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12 May 202312 minute read

Securities 101 for start-ups: How securities laws apply to private companies

Yes — securities laws apply to private companies, even start-ups. There is a common misconception that securities laws only apply to companies listed on stock exchanges. In fact, securities laws apply to any issuer‎1‎ of securities from the moment of their formation and must be followed from as early as your family and friends seed round, all SAFE rounds, and each Series round, as well as many convertible and bridge options in between. Fortunately, private companies can rely on certain exemptions from securities law requirements when issuing securities.

This article seeks to provide an overview of foundational securities laws and common exemptions for start-ups and to set a baseline for founders considering how to keep their raise options open to the broadest category of investors.

What are foundational securities laws?

At their base, it is helpful to think of securities laws as consumer protection for all levels of investors. There are two basic requirements underlying securities laws in Canada, both of which serve to ensure that investors are receiving adequate and reliable information prior to making a risky financial investment:

  • Prospectus: Every person‎2‎ who "distributes" previously unissued securities‎3‎ (i.e. new securities being issued for the first time) must file and obtain a receipt for a prospectus with the applicable securities regulator. A prospectus is a comprehensive document that discloses all material information about the issuer and the securities being sold. This requirement ensures that investors receive sufficient information to make an informed investment decision. Prospectuses are very involved documents that also require a certain level of financial disclosure.
  • Registration: Every person who is in the business of trading (selling) securities must be registered (licensed) with the applicable securities regulator. This requirement is intended to ensure that people selling securities are knowledgeable and able to properly advise investors.

Every company must comply with the prospectus and registration requirements or be able to rely on an exemption from those requirements. If a company does not comply with the requirements and is not able to rely on an exemption from them, then it is violating securities laws which may result in penalties such as severe fines or the shutdown of operations. Ultimately, it is the company’s obligation to show that it has complied with securities laws in its issuances. This may come into question from regulators, but more likely from institutional investors at later phases or diligence in an exit scenario.

What are common exemptions?

The general rule is that when a company wants to raise capital, it must file a prospectus with the applicable securities regulator and obtain a receipt before it can sell securities to the public. This can be a lengthy and expensive process, so securities regulators provide exemptions from the prospectus requirement to raise capital more quickly and efficiently without compromising investor protection.

Private companies in British Columbia and Ontario can take advantage of certain exemptions to the prospectus requirement to issue securities to certain kinds of investors without prospectus disclosure. The following are the most commonly used exemptions:

  • Private issuer
  • Family, friends and business associates
  • Employee, director, officer and consultant
  • Accredited investor
  • Minimum amount of $150,000
  • Start-up crowdfunding
  • Offering memorandum

Private issuer exemption

This is the most common and useful exemption for small companies. As its name suggests, this exemption can only be used by a “private issuer”, which is defined as a company that is not a reporting issuer or investment fund and the securities of which: (i) are beneficially owned by not more than 50 persons (not including employees and former employees); (ii) are subject to restrictions on transfer in the company’s constating documents or shareholders’ agreement; and (iii) have only been distributed to certain kinds of investors, as set out in the bulleted list below.

The private issuer exemption is only available to distribute securities without disclosure to certain categories of persons, including:

  • directors, officers, employees, founders or control persons (typically, a holder of 20 percent of the voting securities) of the issuer;
  • certain family members of a director, executive officer, or control person;
  • close personal friends or close business associates of a director, executive officer, or control person;
  • current security holders of the issuer; and
  • accredited investors.

See below under the Family, Friends and Business Associates Exemption and the Accredited Investor Exemption for a discussion of who qualifies under those exemptions.

Once a company loses its private issuer status, it cannot be regained except in certain limited circumstances. Losing private issuer status may close the door to certain exemptions and require the issuer to file a report of exempt distribution following each issuance of new securities. Therefore, as a private company, it is important to keep a record of all the investors and note how they fit the terms of the exemption. For more information on the Private Issuer exemption, see our article: The private issuer exemption – What is a ‘private issuer’ and should you care if your business has lost this status?

Family, friends and business associates exemption

Under this exemption, a company can sell securities in any amount without providing any disclosure to the following:

  • a director, senior officer or control person of the issuer;
  • a family member (spouse, parent, grandparent, brother, sister or child) of a director, senior officer or control person of the issuer; or
  • a close personal friend or close business associate of a director, senior officer or control person of the issuer.

In determining whether a person qualifies as either a close personal friend or a close business associate, the securities regulator will consider the length of the time the two individuals have known each other, the nature of the relationship (including frequency of contact), and the total number of close personal friends or close business associates being claimed. For close personal friends, the securities regulator will also consider the level of trust/reliance between the two individuals in other circumstances. For close business associates, the securities regulator will also consider the nature and number of business dealings, the length of the period during which they occurred, and the nature/date of the most recent business dealing.

An individual is not a close personal friend or a close business associate solely because he or she is a member of the same club, organization or religious group, a co-worker or colleague, a client or former client, or connected through social media such as Facebook or LinkedIn. An individual may also not be able to claim this status based on the investment at hand. At one point there was a back of the napkin test that would require a close personal friend to be someone who could find their way to the washroom in a founder’s home without a map. Query how accurate that test remains, but the point is clear: it’s more than an acquaintance and is intended to bring with it a level of trust in being able to ask questions with respect to the company and investment that one would otherwise be able to learn through a prospectus. Somewhat surprisingly to many, regulators do come back to question the strength of certain close personal friend and close personal business exemptions.

