The private issuer exemption lets a company that is not reporting and has genuine transfer restrictions on its shares raise money from a short list of insiders and close contacts — up to 50 outside security holders, plus permitted categories like directors, officers, family, accredited investors and close friends — without a prospectus.
National Instrument 45-106, section 2.4, defines a “private issuer” through three conditions. It must not be a reporting issuer or an investment fund. Its securities, other than non-convertible debt, must be “subject to transfer restrictions” in the constating documents or a security holders’ agreement, and beneficially owned by “not more than 50 persons”, not counting employees and former employees, with each person counted once unless an entity was created or used solely to hold the securities. And it must have distributed its securities only to the permitted purchasers the same section lists: directors, officers, employees, founders and control persons and their close relations; listed family members; a close personal friend or close business associate; existing security holders; accredited investors; certain majority-owned entities and trusts; and, in the instrument’s own words, “a person that is not the public.”
The “transfer restrictions” the definition demands are not abstract — they are the same clauses covered elsewhere in this glossary. A right of first refusal, a right of first offer, a shotgun clause, a tag-along right or a pre-emptive right, once written into a CBCA corporation’s articles under section 6(1)(d) or into a unanimous shareholder agreement, is exactly the kind of restriction that lets an issuer satisfy section 2.4(b) — the corporate-law mechanism and the securities-law qualification are two views of the same document.
The exemption stops covering an issuer the moment either condition breaks: once outside holders approach 50, or once the company sells to someone who does not fit any category in the permitted-purchaser list, it needs a different route — typically the offering memorandum exemption or a raise confined to accredited investors.
A newly incorporated CBCA holding company has 12 shareholders: two founders, three employees who received shares on exercising options, four friends-and-family angels, and three accredited investors from a referral, and its articles carry a right of first refusal restricting share transfers. Because it is not a reporting issuer, that restriction satisfies section 2.4(b), and every one of its 12 holders fits a permitted-purchaser category, it can keep raising modest rounds from new directors, employees, family and accredited investors under the private issuer exemption. The moment it wants to accept money from a stranger who fits none of those categories, or its outside holder count nears 50, the exemption stops covering it.
See also: Offering memorandum exemption · Accredited investor · Right of first refusal · Unanimous shareholder agreement.
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