A search fund is an investment vehicle that raises capital for an individual or small team — the “searcher” — to spend a year or two searching for, then acquiring and running, a single privately held Canadian business.
No Canadian statute defines “search fund” as a term — it is a market label for a two-stage capital structure built out of ordinary securities-law and corporate-law tools. Search-phase capital, which funds the searcher’s salary and search costs, is typically raised from a small group of investors as a private placement rather than a prospectus offering, relying on the NI 45-106 private issuer exemption: an issuer that is not a reporting issuer, whose securities are transfer-restricted and beneficially owned by not more than 50 persons, and distributed only to permitted purchasers such as accredited investors. Investors typically negotiate the right, in their own investor agreement rather than under any statute, to convert their search-phase capital into equity of the eventually acquired company. Once an acquisition closes and the searcher takes an operating role, the investor group commonly formalizes its control rights through a CBCA s.146 unanimous shareholder agreement, which the Act confirms “is valid” even though it restricts the directors’ ordinary powers.
Financing the acquisition itself runs into a specific Canadian constraint. Most search funds acquire control through a share purchase, to preserve the target’s existing contracts and licences — but Canada’s main small-business acquisition programme, the Canada Small Business Financing Program, explicitly “cannot” finance “share purchases or assets that a holding company acquires.” A share-purchase search fund is therefore generally shut out of that programme; only an asset-purchase structure, and only for eligible asset categories, can access it. The Business Development Bank of Canada offers a business-purchase loan as one alternative, though BDC “can only review your request for a loan once you have a negotiated agreement to buy another company” — the financing follows the deal, not the search.
Suppose a searcher raises $500,000 of search capital from 12 investors under the NI 45-106 private issuer exemption, to fund an 18-month search. The searcher finds a $4,000,000 target and structures the acquisition as a share purchase, to keep the target’s existing supply contracts intact. Because it is a share purchase, the CSBFP cannot fund any part of the deal; the searcher instead combines the rolled-over search capital, a BDC acquisition loan, and vendor take-back financing from the seller to close the transaction.
See also: Indemnity cap, Material adverse change clause
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