To raise private equity in Canada without filing a costly prospectus, startups often rely on the Accredited Investor Exemption under National Instrument 45-106. To qualify, an individual investor must generally prove they earn over $200,000 CAD annually, or possess over $1 million CAD in net financial assets.
Navigating Canadian Securities Law for Private Funding
When an ambitious Canadian startup is ready to raise significant capital, founders often start pitching to wealthy individuals in cities like Toronto, Calgary, and Vancouver. 💵 However, Canadian securities law strictly protects the public from risky investments. The general rule is that you cannot sell shares of your private company unless you issue a “prospectus”-a massive, incredibly expensive document vetted by provincial regulators like the Ontario Securities Commission (OSC) or the BC Securities Commission (BCSC).
Because a prospectus is far too costly for early-stage companies, you must use a legal loophole known as a prospectus exemption. The most widely used pathway is the Accredited Investor Exemption. The law assumes that wealthy individuals have the financial sophistication to understand the high risks of startup investing and can afford to lose their money without needing government protection.
Relying on this exemption requires strict compliance and paperwork. 💼 You cannot simply take an investor’s word that they are wealthy. If you accept money from an unqualified person, the provincial regulators can force you to return the funds, issue massive fines, and potentially ban you from ever acting as a corporate director. Working with a specialized Canadian securities lawyer is absolutely essential to protect your business.
Step-by-Step Process: Using the Accredited Investor Exemption
Whether you are issuing common shares, Convertible Notes, or SAFEs across Canada, adhering to National Instrument 45-106 (NI 45-106) follows a mandatory federal-style framework managed by provincial commissions.
Step 1: Verify the Investor’s Financial Status
Before accepting a single dollar, you must verify that the investor legally meets the accredited definition. You must conduct reasonable due diligence. While you do not need to audit their tax returns, you must have them complete a detailed questionnaire confirming their income or net assets, and ensure their answers make logical sense based on your interactions with them.
Step 2: Sign the Subscription Agreement
The investor must sign a Subscription Agreement, which is the formal contract to purchase the equity. 📝 Attached to this agreement are the specific schedules from NI 45-106. The investor must physically check the exact box that corresponds to their specific wealth category (e.g., individual income vs. joint assets).
Step 3: Execute Risk Acknowledgement Form 45-106F9
If the accredited investor is an individual (a human being, not a massive venture capital fund), they must also sign Form 45-106F9. This mandatory risk acknowledgement explicitly states that the investment is highly risky, that they could lose everything, and that they may not be able to sell the shares for a very long time.
Step 4: File the Report of Exempt Distribution
After the money is wired and the shares are issued, your legal obligations are not over. 📄 Within 10 days of the distribution, your lawyer must file a Report of Exempt Distribution (Form 45-106F1) with the securities commission in the province where the investor resides, officially notifying the government that you utilized the exemption.
How Much Does Regulatory Compliance Cost in Canada?
Using the Accredited Investor Exemption is much cheaper than a prospectus, but it still carries unavoidable legal and regulatory costs. Here is the 2026 financial breakdown:
- Lawyer Fees: Having a securities lawyer draft the subscription agreements, verify the exemptions, and handle the filings generally costs between $2,000 and $6,000 CAD per funding round.
- Filing Fees: Each provincial regulator charges a fee when you file the Report of Exempt Distribution. For example, in Ontario, the OSC fee is typically around $500 CAD, while other provinces may charge between $100 and $300 CAD.
- The Prospectus Alternative: For context, filing a full prospectus to raise money from the general public easily costs upwards of $100,000 to $250,000+ CAD in legal and accounting fees.
The Accredited Investor Financial Thresholds
To qualify as an individual accredited investor in Canada, the person must meet at least one of the following strict criteria. 📍
| Exemption Category | Financial Threshold Required (CAD) | Key Details |
|---|---|---|
| Individual Income Test | Over $200,000 per year. | Must have earned this in each of the last two years and expect to earn it in the current year. |
| Joint Income Test | Over $300,000 per year. | Combined income with a spouse, meeting the same two-year historical requirement. |
| Financial Asset Test | Over $1,000,000 in net financial assets. | Must be liquid assets (cash, stocks). Does NOT include the value of their primary residence. |
| Net Asset Test | Over $5,000,000 in net assets. | Can include real estate and the value of their primary residence, minus any liabilities. |
How Long Does the Filing Process Take?
Timing is heavily regulated in securities law. 📅 Gathering the signatures and verifying the investor’s status can take 1 to 2 weeks of administrative work. Once the shares are officially issued to the investor, a strict legal clock starts ticking. Your law firm has exactly 10 days to file the Form 45-106F1 with the provincial regulator and pay the filing fees. Missing this deadline triggers severe late fees and regulatory scrutiny.
Frequently Asked Questions (FAQ)
What happens if I take money from a non-accredited investor?
If an investor does not meet the criteria and no other exemption applies, you have conducted an illegal distribution of securities. Regulators can force you to refund the investment, levy massive corporate fines, and prohibit you from trading securities or acting as a director in Canada.
Can I raise money from my family if they are not rich?
Yes. Canada has a separate exemption called the “Family, Friends and Business Associates Exemption.” This allows you to raise money from close personal contacts regardless of their income, but the relationship must be genuinely close and easily provable.
Does a corporate entity qualify as an accredited investor?
Yes. A company or trust can qualify if it has net assets of at least $5,000,000 CAD, or if all of the owners of that specific corporation are individually accredited investors themselves.
Do I need to file paperwork if the investor lives in a different province?
Yes. Securities laws apply where the investor resides. If your company is in Ontario, but you accept money from an accredited investor in Alberta, you must generally file the Report of Exempt Distribution with the Alberta Securities Commission.
Who enforces these securities laws?
Unlike criminal law, securities are regulated at the provincial level. The Ontario Securities Commission (OSC), British Columbia Securities Commission (BCSC), and the Autorité des marchés financiers (AMF) in Quebec are the primary enforcement bodies.
Leave a Reply