Private Issuer Exemption

Issuing new shares is a distribution under Ontario's Securities Act, and section 53 prohibits a distribution unless a prospectus has been filed and receipted or an exemption applies. The private issuer exemption is the one most closely held Ontario corporations rely on, often without knowing it, when they issue shares to founders, family members, employees and early investors. It also covers SAFEs, convertible notes, options and warrants, all of which are securities.

In Ontario the exemption itself is in section 73.4 of the Securities Act. The Act leaves the definition of private issuer and the list of eligible purchasers to the regulations, which are in section 2.4 of National Instrument 45-106 Prospectus Exemptions (NI 45-106). The other provinces and territories use section 2.4 of NI 45-106 directly.

Its main attraction is what it does not require. Section 6.1 of NI 45-106 lists the exemptions that trigger a report of exempt distribution on Form 45-106F1, and the private issuer exemption is not on the list. There is no filing, no filing fee and no prescribed risk acknowledgement form. The company still has to be able to show that each purchaser fit a permitted category.

A company is a private issuer only if it meets all three parts of the definition in section 2.4(1) of NI 45-106:

1. It is not a reporting issuer or an investment fund.
2. Its securities, other than non-convertible debt securities, are subject to restrictions on transfer contained in its constating documents or security holders' agreements, and are beneficially owned by not more than 50 persons, not counting employees and former employees of the issuer or its affiliates.
3. It has distributed its securities only to permitted purchasers, or it completed a transaction after which all of its holders were permitted purchasers and has sold only to permitted purchasers since.

The restriction must sit in the company's constating documents, usually the articles of incorporation as a requirement for board consent to any transfer, or in a security holders' agreement such as a shareholder agreement. A company formed from a template without one does not qualify. Our article on share structure for a new Ontario corporation covers how to draft it.

The 50-holder count looks at beneficial owners, not registered names. Each person counts once, but if an entity is created or used solely to hold the issuer's securities, each of its owners or beneficiaries counts separately. Only non-convertible debt is ignored, so holders of SAFEs, convertible notes, warrants and options count unless they are employees or former employees, and the transfer restriction requirement applies to those instruments as well.

In Ontario, section 2.4(2.1) of NI 45-106 prescribes who may buy. The purchaser must buy as principal and be:

• a director, officer, employee, founder or control person of the issuer, or a director, officer or employee of an affiliate;
• a spouse, parent, grandparent, brother, sister, child or grandchild of a director, executive officer, founder or control person, or a parent, grandparent, sibling, child or grandchild of that person's spouse;
• a close personal friend or close business associate of a director, executive officer, founder or control person;
• a spouse, parent, grandparent, brother, sister, child or grandchild of a selling security holder or of that holder's spouse;
• an existing security holder of the issuer;
• an accredited investor;
• since December 4, 2025, a purchaser under Ontario's temporary self-certified investor exemption, either Ontario Instrument 45-510 (in effect since October 25, 2025) or its predecessor, Ontario Instrument 45-507;
• an entity whose voting securities are majority-owned by, or a majority of whose directors are, people in the categories above other than the self-certified category, or a trust or estate all of whose beneficiaries, or a majority of whose trustees or executors, are in those categories; or
• a person that is not the public.

A founder must still be actively involved in the business at the time of the sale. A control person holds enough votes to affect control materially, presumed above 20% of the votes. The Companion Policy to NI 45-106 says a close personal friend must know the insider well enough, and for long enough, to assess their capabilities and trustworthiness. Being an unlisted relative, a club member, co-worker, client, acquaintance or social media connection is not enough by itself, and the relationship must be direct: a friend of a friend does not qualify. The not-the-public category is a fact-specific catch-all, and courts have read "the public" very broadly.

• No insider commissions. No commission or finder's fee may be paid to a director, officer, founder or control person for a distribution under the exemption, except a distribution to an accredited investor or, in Ontario since December 4, 2025, to a self-certified investor under Ontario Instrument 45-510.
• Excluded products. The exemption does not apply to syndicated mortgages or short-term securitized products.
• One sale outside the list ends it. If a private issuer sells to anyone outside the permitted categories, even under another exemption such as the offering memorandum exemption, it stops being a private issuer. Later rounds then usually rely on exemptions that carry filings, such as the accredited investor exemption.
• Resale. Securities acquired under the exemption are subject to National Instrument 45-102. While the company is not a reporting issuer, holders generally resell only under another exemption. The Companion Policy says a sale of all of a private issuer's securities to one buyer, as in a share purchase, is generally not a sale to the public.

When a private issuer sells to an accredited investor, it may rely on the private issuer exemption rather than the accredited investor exemption; the Companion Policy itself refers to distributions to accredited investors under the private issuer exemption. The Form 45-106F9 condition and the Form 45-106F1 report attach to the accredited investor exemption, not to section 73.4, but the company must still confirm and document the investor's status. Our guide to SAFEs and convertible notes in Canada covers the forms and filings that apply when a seed round relies on the accredited investor or family, friends and business associates exemption instead.

For most owner-managed corporations, keeping private issuer status is the cheapest way to stay compliant: restrict transfers at incorporation and check every new holder. Lamba Law's startup financing practice reviews the exemption for each issuance.

Ridgeway Analytics Inc. is an Oakville software company owned by its founders and directors, Aisha Rahman and Tomás Alvarez, and two early employees. Its articles require board approval for any share transfer, it is not a reporting issuer, and it has issued shares only to founders and employees, so it is a private issuer. It wants to raise $300,000 in common shares at $1.00 per share.

• Karim Rahman, Aisha's brother, subscribes for $50,000 as a sibling of a director.
• Helen Brooks co-owned and ran a consulting firm with Tomás for eight years and has invested alongside him since. Counsel documents those dealings and treats her as a close business associate; she subscribes for $75,000.
• Priya Nair, an angel with $2,000,000 in investments, is an accredited investor and subscribes for $175,000. The company keeps her account statements on file.
• Owen Patel, who follows Tomás on LinkedIn and met him once at a demo day, offers $25,000. He is not accredited and the relationship is not close, so the company declines his money.

Ridgeway now has seven shareholders, far below the 50 limit, and no one is paid a finder's fee. The directors pass a resolution issuing 300,000 shares, the subscription agreements and notes on each purchaser's category go into the minute book, and the securities register is updated. Because every sale fit section 73.4, Ridgeway files no report and remains a private issuer for its next round.