Employee, director, officer and consultant exemption

Under this exemption, a company can sell securities in any amount without providing any disclosure to its employees, directors, senior officers or consultants‎4‎, provided the purchaser is buying the securities voluntarily. This means that the purchaser has not been persuaded to buy the securities due to a promise that they will be, or will continue to be, employed, appointed or engaged by the company.

Accredited investor exemption

Under this exemption, a company can sell securities to an accredited investor in any amount without providing any disclosure about the company. 

An "accredited investor" includes individuals who:

  • have at least $5 million in net assets;
  • own at least $1 million in financial assets (cash and securities) net taxes and any related liabilities; or
  • have a net income before taxes that exceeds $200,000 (or $300,000 combined income with spouse) in each of the two most recent years and who reasonably expects to exceed that net income in the current year.

Purchasers who qualify as an accredited investor in the listed categories above must sign a risk acknowledgement form. It requires the purchaser to acknowledge that the investment is risky and requires the purchaser to confirm that they understand how they qualify as an accredited investor.  Notably, for holding companies to avail themselves of the accredited investor exemption, each holder of securities in that holdco must individually also meet the test for accredited investor and must complete a certificate confirming as such.

Minimum amount of $150,000 exemption

Under this exemption, a company can sell securities to non-individual investors without providing any disclosure to the purchaser, provided the purchaser buys at least $150,000 worth of securities.

Offering memorandum exemption

Under this exemption, the company can sell securities in any amount to anyone provided, before the purchaser signs the agreement to purchase the securities, the company:

  • obtains a signed risk acknowledgement form from the purchaser, and
  • delivers an offering memorandum to the purchaser.

An offering memorandum is a disclosure document that can be thought of as a simplified version of a prospectus. It is important to note that, to use this exemption, the company’s offering memorandum must strictly comply with certain disclosure and form requirements. It must also be filed with the applicable securities regulators within ten days of selling the securities.

Start-up crowdfunding exemption

This exemption allows a company to sell its securities to anyone, regardless of their relationship, wealth or the amount of securities purchased. In order to rely on it, a company must complete an offering document outlining its idea and make it available online through a funding portal. This exemption has prescribed limits for both the company and the investor depending on what category the investor falls into. Practically speaking, this category enables only small investments from many investors, leaving a company with likely too many shareholders to hold onto their private issuer status, and importantly, many small shareholders who may be more work to manage than their funds are necessarily worth. Companies choosing to raise on a crowdfunding exemption typically have a dual purpose for marketing their product or service through the crowdfunding raise.

What are filing requirements?

With the exception of the private issuer exemption and the employee, director, officer and consultant exemption, each time a company uses any of the exemptions listed in this article, the company must prepare and file a timely report of exempt distribution with the applicable securities regulator,. In addition, if a company uses the offering memorandum exemption or the start-up crowdfunding exemption, it must file with the securities regulator a copy of the offering memorandum or offering document.

What are resale restrictions?

If a company issues or sells securities using any of the exemptions listed in this article, the securities are subject to resale restrictions. This means that the securities cannot be sold by the purchaser unless certain requirements are met. This includes not selling the securities for a specific period of time. To resell their securities, a purchaser can rely on any of the exemptions listed in this article except for the offering memorandum exemption and the start-up crowdfunding exemption, which are only available to companies when issuing their securities.


Securities laws apply to all companies issuing securities, not just those that are publicly listed on a stock exchange. Private companies should be cautious to ensure that, whenever they issue securities, they are properly relying on an exemption from the prospectus requirement under securities laws. Before issuing securities, connect with counsel who understands securities laws (of both the jurisdiction of the company and of the investor) to ensure that proper considerations have been made. Like most decisions with start-ups, spending a bit of time at the outset to ensure your company is on the right path will save a lot of clean up cost and headache down the road.

This article is intended only to provide a high-level overview of some of the basic concepts related to securities laws. Since navigating prospectus and reporting requirements involve some complexity, we strongly encourage you to seek the advice of a lawyer (particularly in regards to corporate and securities law requirements) in order to avoid mistakes or missteps. If you have any questions about issuing securities and adhering to corporate and securities laws, we would be happy to assist.

[1]‎ An "issuer" is a company, whether public or private, that issues securities. ‎
[2]‎ The term "person" has a broad legal meaning that includes an individual, corporation, partnership, party, trust, fund, association, or any other organization.
[3]‎ The term "security" also has a broad legal meaning, which includes:‎ common and preferred shares,‎ options, warrants and other convertible instruments,‎ debentures, notes and other instruments of indebtedness limited partnership units,‎ memberships in co-operative associations, and units in a resort property (sharing in the rental profits for the whole building or property).‎
[4]‎ A "consultant" is an individual that provides consulting, technical, management or other services to the issuer under a written contract and spends a significant amount of time and attention on the affairs and business of the issuer.