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.
Private capital markets can be fertile ground for investors and companies alike, but they operate under a looser disclosure regime than public exchanges. To protect everyday investors, Ontario securities law generally requires a prospectus before a business can sell its shares or debt. The Accredited Investor exemption is one of the main ways issuers sidestep that prospectus requirement.
If you meet the Accredited Investor thresholds, you gain access to early-stage ventures, private equity, venture capital funds, and other deals unavailable on the TSX. Yet the exemption is a double-edged sword: along with opportunity comes an expectation that you will fend for yourself on diligence, valuation, and risk management. This guide unpacks the Accredited Investor rule set, explains how to confirm eligibility, and highlights the legal pitfalls both investors and issuers need to watch.
What Is the Accredited Investor Exemption?
Under National Instrument 45-106, securities can be sold without a prospectus if every purchaser is an accredited investor. In practice, the issuer files a brief report of exempt distribution and closes the round with far less cost and delay than a public offering.
The logic is simple: people or entities that meet the Accredited Investor financial tests are presumed to:
- Absorb losses without undue hardship
– - Negotiate terms or hire experts
– - Grasp the information gaps that come with private placements
Because regulators grant Accredited Investors that latitude, the flip side is diminished statutory protection. Investors surrender rights to continuous disclosure, secondary-market liquidity, and certain civil-liability remedies that public shareholders enjoy.
Why the Exemption Exists
Ontario capital markets have a public-policy balance to strike. On one hand, startups and growth companies need frictionless funding channels; on the other, retail investors deserve safeguards. The Accredited Investor exemption is a compromise: sophisticated (or wealthy) backers can assume more risk, freeing issuers from the burdens of a prospectus, while smaller investors remain shielded from thinly disclosed offerings.
That policy lens matters. If you accept Accredited Investor status, regulators expect you to exercise heightened self-reliance. Courts likewise hold accredited investors to a stricter standard when disputes arise.
Accredited Investor Criteria in Ontario
You qualify as an individual Accredited Investor if you meet any one of these financial thresholds:
- Net financial assets of at least $1 million (cash, stocks, bonds) excluding your primary residence and related liabilities.
– - Net assets of at least $5 million, including real estate.
– - Annual pre-tax income of $200,000 in each of the last two calendar years (or $300,000 combined with a spouse) and a reasonable expectation of meeting that income again this year.
Entities can also be accredited if they are:
- A corporation or trust with net assets of at least $5 million.
– - An investment fund that distributes securities only to Accredited Investors or under another exemption.
– - A registered adviser or dealer.
The numbers are fixed across Canada; there is no regional cost-of-living adjustment.
Proving Accredited Status
Before closing, an issuer—or its exempt-market dealer—must form a reasonable belief that each purchaser is accredited. Common approaches include:
- Signed investor questionnaires confirming you meet the relevant test.
– - Income verification through recent CRA Notices of Assessment or employer letters.
– - Asset statements from financial institutions confirming portfolio values.
Privacy laws still apply; issuers should collect only what is needed to show reasonable diligence and keep that data secure.
Deals That Rely on the Accredited Investor Exemption
Most exempt-market opportunities in Ontario circle back to accredited investors, including:
- Seed and Series A rounds in tech and life-science startups.
– - Private equity or venture capital limited-partnership units with minimum tickets ranging from $25,000 to $500,000.
– - Real-estate limited partnerships for development or income properties.
– - Convertible note and SAFE financings where founders want flexibility before a priced equity round.
Because the investor pool is narrower, rounds can close quickly—sometimes within days of term-sheet execution. That speed places a premium on having diligence resources lined up in advance.
Key Risks for Accredited Investors
Information gaps are the defining hazard. Private companies need not publish audited financials, MD&A, or continuous disclosure. Financial projections may be optimistic; governance may rest with a small circle of founders.
–
Liquidity risk comes next. Exempt securities generally carry contractual resale restrictions plus a seasoning period under securities rules. You should expect to hold the investment until an acquisition, IPO, or secondary sale—none of which is guaranteed.
–
Valuation opacity poses another challenge. Without an open market, pricing is negotiated. Comparable data points are scarce, making it easy to overpay.
