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.
Putting money into a private company can be a rewarding way to diversify your portfolio and back early-stage innovation, but it isn’t the same as buying publicly traded shares. In Ontario, private placements—often called exempt market offerings—operate under a different rulebook. The promised upside is higher, yet the legal protections and liquidity investors enjoy on public exchanges are limited. Understanding that trade-off is essential before you wire funds.
This guide explains how private placements work in Ontario, why they’re regulated, and the safeguards every private investor should have in place. It ends with practical ways AMAR-VR LAW supports investors at each step.
What Exactly Is a Private Placement?
A private placement is the sale of securities—shares, convertible notes, limited-partnership units or similar instruments—without filing a prospectus. Instead of marketing broadly to the public, the issuer targets a defined group of investors who qualify for one of several prospectus exemptions set out in National Instrument 45-106.
For investors, that means you can access deals and price points unavailable on public markets. For issuers, it means raising capital faster and with fewer disclosure obligations. The trade-off is that investors shoulder more risk, because regulators assume you’re sophisticated enough to assess the opportunity yourself.
Core Prospectus Exemptions You’ll Encounter
Most private investors see one of three exemptions used in Ontario offerings:
- Accredited Investor (AI) Exemption – You qualify if you meet certain income or asset thresholds (e.g., $200k annual income or $1 million in financial assets, excluding your home). There is no cap on how much you can invest, but you must sign a risk-acknowledgement form confirming your status.
– - Offering Memorandum (OM) Exemption – Available to non-accredited investors. The issuer provides a detailed disclosure document—the OM—and each investor signs a form acknowledging the risks. Individual investment limits apply unless you’re an AI.
– - Private Issuer Exemption – Used by closely held companies with ≤50 shareholders (excluding employees). Investors must be directors, officers, close family, close friends, or close business associates of a principal. If you don’t genuinely know management, you don’t qualify.
Knowing which exemption the issuer relies on tells you how much disclosure to expect and what rights you have if things go sideways.
Why Private Placements Look Attractive
Private placements offer features you won’t find on the TSX:
- Early-stage upside – If the company scales or is acquired, early investors can see outsized returns.
– - Negotiated terms – You may secure preferred shares, board observation rights, anti-dilution protections, or dividend preferences.
– - Portfolio diversification – Exposure to sectors or business models that haven’t reached public-market maturity.
Tempting as these advantages are, they come packaged with elevated information gaps and liquidity constraints.
Key Legal Documents You’ll Be Asked to Sign
Expect at least three documents:
- Subscription Agreement – Your promise to purchase securities and the issuer’s acceptance. Check price, number of units, closing conditions, and representations you make about your investor status.
– - Shareholders’ (or Limited Partnership) Agreement – Sets out governance, transfer restrictions, pre-emptive rights, and exit mechanics. Ensure you understand voting thresholds and information rights.
– - Risk Acknowledgement Form – A regulator-mandated confirmation that you know private placements carry a high probability of loss and limited resale options.
Review each with counsel; the fine print often decides whether you can exit later or protect yourself against dilution.
Risks You Should Weigh
Private investing isn’t for everyone. The major risks include:
- Liquidity Risk – Exempt securities can’t be sold on public exchanges and are often subject to resale restrictions. Plan on holding for years.
– - Valuation Risk – Prices are set privately, not by an open market. Overpaying is easy if comparable data is thin.
– - Information Asymmetry – Issuers need disclose far less than public companies. Financial statements may be unaudited, projections optimistic, and governance practices informal.
– - Dilution – Follow-on rounds can erode your percentage ownership unless you have pre-emptive rights and the cash to exercise them.
– - Business and Execution Risk – Early-stage companies frequently pivot or fail.
Balancing your portfolio so any single private investment is one you can afford to lose is prudent.
Due-Diligence Essentials
Before sending money, verify:
- Management track record – Past exits, sector knowledge, integrity references.
