The information in this blog is for general informational purposes only and does not constitute legal advice. Consult a qualified attorney for advice on your specific situation. We make no guarantees about the accuracy or completeness of the information provided. Reliance on any information in this blog is at your own risk.
Raising capital is a major milestone for any Ontario startup. Whether you’re bootstrapping with friends and family, bringing in angel investors, or preparing for a larger seed round, taking money from others—no matter how informal—triggers legal obligations.
In Ontario (and across Canada), raising capital is governed by securities laws. These rules are in place to protect investors and ensure transparency, but they also place clear responsibilities on business owners and founders. If you’re issuing shares, convertible notes, or other securities, it’s essential to understand how securities compliance works—and when exemptions apply.
At AMAR-VR LAW, we help startups navigate this process with clarity and confidence. In this guide, we outline what founders in Ontario need to know about raising capital legally and how to stay compliant as you grow.
What Are Securities?
A security is any investment product that gives someone ownership or a right to future profits in a business. This includes:
- Common or preferred shares
– - Convertible notes or SAFE agreements
– - Options or warrants
– - Partnership units or investment contracts
If you’re issuing shares to investors in exchange for money, that’s a securities transaction—and it’s regulated.
In Ontario, securities laws are administered by the Ontario Securities Commission (OSC) and guided by the broader Canadian Securities Administrators (CSA) framework. The general rule is that you cannot distribute securities unless a prospectus is filed—or an exemption applies.
Prospectus vs. Exemptions
A prospectus is a comprehensive disclosure document usually used in public offerings. Most early-stage startups won’t file a prospectus—it’s expensive and time-consuming. Instead, you’ll likely raise funds under one of several exemptions that apply to private companies.
The key is ensuring you qualify for the exemption—and that you properly document it. Failing to comply can expose you to fines, legal claims, or restrictions on future fundraising.
Common Private Placement Exemptions for Startups
Here are the most commonly used prospectus exemptions for Ontario startups:
1. Private Issuer Exemption
If your corporation is a private issuer, you can sell securities to a defined group without filing a prospectus. To qualify:
- Your company must not be a reporting issuer
– - Your shares must be held by no more than 50 people (excluding employees)
– - You can only sell to certain types of investors, such as:
–- Directors, officers, or employees
– - Close family or close personal friends
– - Accredited investors
- Directors, officers, or employees
Once you go beyond this list, you lose the private issuer status—and must rely on other exemptions.
2. Accredited Investor Exemption
An accredited investor is someone who meets specific income or asset thresholds, such as:
- $1 million in financial assets (excluding primary residence)
– - $200,000 in annual income ($300,000 with spouse)
– - $5 million in net assets (individual or with spouse)
You can raise unlimited funds from accredited investors, but you must confirm their status and keep proper records. Some provinces also require a signed risk acknowledgement form.
3. Friends, Family and Business Associates (FFBA) Exemption
You can raise capital from people with whom you have a close relationship—defined narrowly under securities law. This includes:
- Immediate family
– - Close friends with a long-standing relationship
– - Close business associates with a history of shared ventures
These relationships must be real and verifiable—not casual acquaintances or LinkedIn contacts. Misusing this exemption can lead to compliance issues.
4. Offering Memorandum (OM) Exemption
Under this exemption, you can raise capital from non-accredited investors if you provide a formal disclosure document known as an Offering Memorandum. This document outlines risks, use of funds, financial statements, and other key data.
This route offers flexibility but involves more preparation, compliance work, and post-closing reporting. It’s more common in larger or later-stage private raises.
Shareholder Agreements and Cap Table Management
Securities compliance is only part of the equation. When raising capital, you also need to carefully manage how you bring new investors into your company. That means:
- Issuing subscription agreements
– - Updating your corporate minute book and shareholder registry
– - Creating or updating a shareholders’ agreement
– - Maintaining a clear and accurate cap table
Investors will want to know how much they own, what rights they have, and how future raises will affect them. A shareholders’ agreement can also clarify voting rights, exit options, and restrictions on share transfers—reducing the risk of disputes down the line.
