A one-deal investor is not a fund. There is no LPA, no committed-capital mechanism and often no prior relationship to fall back on when the term sheet gets drafted, which means every piece of the return promise has to be built from scratch inside the corporate documents themselves.
Key takeaways
A sponsor who has never raised a fund still has to answer the same question a fund does: what does the money get, and what does it get paid in exchange for. The difference is that a fund answers it once, in a limited partnership agreement that governs every deal the fund does. A single-deal sponsor has to answer it fresh, inside the corporate documents for one acquisition, with a securities-law exemption doing the work a fund's registration exemption would otherwise do — a different exercise from the term-sheet and cap-table basics a founder works through when raising money for a startup, though the two share a common vocabulary.
Before any return question matters, the distribution of securities to the investor has to clear a prospectus exemption under National Instrument 45-106. For a single co-investor on one deal, four routes turn up most often. A private issuer exemption is available where the issuer is not a reporting issuer or an investment fund, its shares carry transfer restrictions, and it has no more than 50 beneficial owners (not counting current or former employees) — and it can only have distributed to a defined list: directors, officers, employees, founders and control persons and their affiliates' own directors, officers and employees; listed family members; a close personal friend or close business associate of a director, executive officer, founder or control person; existing security holders; accredited investors; and, in the instrument's own catch-all, “a person that is not the public.”
A close relative of that route is the family, friends and business associates exemption itself, which lets an issuer distribute directly to a director's or officer's family member, close personal friend, close business associate or founder without needing the private-issuer structure — with one sharp limit built in: no commission or finder's fee may be paid to any director, officer, founder or control person of the issuer in connection with a distribution made under it. In Ontario the same exemption only applies where the issuer is not an investment fund and a signed risk acknowledgement is obtained — from the purchaser, from an executive officer other than the purchaser, and from whichever director, officer, founder or control person supplied the relationship — and the form has to be kept for eight years.
Where the investor is not a friend or family connection at all, two other exemptions do the work instead. The minimum amount investment exemption is available only where the purchaser is not an individual, is buying as principal, and is putting at least $150,000 in cash into a single issuer's security. The asset acquisition exemption covers the mirror case — an issuer distributing its own shares as consideration for assets with a fair value of at least $150,000, useful where the investor is contributing an operating business rather than cash.
Once the money is in, a passive single-deal investor's real protection rarely comes from a board seat — it comes from a unanimous shareholder agreement. Under CBCA s.146, an agreement among all the shareholders (or a sole shareholder's own written declaration, which is deemed to be one) restricting the directors' powers is valid, and a purchaser or transferee of shares subject to the agreement is automatically deemed a party to it — with a narrow escape hatch: if they were not given notice of it, they may rescind within 30 days of learning it exists. Where the agreement hands the directors' powers to specific shareholders, those shareholders take on a director's rights, powers, duties and liabilities to the same extent, and the actual directors are relieved of them accordingly. That is how a passive investor gets consent rights over a sale, a new financing round or a related-party transaction without sitting on the board at all — the protection is drafted into the agreement, not negotiated for a seat.
The Income Tax Act does not define a preferred return, a hurdle or a carried interest for a deal like this — none of those are statutory terms. The number a single-deal investor is promised is entirely a drafting choice, fixed in the share terms or the unanimous shareholder agreement itself, whether that takes the shape of a cumulative preferred dividend on preferred shares, a priority return on a shareholder loan, or a straight participation percentage once a return threshold is cleared. To illustrate the mechanics only — the rate itself is a drafting choice, not a benchmark — suppose the agreement fixes an 8% preferred return on the investor's contributed capital, accruing whether or not it is paid out in a given year, ahead of any distribution to the sponsor's own common shares. No Canadian body publishes a market rate to anchor that number against: even CVCA's own Canadianized model legal documents, the closest thing to a standard-form template in this market, state no fee rate, hurdle or preferred return anywhere in their public material.
Where the investor is rolling an existing business into the holdco rather than writing a cheque, ITA s.85(1) lets the disposition happen on a tax-deferred basis, provided the consideration the investor takes back includes shares of the acquiring corporation and the parties jointly elect in prescribed form. The elected amount becomes both deemed proceeds and deemed cost, bumped up to fair market value for any non-share consideration (the “boot”) received alongside the shares, and capped at the property's own fair market value. It is the same mechanism, worth remembering, that a sponsor may reach for again years later if the exit itself is structured as a further share-for-share rollover into a larger acquirer.
A family office is putting $600,000 into a $2,000,000 acquisition alongside a first-time independent sponsor, taking preferred shares in the acquisition holdco. The family office is a corporation buying as principal, and $600,000 clears the $150,000 cash threshold on its own security in this single issuer — so the minimum amount investment exemption under NI 45-106 s.2.10 supports the distribution without needing to establish that any individual behind the family office separately qualifies as an accredited investor. The preferred shares carry an illustrative 8% cumulative preferred return, which accrues at $48,000 a year (8% of $600,000) ahead of any common distribution to the sponsor. A unanimous shareholder agreement under CBCA s.146 gives the family office consent rights over a future sale, additional debt and any related-party transaction, without a board seat, and includes a drag-along clause so that when the sponsor eventually finds a buyer for the whole company, the family office's shares are bound by the same deal rather than able to hold it up.
Not necessarily. Accredited investor status is only one of several National Instrument 45-106 exemptions available. A non-individual purchasing as principal for at least $150,000 cash into a single issuer can rely on the minimum amount investment exemption instead, and a director's, officer's or founder's own family, close friends and business associates have a separate exemption of their own.
Yes. Nothing in the Income Tax Act defines, restricts or requires a specific preferred return, hurdle or carried interest for a private acquisition like this. It is a contractual term set in the share terms or the unanimous shareholder agreement, so the number is a drafting choice negotiated between the parties, not a rate fixed by statute.
No. Under CBCA s.146, a unanimous shareholder agreement can hand specific security holders the board's own powers over defined decisions, and the directors are relieved of those powers to the same extent — so meaningful protection can be built entirely through the agreement, without the investor ever sitting on the board.
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