Money from an outside investor into the company that will buy the business is a securities distribution. Those shares have never been issued before, so section 53(1) of the Securities Act (Ontario) demands a prospectus unless a named exemption applies. National Instrument 45-106 Prospectus Exemptions is where those exemptions live.
Key takeaways
SECTION 01 OF 08
The Ontario Act defines a distribution to include “a trade in securities of an issuer that have not been previously issued”. Newly authorised shares in a company set up to buy a machine shop are exactly that. Section 53(1) then bites: “No person or company shall trade in a security on his, her or its own account or on behalf of any other person or company if the trade would be a distribution of the security, unless a preliminary prospectus and a prospectus have been filed and receipts have been issued for them by the Director.”
Nobody buying a $2 million business files a prospectus, so the private market runs on the alternative: a distribution under an exemption, lawful only if every condition of it holds at the moment of the distribution. The seller carries that burden. Per the Companion Policy 45-106CP, “The person relying on a prospectus exemption is responsible for determining whether the terms and conditions of the prospectus exemption are met.” See also Treadstone Law’s primer on raising money.
SECTION 02 OF 08
There is no Canadian securities act. NI 45-106 is a rule drafted by the Canadian Securities Administrators and enacted separately in each jurisdiction under its own securities legislation. Everything quoted here is from the Ontario Securities Commission’s published consolidation, current to 4 December 2025. Québec adopts the same rule as a regulation of its own, CQLR c. V-1.1, r. 21, made under the Securities Act (chapter V-1.1, s. 331.1).
The instrument writes the variation into its own text. Of the accredited investor exemption, section 2.3(8) says flatly “Subsection (1) does not apply in Ontario”, and section 2.4(5) does the same to the private issuer exemption; Ontario supplies both through sections 73.3(2) and 73.4(2) instead. Section 1.6 even redefines the central term, providing that in Manitoba “distribution” “means a primary distribution to the public”. Ontario amended its own copy this year: the local amendments record that “This Instrument comes into force in Ontario on December 4, 2025.”
SECTION 03 OF 08
Most closely-held Canadian companies sit inside this exemption without naming it. A private issuer under section 2.4(1) is an issuer “that is not a reporting issuer or an investment fund”, whose securities other than non-convertible debt “are subject to restrictions on transfer that are contained in the issuer’s constating documents or security holders’ agreements” and “are beneficially owned by not more than 50 persons, not including employees and former employees of the issuer or its affiliates”.
Section 2.4(2) exempts a distribution “to a person who purchases the security as principal and is” one of twelve listed categories, ending with “a person that is not the public.” One cheque outside that list ends the status, because paragraph 2.4(1)(c) requires the issuer to have “distributed its securities only to persons described in subsection (2)”. Treadstone Law covers both Ontario routes, and compares transfer restrictions in the articles with those in the shareholders’ agreement.
SECTION 04 OF 08
Section 2.5(1) qualifies purchasers by relationship rather than money: the prospectus requirement does not apply to a distribution to someone purchasing as principal who is a director, executive officer or control person of the issuer or an affiliate, a listed relative of one of them, or “a close personal friend of a director, executive officer or control person of the issuer, or of an affiliate of the issuer”.
The two soft-sounding categories are the ones that fail. The Companion Policy defines a close personal friend as “an individual who knows the director, executive officer, founder or control person well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness and to obtain information from them with respect to the investment”. Being a relative, a co-worker, a club member, a client or a social-media contact is not by itself enough.
Two provinces bolt conditions on. Section 2.6 withholds it in Saskatchewan for friends and business associates without a signed Form 45-106F5; section 2.6.1 reaches every Ontario purchaser, requiring “a risk acknowledgement signed by all of the following” including “an executive officer of the issuer other than the purchaser”, retained “for 8 years after the distribution”. A signature obtained after closing repairs nothing: the acknowledgement is a condition of the exemption, not a filing that follows it. For the investor’s side of it, see the family-money article.
