Raising Capital in Alberta’s Capital Markets – Private Issuer Exemptions and Securities Laws

Written by Robert Rizzuti
JD Candidate 2025 | UCalgary Law

Start-ups and entrepreneurs often require capital to fund their rapidly growing businesses. As such, when seeking investments in return for capital, whether from friends, family, or other sources, it’s important to understand that such transactions trigger securities laws, such as the Alberta Securities Act (Alberta)[1] or the provincial securities act of the applicable jurisdiction.
 
Canadian securities laws apply to any issuer of securities, even a private start-up. Any transaction involving securities – i.e., giving shares to private investors to help a business – triggers these laws. As a result, startups and early-stage issuers often unintentionally violate securities laws.
 
Fortunately, an issuer may qualify for certain reporting exemptions as a “private issuer”. This article highlights key aspects of exemptions, and securities laws to be aware of avoid the serious consequences of non-compliance.
 
Prospectus Requirements
 
There are two primary principles in the Canadian securities regime: 1. No person or company may buy or sell securities unless registered as an advisor or dealer;[2] and 2. a prospectus must be filed with the Alberta Securities Commission (the “ASC”) when a person or company distributes its shares to investors.[3] A prospectus requires “full, true and plain disclosure” of the issuer’s business and the securities being offered. This provides investors with complete and accurate information to make an informed investment decision.
 
Filing a prospectus is costly and time-consuming, especially for a startup that is attempting to grow with limited funds. Additionally, registering as a dealer and filing a prospectus eliminates or reduces the chance of a growth company raising early rounds of financing.[4] Fortunately, prospectus exemptions may be relied on pursuant to National Instrument 45-106.[5]
 
Private Issuer Exemption
 
Start-ups often use the private issuer exemption and will exhaust this exemption before relying on the other potentially applicable prospectus exemptions.
 
This exemption will apply if:[6]

• the company offering securities is not a reporting issuer, which is done by filing a prospectus with the ASC or making a special application with the ASC;
• there are restrictions on resale in the contesting documents (Articles of Incorporation, By-laws, and Unanimous Shareholder Agreements) of the company;
• there are no more than 50 shareholders, excluding employees and former employees who can hold the designated securities; and
• the company has not distributed its shares to the public.

 
The securities can only be offered to the company’s directors, officers, employees, founders, and control persons or their close family members, close personal friends, and close business associates. In addition, accredited investors are included on the enumerated list.[7]
 
It is important to note that a family member includes parents, grandparents, siblings, and children.
 
The practical effect of fitting under this exemption is not having to file a costly and time-consuming prospectus with ASC or other provincial securities regulators. In addition, the company is exempted from filing form 45-106 F1 (the “Report of Exempt Distribution”) in Alberta.
 
Other Common Exemptions
 
Eventually, a company will cease to be a private issuer either because it has too many shareholders or because it has distributed shares to members of the public. Yet, companies could be allowed to sell shares to certain classes of investors under the following exemptions.
 
The Family, Friends and Business Associates Exemption is used when the investor has a special relationship with the company.[8] Under this exemption, a close personal friend is an individual who knows the other well enough and has known them for a sufficient period of time to be in a position to assess their capabilities and trustworthiness.[9] A close business associate is an individual who has had sufficient prior business dealings with the other to be in a position to assess their capabilities and trustworthiness.[10]
 
The narrowly used Employees, Directors, Senior Officers and Consultants Exemption is used for trades by an issuer with its employees, directors, senior officers, and those consultants (with a written consultant agreement)[11] that spend a “significant amount” of time working with the company.
There is an Accredited Investor Exemption that is predicated on the fact that some high-income and net-worth investors,[12]  due to their resources and financial knowledge are sophisticated enough to make investment decisions without the protections afforded by a prospectus and registration requirements. This exemption is often used by angel investors and venture capital investors in growth companies. The most common categories of accredited investors include:[13]

• individuals with net financial assets above $1 million;  
• individuals whose net income before taxes exceeded $200 thousand in each of the two most recent years or combined with that of a spouse exceeded $300 thousand in each of the two most recent years, and in either case, reasonably expect to exceed that net income in the current year; and
• persons or companies that either alone or with a spouse have net assets of at least $5 million.

