Canada: Ontario's Proposed Prospectus Exemptions: Family, Friends And Business Associates Exemption

The Ontario Securities Commission's (OSC) proposed family, friends and business associates exemption (the Ontario Exemption), if adopted, would allow small to medium-sized enterprises (SMEs) to raise capital in Ontario from a broader range of permitted individuals, while imposing concurrent parameters and obligations which promote investor protection and consistency of application. With a view to facilitating capital raising by SMEs and harmonizing the exemption across all provinces, the Ontario Exemption is based largely on the existing private issuer and family, friends and business associates exemption available in the other Canadian provinces (the Existing Exemption) with a few notable differences, as summarized below. The OSC's proposal also calls for the repeal of the existing founder, control person and family exemption in section 2.7 of NI-106 upon enactment of the proposed Ontario Exemption.

As we previously discussed, the Ontario Exemption is one of the prospectus exemptions proposed by the OSC last month.

Current Regime

In Ontario, issuers can currently raise capital from certain family members of their executive officers, director or founders without the need to file a prospectus by way of the private issuer exemption in section 2.4 of National Instrument 45-106 Prospectus and Registration Exemptions or the founder, control person and family exemption in section 2.7 of NI 45-106. In the other Canadian provinces, however, a much broader family, friends and business associates exemption is available in section 2.5 of NI 45-106 (and section 2.6 of NI 45-106 in Saskatchewan), whereby companies can raise capital from a wider scope of family members, as well as close personal friends and close business associates of their or their affiliates' executive officers, directors or control persons.

Similar Features

Like the Existing Exemption, the Ontario Exemption would be available to both reporting issuers and non-reporting issuers and selling security holders, imposes no restrictions on the size of the offering, the jurisdiction of incorporation or organization of the issuer, or the nature of the business, and does not provide investors with a right of withdrawal. Also consistent with the Existing Exemption, there is no requirement for principals to invest their own money in the business prior to making an offering under the exemption, and investors can invest an unlimited amount of money into the company. The resale restrictions would be the same under the Ontario Exemption, with securities of a reporting issuer being subject to a four-month hold period, and securities of a non-reporting issuer being subject to an indefinite hold period unless resold under another prospectus exemption or the issuer becomes a reporting issuer.

Distinguishing Features

In contrast to the Existing Exemption, however, the Ontario Exemption is not available to investment funds, as the OSC notes it seeks to address investment funds in separate initiatives targeted towards the modernization of product regulation and point of sale disclosure. Also, unlike the Existing Exemption under which the distribution of any type of security is permitted, only specific categories of securities can be distributed under the Ontario Exemption, namely: common shares, non-convertible preference shares, securities convertible into common shares or non-convertible preference shares, non-convertible debt securities linked to a fixed or floating interest rate, units of a limited partnership or flow-through shares under the Income Tax Act (Canada). Novel or complex products are purposefully excluded from distribution under the Ontario Exemption, as it is the OSC's view that SMEs would be unlikely to issue complex products and that such securities only be sold with the full protection afforded by a prospectus.

While the use of registrants, finders or advertising is not prohibited to solicit investors in connection with a distribution under the Existing Exemption, the Ontario Exemption prohibits such advertising as well as any corresponding finder's fees or commissions. Given that investors must be within the personal networks of the executive officers, directors or control persons of the issuer or its affiliates, the OSC reasons that any such advertising would be unnecessary and any need for advertising would raise concerns about the application of the exemption in the first instance. Another proposed change under the Ontario Exemption provides that if potential investors are voluntarily supplied with an offering memorandum in connection with a distribution under the exemption, then statutory rights of action, including rights of action for damages and rescission, would be available to investors.

Of note, the most significant differences found in the Ontario Exemption include additional guidance on the scope of "close personal friends" and "close personal business associates", which has been a longstanding concern, and imposing additional and/or more comprehensive reporting requirements. Each of these changes is described in greater detail below.

Close Personal Friends and Close Personal Business Associates

Although the Ontario Exemption contemplates substantially similar categories of investors as those found in the Existing Exemption, being family members, close personal friends and close personal business associates, the OSC also proposes expanded guidance on the meaning of "close personal friend" and "close personal business associate" in the companion policy to NI 45-106 in its attempt to mitigate against improper use of the exemption. The expanded guidance would add more colour to the guidance accompanying the Existing Exemption, which the OSC considers to be insufficient, and would place the onus on the issuer to establish whether such close personal relationship exists. In addition to providing definitions of "close personal friend" and "close personal business associate", the proposed amendments to the companion policy also enumerate specific factors that the OSC would examine in its determination of the existence of such relationships. In recognition of the rise of social media, the OSC also notes that a friendship that is primarily founded on Facebook, Linkedin or other internet forums would generally not meet the standard of a close personal friend or close personal business associate.

Risk Acknowledgment Form

Notably, the Ontario Exemption would require any investor who is an individual to sign a risk acknowledgment form (RAF) upon purchasing a security in reliance on the exemption. Such prerequisite currently exists in Saskatchewan but not in the other jurisdictions where the Existing Exemption is available. In order to promote greater investor awareness and protection, the proposed RAF would require the investor to acknowledge, among other things, the riskiness of the investment, that the investor could lose all of the money invested, and that the investor will not have the benefit of protections under securities laws that are afforded under prospectus distributions. Furthermore, the investor must disclose which category of investor he or she satisfies and provide specifics of his or her relationship, including the length of time the investor has known the director, executive officer, founder or control person with whom he or she is claiming to be a close personal friend or close personal business associate. The issuer as well as the director, executive officer, founder or control person with whom the investor has directly or indirectly asserted the exempt relationship must sign the RAF and the person making the distribution must retain a copy of the form for eight years following the distribution.

Report of Exempt Distribution

Consistent with the approach taken in other provinces, issuers relying on the Ontario Exemption would be required to file a report of exempt distribution on proposed Form 45-106F11. Beyond simply identifying the exemption relied upon, however, additional disclosure concerning the identity and position of the individual with whom the investor has declared a relationship and the category of relationship asserted must also be provided. Such additional disclosure would be provided in a confidential schedule to the report of exempt distribution and would not appear on the public record. Such information is intended to help monitor compliance with the Ontario Exemption and create a more uniform interpretation of the close personal friend and close personal business associate categories.

Comments on the proposed Ontario Exemption will be accepted by the OSC until June 18, 2014.

This article is the third in a series of posts discussing the prospectus exemptions proposed in Ontario. Our first post on the existing security holder exemption was published on March 20  and our second post on the crowdfunding exemption was published earlier this week.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.