The conversation often starts at a family dinner or after a service at the gurdwara or the mosque. Someone hears that your food-processing startup on Rutherford Road needs $150,000 for equipment and says, “I’d put in twenty.” Two more people say the same. Within a month you have a WhatsApp group of possible investors and a spreadsheet that looks like a funding round.
Most owners treat this as a personal favour with a bit of paperwork attached. Ontario law treats it as something else. If you give someone shares, a convertible note, or a promise of a share of future profits in exchange for money, you are very likely selling a security, and securities law applies to small private companies as well as to public ones. The rules are workable, and a large number of Ontario businesses raise money under them every year. They do require you to know which exemption you are using before you accept the cheque.
This article is general information about Ontario law. It is not legal or tax advice, and securities rules are detailed enough that a specific proposed raise should be reviewed against the current instruments.
The Starting Rule Most Owners Have Never Heard
Under Ontario’s Securities Act, a company selling its own securities must file a prospectus with the Ontario Securities Commission unless an exemption applies. A prospectus is a lengthy, costly disclosure document used for public offerings. No Brampton bakery or software shop is going to prepare one, so in practice the whole exercise is about fitting each sale inside an exemption.
The word “security” is broad. It clearly covers common and preferred shares. It can also cover debt instruments such as promissory notes and debentures, convertible notes, simple agreements for future equity, and certain profit-sharing or investment arrangements. Calling the document a “loan agreement” or “partnership letter” does not decide the matter, because the substance of the arrangement is what counts. An ordinary bank loan is a different thing, as is a loan from one relative on plain terms, although the second can still raise questions if it is part of a wider raise from many people.
The Exemptions a Small Business Usually Uses
National Instrument 45-106, read with Ontario’s Securities Act, contains most of the exemptions. Four of them come up repeatedly.
The private issuer exemption. This is the workhorse for closely held companies. In general terms, your company must not be a reporting issuer, its securities must be subject to transfer restrictions in its constating documents or security holder agreements, and it may have no more than 50 holders, not counting employees and former employees. Sales must be made only to listed categories of purchaser, such as directors, officers, employees, founders, control persons, specified relatives of those people, their close personal friends and close business associates, existing security holders, and accredited investors. Companies relying on this exemption generally do not need to file a report of the sale when its conditions are met.
Family, friends and business associates. This is a separate exemption with no cap on how much can be raised or how many people can take part. In Ontario, it comes with an extra condition: each purchaser must complete a prescribed risk acknowledgement, Form 45-106F12, which records the relationship. A report of exempt distribution must also be filed.
Accredited investors. People and entities that meet financial tests may buy without a prospectus. For an individual, the commonly cited tests are financial assets over $1 million before tax and net of related liabilities, net assets of at least $5 million, or net income before tax over $200,000 in each of the two most recent years ($300,000 when combined with a spouse), with a reasonable expectation of the same in the current year. Individuals in the lower-threshold categories must generally sign a risk acknowledgement on Form 45-106F9. You must take reasonable steps to confirm a person qualifies, so a tick in a box on a subscription form may not be enough if you have reason to doubt it.
Offering memorandum and crowdfunding. A company can raise from a wider group using a formal offering memorandum, which brings prescribed content, investment limits for some buyers, and statutory rights for investors. A separate start-up crowdfunding exemption under National Instrument 45-110 allows small raises through a registered dealer or eligible portal. Neither is a casual option, and both are worth pricing out before you commit.
“Close Friend” Means Less Than People Assume
The relationship tests are where small raises most often go wrong. A close personal friend is someone who knows the director or officer well enough, and for long enough, to assess that person’s capabilities and trustworthiness and to obtain information about the investment. Regulators have said that being a member of the same club, congregation, or professional association, being a social media contact, or being a customer does not on its own qualify.
That matters in a community like Brampton, where business often grows through extended family and faith or cultural networks. A hypothetical example: a founder posts in a large community Facebook group that he is offering shares in his trucking company. Fifteen people respond. Few of them have a real relationship with him. Those sales probably do not fit the friends-and-associates category, and the posting itself may look like a general solicitation.
Family categories are also narrower than an everyday understanding of family. A cousin or a sibling-in-law may or may not fit, depending on which exemption and which relationship is being relied on. Check each proposed investor by name against the current wording, and keep a short note of why that person qualifies.
Paperwork the Regulator May Expect
When a report of exempt distribution is required, it is filed on Form 45-106F1, generally no later than 10 days after the sale, through the national filing system, along with the applicable fee. Owners frequently miss this because the money has already arrived and everyone has moved on. A late report can bring fees and draw attention you do not want.