 
When the investor is an incorporated entity a less commonly used exemption is the Minimum Amount Investment Exemption, which provides an exemption from prospectus requirements where a company acquires more than $150 thousand worth of securities.[14]
 
Except for the Employees, Directors, Senior Officers and Consultants Exemption, all the other common exemptions mentioned in this section require filing the Report of Exempt Distribution within 10 days at the ASC, and potentially in each jurisdiction in which the distribution takes place.
 
Other Rules and Best Practices

• Securities that are sold under a prospectus exemption are subject to “resale rules”, and until these resale rules expire, an investor can only resell the securities under a prospectus or prospectus exemption.[15]
• Keep track of the exemptions and number of investors. The failure to keep track of investors could result in having more than 50 shareholders, thus meaning that the private issuer exemption cannot be relied on.
• Subject to certain exemptions, no commissions or finder’s fees may be paid in connection with a distribution or a trade made under the private issuer exemption[16] when the issuer is not a registered advisor or dealer.
• It is best practice to have investors sign a subscription agreement that sets out the terms and conditions of the investment, and the exemption being relied on according to the relationship between the parties.[17]
• Start-ups and enterprises soliciting investments are prohibited from making representations that securities will be publicly listed or about the future value of a security in connection with its sale. Practically, it may be difficult for a company to discuss financing in any meaningful way without violating these prohibitions. However, start-ups and entrepreneurs should avoid making representations, warn of potential risks, ensure that prohibited representations are not in offering documents, and use disclaimers.[18]

 
Conclusion
 
Start-ups and entrepreneurs looking to attract capital from investors should be aware that a prospectus is required to be filed with securities regulators unless a private issuer exemption is applicable. Relying on an exemption is a great way to raise capital from a limited number of investors without burdensome and costly prospectus requirements, especially where the company is looking to grow in a cash-strapped environment.
 
However, caution is warranted, there are serious pitfalls and traps in the Canadian securities regulatory field with serious consequences for being offside an exemption under NI 45-106 or making prohibited representations about a company’s future. Navigating the complexities of securities law in the start-up landscape is crucial since non-compliance with Canadian securities laws can have significant consequences, including penalties and fines, trading restrictions, and in severe cases jail time.
 
Overall, one should remain vigilant to ensure compliance with securities laws, and understand that properly relying on a prospectus exemption can offer flexibility when raising capital.
 
We encourage you to reach out to the Business Venture Clinic for legal information or to seek professional counsel for tailored legal advice.
 
 
 
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[1] Securities Act, RSA 2000, c S-4 [ASA].

[2] Ibid, s 75.

[3] Ibid, s 110.

[4] Bryce C. Tingle, Start-Up and Growth Companies in Canada: A guide to Legal and Business Practice, 3rd ed (Toronto, Canada: LexisNexis Canada Inc, 2018) [Growth Companies], ch 12 at 251.

[5] National Instrument 45-106 [NI 45-106].

[6] Ibid, s 2.4(1).

[7] Ibid, s.2.4(2).

[8]NI 45-106, supra note 5, s 2.5(1).

[9] Companion Policy 45-106 [CP 45-106CP], s 2.7.

[10] Ibid, s 2.8

[11] NI 45-106, supra note 5, s 2.24.

[12] NI 45-106, supra note 5, s 1.1.

[13] NI 45-106, supra note 5, s 2.3.

[14] NI 45-106, supra note 5, s 2.10.

[15] National Instrument 45-102, s 2.5-2.6.

[16] Multilateral Instrument 45-106.

[17] Subscription Agreement (Equity), by Practical Law Canada Corporate & Securities (Thomson Reuters).

[18] Growth Companies, supra note 4, ch 13 at 279-284.