Filing and Reporting Requirements
Depending on the exemption used and the number of investors, you may need to file a Form 45-106F1 with the OSC. This is known as a report of exempt distribution and must be filed within 10 days of the closing of a private placement.
Failing to file this form on time—or misreporting information—can trigger penalties or create problems when seeking investment in the future.
Avoiding Common Mistakes
Securities compliance is often misunderstood by early-stage founders. Some common issues we see include:
- Issuing shares informally without legal documentation
– - Accepting funds from friends or acquaintances who don’t qualify under an exemption
– - Not tracking cap table changes or properly recording share issuances
– - Assuming every investor is “accredited” without verifying eligibility
– - Offering equity in exchange for services without understanding tax and compliance impacts
These mistakes can be difficult and expensive to unwind—especially if you seek institutional investment later. Legal guidance early in the process helps prevent costly corrections.
Raising Capital Through SAFEs or Convertible Notes
Many Ontario startups use SAFEs (Simple Agreements for Future Equity) or convertible notes instead of issuing shares outright. While these are popular in early-stage fundraising, they are still securities under Ontario law—and subject to the same exemption rules.
If you’re using a SAFE or convertible note, you must:
- Identify and document the appropriate exemption
– - Disclose the risks to investors
– - Understand how conversion terms will impact future equity–
We help startups structure these agreements in a way that’s compliant, founder-friendly, and ready for future investment rounds.
How AMAR-VR LAW Can Support
At AMAR-VR LAW, we work closely with Ontario startups to ensure every capital raise is legally sound and strategically structured. We help founders understand which securities exemptions apply, prepare and review investor documentation, maintain clean corporate records, and ensure proper filings are made with the Ontario Securities Commission. We also advise on shareholder agreements, SAFE and convertible note terms, and how to keep your cap table investor-ready. Whether you’re raising your first $50,000 or preparing for a larger round, we provide clear, business-focused legal advice that protects your company and builds trust with your investors.
Conclusion
Raising capital can fuel growth—but it also creates legal obligations under Ontario securities law. Whether you’re taking your first cheque from friends and family or closing a round with angel investors, it’s critical to understand which exemptions apply and how to document them properly. Ignoring securities compliance—even at the earliest stages—can cause delays, investor disputes, and regulatory issues down the line.
If you’re planning to raise funds or want to confirm that your startup’s previous raises were handled correctly, Contact us today for tailored legal support that helps you raise capital with confidence.
Frequently Asked Questions (FAQs)
- Do I need to follow securities laws if I’m only raising money from friends and family in Ontario?
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Yes—raising capital from friends or family still falls under Ontario securities law. You must rely on a valid exemption (like the Friends, Family, and Business Associates exemption) and properly document the transaction to remain compliant.
– - What is the difference between a SAFE and a convertible note in startup fundraising?
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A SAFE (Simple Agreement for Future Equity) is an agreement where the investor receives equity in the future, typically during a priced round, without accruing interest or having a maturity date. A convertible note is a debt instrument that converts into equity and includes interest and a maturity timeline. Both are securities and must comply with Ontario exemption rules.
– - What happens if I don’t file Form 45-106F1 after raising capital?
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Failing to file Form 45-106F1 within 10 days of closing a private placement can lead to regulatory penalties, jeopardize future financings, and flag compliance issues during investor due diligence. Proper legal support helps avoid these costly oversights.
– - What legal documents are required when raising funds through private placement?
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You’ll typically need a subscription agreement, updated shareholder registry, exemption documentation (e.g., risk acknowledgements), and potentially a shareholders’ agreement. These documents formalize the investment and ensure legal compliance under Ontario law.
– - How can AMAR-VR LAW help Ontario startups raise capital legally?
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AMAR-VR LAW supports startups by identifying applicable securities exemptions, preparing compliant investor documents, handling regulatory filings, managing cap tables, and drafting shareholder and SAFE agreements—all with a focus on growth-readiness and legal protection.