What is the private issuer exemption in Ontario?

What makes a company a private issuer?

Under section 2.4 of National Instrument 45-106, and section 73.4 of Ontario’s Securities Act, a private issuer is a company that:

• isn’t a reporting issuer (a public company) or an investment fund;
• has securities, other than non-convertible debt, that are subject to transfer restrictions in its articles or a securityholders’ agreement;
• has those securities beneficially owned by no more than 50 people, not counting employees and former employees; and
• has only ever distributed securities to the permitted purchasers below.

Who can buy under it?

The list in NI 45-106 includes, buying as principal:

• directors, officers, employees, founders and control persons of the company;
• the spouses, parents, grandparents, siblings, children and grandchildren of a director, executive officer, founder or control person, and those of their spouses;
• close personal friends and close business associates of a director, executive officer, founder or control person;
• existing securityholders;
• accredited investors;
• companies and trusts controlled by people on the list; and
• “a person that is not the public”, a narrow, fact-based category.

Why do startups use it?

Because it’s simple. In Ontario there’s no prescribed risk acknowledgement form and generally no report of exempt distribution, unlike the accredited investor exemption and the family, friends and business associates exemption. The private issuer exemption isn’t on the list in section 6.1 of NI 45-106 of exemptions that require a report of exempt distribution, and that holds even when the purchaser is an accredited investor.

	Private issuer	Accredited investor	Family, friends and business associates
Who	Defined list, including accredited investors	Accredited investors	Insiders’ family, close friends, close business associates
Holder limit	50, excluding employees	None	None
Form	None prescribed	45-106F9 for some individuals	45-106F12
OSC report within 10 days	Generally no	Yes	Yes

Where do the transfer restrictions come from?

From your articles or a shareholder agreement. Most Ontario and federal startups put a restriction in their articles of incorporation requiring board approval for any share transfer. Check yours; an online incorporation that skipped this step may not qualify.

How can a company lose the exemption?

• by exceeding 50 holders, not counting employees;
• by issuing to someone outside the permitted list, even once;
• by becoming a reporting issuer.

After that, future financings need a different exemption, such as the accredited investor exemption, which does require a report (Companion Policy 45-106CP, s. 3.6(5)). Earlier distributions aren’t undone, but count holders carefully before each issuance, including SAFE holders, who hold securities too.

Can we pay someone to find investors?

Not if the payee is the company’s own director, officer, founder or control person, except for sales to accredited investors. Paying anyone to find investors can also raise securities registration issues, so ask first.

Our SAFE round work includes reviewing which exemption applies to each investor, starting at $2,600. See fees.

This guide is general information about Ontario securities law, not legal advice for your situation. To confirm your exemption before you take money, book a free 15-minute consult.