SECTION 05 OF 08
Outside Ontario the operative words are in section 2.3(1): “The prospectus requirement does not apply to a distribution of a security if the purchaser purchases the security as principal and is an accredited investor.” The individual tests in section 1.1 are absolute dollar figures — paragraph (j) covers “an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that, before taxes but net of any related liabilities, exceeds $1 000 000”.
Those individual tests carry a paperwork condition inside the exemption itself. Section 2.3(6) withholds it “unless the person distributing the security obtains from the individual a signed risk acknowledgement in the required form at the same time or before that individual signs the agreement to purchase the security”, kept eight years under section 2.3(7). Companies qualify under paragraph (m), and section 2.3(5) blocks a vehicle that “was created, or is used, solely to purchase or hold securities as an accredited investor”. Treadstone Law describes the subscription agreement.
SECTION 06 OF 08
This exemption ignores both the investor’s wealth and their relationship to you, and looks only at the shape of the cheque. Section 2.10(1) applies where all four conditions hold: “that person is not an individual”; that person purchases as principal; “the security has an acquisition cost to that person of not less than $150 000 paid in cash at the time of the distribution”; and “the distribution is of a security of a single issuer”.
The first condition surprises people: a wealthy individual cannot use this exemption at all, however large the cheque. Its natural user is a holding company, a family office or an operating business. The cash condition is equally literal — a promissory note or a deferred payment is not cash paid at the time of the distribution. A vendor taking shares needs a different route, and section 2.12 supplies it for assets of “a fair value of not less than $150 000”. See the single-acquisition vehicle article on assembling a one-deal vehicle.
SECTION 07 OF 08
Each exemption fails in the way its own conditions are written, and the failures are unglamorous. A purchaser buying for someone else is not purchasing as principal, which defeats sections 2.3, 2.4 and 2.5 alike. An individual defeats section 2.10 by existing. A friend of a friend defeats section 2.5, because the Companion Policy says the exemption “is not available to a close personal friend of a close personal friend of a director of the issuer”. A missing Form 45-106F9, 45-106F5 or 45-106F12 defeats sections 2.3, 2.6 and 2.6.1.
Two conditions sit outside the purchaser entirely. Sections 2.4(3) and 2.5(2) prohibit paying a commission or finder’s fee to a director, officer, founder or control person on a distribution under those exemptions, and section 1.5(1) provides that an exemption referring to a registered dealer “is only available for a trade in a security if the dealer is registered in a category that permits the trade described in the exemption.” Most exemptions also generate a filing, due under section 6.1(2) “no later than 10 days after the distribution.”
SECTION 08 OF 08
An exempt distribution restricts what the investor can do next. National Instrument 45-102 Resale of Securities makes the first trade of exempt securities a distribution in its own right unless its conditions are met, and the first of those is that “The issuer is and has been a reporting issuer in a jurisdiction of Canada for the four months immediately preceding the trade.” A private acquisition company is not a reporting issuer and does not intend to become one, so that condition can never be satisfied and the restriction never lifts. Its investor has no exit but the one the shareholders’ agreement builds — the terms worth settling before the money moves, and why an investor is not a smaller sale.
Two boundaries. This page states what each exemption requires; it does not tell you which to use, and that choice turns on facts a page cannot see. And every quotation is from the OSC’s consolidation current to 4 December 2025 — other provinces enact the same rule with local variations, so confirm the text as adopted where the distribution takes place. Treadstone Law’s debt-versus-equity comparison starts the other question: whether the money should arrive as a loan.
Not by wealth alone. The minimum amount exemption requires that the purchaser not be an individual, however large the cheque — its natural users are holding companies, family offices, or operating businesses. A wealthy person investing personally has to qualify a different way, typically as an accredited investor.
Only if the friendship meets a specific bar, and only with extra paperwork in some provinces. A close personal friend must know the director or officer well enough, and for long enough, to assess their capabilities and trustworthiness — being a relative, co-worker, or club member is not enough. Saskatchewan and Ontario also require a signed risk acknowledgement.
No. That exemption requires at least $150,000 paid in cash at the time of the distribution, so a promissory note or deferred payment does not qualify. A vendor taking shares as part of the price needs a different exemption, such as the one covering assets of at least $150,000 in fair value.
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