–
Finally, dilution looms in future rounds. Preferred-share investors often secure anti-dilution adjustments that shift risk to common shareholders or later entrants. Reading term sheets closely is not optional.–
Due-Diligence Best Practices
Accredited status should never replace due diligence. Investors should:
- Analyse management’s track record—prior exits, sector credentials, reputation.
– - Stress-test financial projections against industry benchmarks and cash-burn rates.
– - Review corporate records—minute book, share registry, IP assignments—to confirm clean ownership and authority to issue securities.
– - Scrutinise the cap table for outstanding options, SAFEs, or convertible notes that could dilute early positions.
– - Engage tax advice—especially if you hope to claim the Lifetime Capital Gains Exemption or shelter gains inside an RRSP or corporation.
A paper trail of questions asked and answers received is your best defence if something unravels later.
Regulatory Obligations and Reporting
Issuers who rely on the Accredited Investor exemption must file Form 45-106F1 within ten days of each distribution, listing investor categories (but not personal financial data). Investors themselves have limited ongoing obligations, yet you should retain copies of subscription agreements and risk acknowledgements for seven years in case the OSC investigates.
Issuers that consistently miss filing deadlines or misclassify purchasers risk enforcement action—penalties, cease-trade orders, or conditions on future financings. If you are an investor-director, sloppy compliance can land on your own doorstep.
Common Misunderstandings–
- “Accredited equals sophisticated.” Not always. Net worth does not guarantee financial literacy. Courts will still weigh whether you acted prudently.
– - “All private deals are Accredited Investor-only.” False. Exemptions such as the Offering Memorandum or Friends-and-Family routes can include non-accredited investors—subject to caps and disclosure requirements.
– - “Once accredited, always accredited.” Your status is assessed at each purchase date. A sudden drop in income or assets can disqualify you from subsequent rounds.–
How AMAR-VR LAW Can Support
Our securities practice helps Ontario investors and issuers navigate the accredited investor landscape with confidence. We:
- Validate eligibility by preparing robust investor questionnaires and guiding issuers on reasonable verification steps.
– - Draft and negotiate subscription agreements that balance investor protections with issuer flexibility.
– - Conduct legal due diligence on corporate records, intellectual-property ownership, and cap-table integrity.–
Whether you are a first-time angel or a serial entrepreneur raising your next round, we deliver clear, actionable advice tailored to your risk tolerance and growth plans.
Conclusion
The Accredited Investor exemption opens doors to high-growth companies and alternative asset classes, but those doors swing on hinges of personal responsibility. Meeting the financial thresholds is only step one; understanding the reduced disclosure, thin liquidity, and valuation challenges is just as critical. With informed diligence and sound legal guidance, accredited investors can harness private-market upside while containing downside surprises.
–
Contact us today for a consultation if you are preparing to invest under the Accredited Investor exemption—or structuring a raise that relies on accredited capital. We will help you navigate the rules, manage the risks, and close your deal with confidence.
Frequently Asked Questions (FAQs)
- What is the Accredited Investor exemption under Ontario securities law?
–
The Accredited Investor exemption allows eligible individuals or entities to invest in private placements without a prospectus. It is based on meeting specific financial thresholds and is intended for those who can bear greater investment risk. This exemption enables access to high-growth opportunities not available on public markets, but with fewer legal protections.
– - How do I qualify as an Accredited Investor in Ontario?
–
You qualify if you meet any of the following: at least $1 million in financial assets (excluding your home), $5 million in net assets, or $200,000 in annual income for two years ($300,000 with a spouse). Corporations or trusts with $5 million in net assets also qualify. These criteria are uniform across Canada and must be met at each investment.
– - What risks should Accredited Investors be aware of?
–
Accredited Investors face reduced disclosure, high illiquidity, valuation opacity, and potential dilution from future fundraising rounds. Unlike public markets, private investments lack continuous reporting, making independent due diligence essential before committing capital.
– - Is proving Accredited Investor status a one-time process?
–
No. Accreditation must be assessed at the time of each new investment. Income or asset levels may change, and issuers are responsible for verifying your eligibility each time, usually through signed investor forms and supporting financial documents.
– - How does AMAR-VR LAW help Ontario investors using the Accredited Investor exemption?
–
AMAR-VR LAW supports investors by confirming eligibility, reviewing deal documents, conducting due diligence on corporate and IP records, and negotiating subscription terms. Our legal advice helps investors protect their interests and issuers remain compliant under Ontario securities regulations.