Raising Capital Without a Prospectus The Key Exemptions Explained
Securities law requires a prospectus for any distribution of securities unless an exemption applies. For most private companies, exemptions are the only practical path to raising capital. Here is how they work.
The General Rule: Prospectus Required
Under Canadian securities law, you cannot distribute (offer and sell) securities to the public without first filing a prospectus a lengthy, costly, and time-consuming disclosure document reviewed by regulators. For most early-stage and private companies, a full prospectus offering is simply not feasible. Fortunately, securities law provides a range of prospectus exemptions allowing issuers to raise money from certain investors without a prospectus, provided specific conditions are met.
Canadian Exemptions National Instrument 45-106
Most prospectus exemptions in Canada are found in National Instrument 45-106 (NI 45-106), which applies across all provinces and territories.
1. Accredited Investor Exemption
The most widely used exemption. Securities can be sold to accredited investors (as defined in NI 45-106 see the Investor Types article for full definitions) without a prospectus. There are no limits on the amount raised or the number of investors. The issuer must obtain a signed risk acknowledgment form (Form 45-106F9) from each individual accredited investor.
2. Offering Memorandum (OM) Exemption
Allows a wider range of investors including eligible (non-accredited) investors to participate, provided the issuer delivers a prescribed Offering Memorandum (a disclosure document similar to a mini-prospectus). Investment limits apply to non-accredited eligible investors:
- Eligible investors: up to $30,000 per calendar year (or higher if advised by a registered investment dealer)
- Accredited investors: no limit
The OM must include audited financial statements and a prescribed risk acknowledgment signed by each investor.
3. Friends, Family and Business Associates (FFBA) Exemption
Allows founders to raise from close personal contacts family members, close personal friends, and close business associates without a prospectus. The relationship must be genuine and pre-existing. This exemption is not available in all provinces check local requirements. Social media connections or casual acquaintances do not qualify as "close personal friends."
4. Minimum Investment Exemption ($150,000)
Where a single investor acquires securities with a purchase price of at least $150,000 and signs a prescribed risk acknowledgment. Useful for a small number of high-value investors where the accredited investor exemption is not available.
5. Start-Up Crowdfunding Exemption
Allows startups and early-stage businesses to raise up to $1,500,000 per calendar year from the public through registered portals. Individual investors are limited to $2,500 per offering ($10,000 if advised by a registered investment dealer). The issuer must be incorporated in Canada.
U.S. Exemptions Regulation D
| Rule | Key Features | Who Can Invest |
|---|---|---|
| Rule 504 | Up to $10M in 12 months; generally no general solicitation | No investor type restriction |
| Rule 506(b) | Unlimited raise; no general solicitation; up to 35 sophisticated non-accredited investors | Accredited + up to 35 sophisticated non-accredited |
| Rule 506(c) | Unlimited raise; general solicitation and advertising permitted | Accredited investors only; issuer must verify status |
Issuers relying on Regulation D must file a Form D with the SEC within 15 days of the first sale of securities in the offering.
Resale Restrictions
Securities acquired under a prospectus exemption are typically "restricted securities" they cannot be freely resold for a hold period (commonly 4 months in Canada under NI 45-102; 6–12 months in the U.S. under Rule 144). This must be disclosed to investors and reflected in the securities documentation, including on share certificates or in the subscription agreement.