up with that rule before counting on both pieces of financing at once. See the CSBFP glossary entry for the mechanics.
An operator buying a small commercial cleaning business for $600,000 plans a capital stack of $150,000 in buyer equity, an $80,000 vendor take-back, and the balance financed through a bank term loan supported by the CSBFP. Of the $150,000 equity, $40,000 is the buyer’s own savings and $110,000 comes from three relatives, structured as common shares in the newly incorporated acquisition company rather than as personal loans to the buyer.
Because the business is Ontario-based and the acquisition company is an Ontario issuer, the raise relies on NI 45-106 s. 2.5 (family, friends and business associates) rather than the accredited-investor test — none of the three relatives clears the $1,000,000 financial-asset or $200,000 income thresholds on their own. Because the issuer is not an investment fund, Ontario’s s. 2.6.1 risk-acknowledgement requirement applies: each of the three relatives signs the prescribed form, countersigned by the founder as the qualifying control person, and the buyer’s counsel retains the signed forms for the eight-year period the instrument requires. No finder was involved and no fee changed hands for the introductions, so s. 2.5(2) is not engaged. The equity clears before the bank underwrites the loan, because the lender wants to see the buyer’s committed equity in place, not promised, before it commits its own capital.
No. It changes which prospectus exemption applies — NI 45-106 s. 2.5 instead of the accredited-investor test — it does not remove the requirement to rely on a documented exemption in the first place.
Ontario's s. 2.6.1 form is that province's own requirement; Saskatchewan runs a parallel rule under s. 2.6. Confirm the current requirement in the investor's own province before assuming the general s. 2.5 exemption applies without extra paperwork.
Not if that friend is a director, officer, founder or control person of the issuer relying on the family-and-friends exemption — NI 45-106 s. 2.5(2) bars a commission or finder's fee to anyone in those categories for that distribution.
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