– - Financial realism – Can the current round sustain operations to the next milestone?
– - Cap-table clarity – Who owns what after the raise, including option pools?
– - Use of proceeds – How will funds be spent, and what metrics define success?
– - Corporate housekeeping – Minute book up to date, intellectual-property assignments in the company, no hidden shareholder disputes.
If anything is vague or missing, press for answers or walk away.
Tax Considerations
Ontario investors should discuss with tax advisers whether:
- Gains will be capital gains or business income.
– - The investment qualifies for the federal Lifetime Capital Gains Exemption (LCGE) on Canadian-controlled private corporations.
– - Losses may be deductible if the company fails, via allowable business investment losses (ABILs).
– - An RRSP/TFSA purchase is permissible; most private securities aren’t “qualified investments” unless they meet certain conditions.
Proper structuring at the subscription stage can materially affect your after-tax return.
Red Flags That Warrant Extra Caution
Limit your enthusiasm if you see:
- Pressure to sign quickly or wire funds without independent review.
– - Promises of guaranteed returns or unrealistic exit timelines.
– - Complex fee structures benefiting insiders.
– - Inconsistent or unaudited financials.
– - Management reluctant to allow questions or provide references.
These aren’t automatic deal-killers, but they signal the need for deeper scrutiny.
How AMAR-VR LAW Can Support
Private placements blend opportunity with complexity. Our team helps Ontario investors cut through that complexity by performing legal due diligence, reviewing subscription packages, and negotiating protective terms such as information rights, anti-dilution provisions, and exit mechanisms. We verify the issuer’s exemption strategy, ensure required filings are on track, and coordinate with your tax advisers so the investment fits your broader financial plan. In short, we give you a clear picture of the legal risk-reward balance before you commit capital.
Conclusion
Private placements can open doors to high-growth companies long before they reach public markets, but they demand a sharper eye and a stronger stomach than traditional securities. Understanding the exemption framework, scrutinising deal documents, and respecting liquidity limits are non-negotiable steps for any prudent investor. With thoughtful due diligence and tailored legal advice, you can capture private-market upside while managing the risks.
–
Contact us today for a consultation if you’re evaluating a private placement or want a second opinion on the documents in front of you. We’ll help you invest privately with clarity, confidence, and compliance.
Frequently Asked Questions (FAQs)
- What qualifies as a private placement in Ontario, and who can invest?
–
A private placement is the sale of securities without a prospectus, available only to investors who meet specific exemptions under Ontario securities law. Eligible investors include accredited investors, close friends or family of the issuer, or those receiving a formal Offering Memorandum. Each exemption has unique criteria and documentation requirements.
– - What documents should I review before investing in a private placement?
–
Private placement investors are typically asked to review and sign a subscription agreement, a shareholders’ or limited partnership agreement, and a risk acknowledgement form. These documents outline pricing, ownership terms, voting rights, and potential restrictions on resale. Legal review is essential to understand your rights and obligations before investing.
– - Are private placement investments in Ontario risky?
–
Yes—private placements carry higher risks than public investments. They are illiquid, often involve early-stage or unproven companies, and provide limited financial disclosure. Investors should assess business viability, management credibility, and legal protections before committing capital. Diversifying and limiting exposure is key.
– - What tax issues should I consider before making a private investment?
–
You should confirm whether gains qualify for the Lifetime Capital Gains Exemption (LCGE), if losses may be claimed as Allowable Business Investment Losses (ABILs), and whether the investment can be held in a registered plan like an RRSP or TFSA. Proper tax planning can improve your net return and reduce downside risk.
– - How does AMAR-VR LAW help Ontario investors with private placements?
–
AMAR-VR LAW helps investors by reviewing subscription documents, assessing exemption compliance, identifying legal risks, and negotiating protections such as pre-emptive rights and exit terms. We ensure your investment is structured legally and aligns with your financial strategy, giving you clarity before you commit.