Keep a file for each raise containing:
- A list of every purchaser, the amount paid, the date, and the exemption relied on
- Signed subscription agreements with representations about the purchaser’s status
- Any risk acknowledgement forms
- Evidence supporting accredited investor status where that exemption is used
- A copy of any presentation, financial projection, or summary you handed out
- Proof of filing and fee payment
Securities issued under most of these exemptions come with resale restrictions, which should be explained to investors. Many people assume they can sell their shares to a friend whenever they like. Generally they cannot, and your own articles or shareholder agreement probably restrict transfers too.
What You Say Can Create Liability
Outside money changes the seriousness of a pitch. Ontario securities law prohibits misleading statements and fraud in connection with a sale of securities, and it restricts certain promises. You generally may not undertake that a share will reach a future value or that the investor will get their money back, unless the terms of the security actually provide that right and the rules permit it.
Think about the phrases that come up naturally when you are asking relatives for money: “It’s safe,” “You’ll double it in three years,” “Worst case, I’ll pay you back myself.” The first two may be misrepresentations if they lack a reasonable basis. The third may become an enforceable personal guarantee, depending on how it was said and recorded, which undoes much of the protection your corporation gives you.
Projections are not prohibited as a matter of common sense business planning, but they need reasonable assumptions and clear labels. Show what happens if sales come in 30 per cent lower. Tell people plainly about existing debts, related-party payments, and your own salary. Disclosure protects you as much as it protects them, since an investor who was told about a risk has a much harder time claiming later that they were misled.
A finder is another trap. Paying someone a commission for bringing in investors can make that person, and possibly your company, subject to the dealer registration rules, and some exemptions prohibit commissions or finder’s fees to insiders. Get advice before agreeing to pay anyone for introductions.
Choosing What You Are Actually Selling
Before anyone signs, decide what the investor gets. Each structure has a different effect on control and on your cash flow.
Common shares give a permanent stake, typically with votes and a share of the sale price. They are simple but hard to undo. They also require a value: if you sell 10 per cent for $100,000, you have implied that the company is worth $1 million, and later investors and the tax authorities may take note.
Preferred shares can give the investor priority on a sale or a fixed dividend, usually without voting rights. Your articles must authorize the class. If they do not, you will need articles of amendment, which ordinarily call for a special resolution of the shareholders.
Debt does not dilute ownership, and interest can be set and capped. It must be repaid, however, even in a bad year, and lenders may want security registered against your assets. Loans to an individual, or for smaller sums, are subject to the criminal interest rate limit of 35 per cent APR, with different treatment for larger commercial loans made to corporations. Fees count toward that calculation.
Convertible notes begin as debt and turn into shares on a later financing or date. They avoid arguing over value today, but they contain conversion caps, discounts, and maturity terms that can surprise a founder at the next round. Templates borrowed from American startup websites often assume laws that do not apply here.
Terms Worth Settling Before the Money Arrives
An investor who holds 8 per cent and has no agreement is a problem waiting to happen, and so is one who holds 8 per cent with a veto over everything. A short term sheet followed by a subscription agreement and a shareholder agreement usually covers:
- Whether the investor gets a board seat or only observer and information rights
- What decisions need investor consent, and at what thresholds
- Pre-emptive rights to keep their percentage in a future raise
- Drag-along and tag-along rights on a sale
- Restrictions on transfer, and what happens if the investor dies or divorces
- Founder vesting, so an investor is not left funding a company whose founder has walked away
- How often financial statements will be shared, and in what form
Corporate formalities have to be followed too. Under Ontario’s Business Corporations Act, a share must be fully paid in money, property, or past services before it is issued, and directors should pass a resolution authorizing it. The securities register and, where relevant, the register of individuals with significant control then need updating. Our business formation and organization page outlines how these records fit with the company’s founding documents.
If You Have Already Taken the Money
Many owners read this after the fact. A company may have issued shares to eight relatives two years ago with a handshake and an e-transfer, and nobody has heard of Form 45-106F1. That situation is usually not a catastrophe, but it should not be ignored either, particularly if you are about to bring in a serious investor, a lender, or a buyer whose lawyer will ask about past issuances.
Start by listing what actually happened: who paid, how much, what they were told, and what they think they own. Check it against your securities register. A lawyer can then assess whether an exemption likely covered each sale, whether any late filing should be made, and how to paper the arrangement going forward. Do not create documents with old dates to make the file look tidy. Use a current date and describe the earlier events accurately.
Getting Advice Early
The right time to ask is before the first conversation becomes a promise, because a change of structure is cheap at that stage. A review can usually be focused: who are the proposed investors, how much is being raised, what are they getting, and what is being said to them. If your raise is part of a broader reorganization, our corporate law group can look at it together with your existing agreements, and you can contact the firm to arrange a discussion. Bring your cap table, your articles, and any pitch material you have already shared.
Investors who are close to you deserve the same care as strangers. A clear document protects the relationship, since everyone knows what was bought and what was risked if the business has a hard year.