Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Canadian private fund sponsors operate in a regulatory environment that allows capital to be raised without a prospectus, provided the fund relies on a valid exemption under National Instrument 45-106 ‘Prospectus Exemptions’ (NI 45-106) or an equivalent local rule. 

These exemptions are essential to the structuring and marketing of private investment funds, particularly those targeting accredited investors, family offices, and institutional limited partnerships (LPs). The Accredited Investor (AI) exemption, the Minimum Amount Exemption, and the Offering Memorandum (OM) exemption are commonly used for private fund offerings. Each exemption carries its own eligibility tests, disclosure obligations, and post-trade filings that require disciplined compliance.

For fund sponsors, understanding how these exemptions operate and how regulators interpret them in practice can materially reduce regulatory risk. Missteps generally occur around investor qualification, marketing practices, continuous offering mechanics, and the intersection between prospectus exemptions and registrant obligations under National Instrument 31-103 ‘Registration Requirements, Exemptions and Ongoing Registrant Obligations’ (NI 31-103). This article outlines the legal framework, digs into definitions, provides practical guidance, analyses grey zones, and closes with scenarios and compliance considerations relevant to funds operating in Ontario and other Canadian jurisdictions.

Regulatory Framework & Sources of Law

Prospectus exemptions exist under provincial securities legislation, most prominently in the Securities Act (Ontario) and NI 45-106. Section 53 of the Securities Act (Ontario) establishes the prospectus requirement for distributions of securities unless an exemption is available. NI 45-106 harmonises the main exemptions across provinces, though certain provinces such as Alberta and British Columbia layer on additional local variations through blanket orders and companion policies.

The policy rationale behind prospectus exemptions is grounded in investor sophistication, access to financial resources, and the nature of the relationship between investor and issuer. Canadian Securities Administrators (CSA) members routinely comment in notices on the goal of balancing investor protection with efficient capital formation. For fund sponsors, this means regulators expect a high standard of compliance even where no prospectus is filed, including meaningful verification of investor status and careful adherence to marketing restrictions.

Investment funds are subject to layered oversight due to the pooling and discretionary management of capital. Most private equity, real estate, venture and credit funds rely on prospectus exemptions to avoid reporting issuer status and structure their redemption mechanics to avoid mutual fund classification, thereby remaining outside the NI 81-102 investment restriction regime and the NI 81-106 continuous disclosure framework applicable to reporting issuer funds.

Definitions & Thresholds

The Accredited Investor exemption under NI 45-106, s. 2.3 remains the primary exemption relied on by private fund sponsors. It defines individual accredited investors in terms of income, financial assets, or net assets (e.g., $1 million in financial assets net of liabilities, $5 million in net assets, or income thresholds of $200,000 individually or $300,000 combined for two years with reasonable expectation of same in the future). For institutions, the categories include Canadian financial institutions, pension funds, and certain managed accounts. Sponsors must understand which branch applies to each investor and maintain records at a detailed category level.

The minimum amount exemption under NI 45-106, s. 2.10 permits a distribution where the investor purchases at least $150,000 of securities in cash. It is only available to non-individuals and cannot be broken across multiple issuers or investment vehicles to meet the threshold. This exemption is widely used by fund-of-funds and by corporations holding family wealth.

The offering memorandum (OM) exemption under NI 45-106, s. 2.9 permits a distribution to any investor in certain provinces, including Ontario, provided the issuer delivers an OM meeting the prescribed disclosure standards and complies with ongoing reporting obligations. In Ontario, the OM exemption was introduced in 2016 and includes investor limits for individuals who are not eligible under another exemption (i.e., $10,000, $30,000 or $100,000 depending on financial circumstances and dealer suitability assessment). Fund sponsors must recognise that using the OM exemption can impose performance reporting, audited financials, and marketing restrictions that do not apply under the Accredited Investor exemption.

Definitions such as “distribution,” “investment fund,” “managed account,” “control person” and “mutual fund” in Securities Act (Ontario), s. 1(1) may also shape the availability of exemptions. Funds structured as trusts, limited partnerships (LPs), or unlimited liability companies (ULCs) must consider whether they trigger investment fund definitions and, if so, whether they are subject to NI 81-106 continuous disclosure requirements by virtue of their exemption choice and structure.

Application in Practice

In practice, fund sponsors implement prospectus exemptions at the subscription stage by incorporating investor representations and certificates into subscription agreements. Although NI 45-106 does not impose an express obligation to take reasonable steps to verify accredited investor status, issuers must be able to substantiate that the purchaser qualified at the time of distribution. Where registrants are involved, KYC and suitability obligations require collection of sufficient financial information. Regulators have signalled through enforcement activity and compliance notices that reliance solely on unchecked self-certification, without adequate supporting information, may be insufficient in certain circumstances.

For most prospectus exemptions, the fund must prepare and file a Form 45-106F1 report of exempt distribution within 10 days of each distribution. In a continuous offering model typical for private equity and private credit funds, this means filing after each closing or capital call. Sponsors must carefully track “date of distribution” to ensure timely filings and avoid late penalties or compliance reviews.

Marketing activities must align with the exemption relied upon. For accredited investor offerings under section 2.3 of NI 45-106, sponsors commonly provide an investor presentation and a private placement memorandum (PPM), though neither is required by the Instrument. If the issuer relies on the OM exemption under section 2.9, the OM must comply with the prescribed form requirements, and in specified jurisdictions OM marketing materials are incorporated by reference. The OM gives rise to statutory or mandated contractual rights of action for misrepresentation, creating heightened liability and compliance risk if the disclosure and marketing materials are not aligned.

Engagement of dealers triggers additional considerations. Distributing securities to the public, even under exemptions, may require the issuer or its personnel to be registered as a dealer, commonly as an “exempt market dealer” under NI 31-103, unless an adviser or dealer registration exemption applies. Most fund sponsors either (i) register affiliated entities as EMDs, (ii) use third-party dealers, or (iii) rely on the “international dealer” or “international adviser” exemptions when applicable, each with significant conditions.

Grey Areas & Regulator Focus

A recurring grey area involves verification of accredited investor status. Regulators have not prescribed explicit verification methods, leaving issuers to build risk-based processes. For individual accredited investors relying on income or financial asset thresholds, sponsors may rely on self-certification and additionally, when determined appropriate, review accountant letters, brokerage statements, or net-worth attestations. Regulators have criticized cursory or unsupported self-certifications, particularly where the investor’s profile suggests borderline eligibility.

Marketing remains an area of regulatory scrutiny. Ontario Securities Commission (OSC) staff guidance emphasizes that registrants must ensure communications are fair, balanced and not misleading, including in the exempt market. This includes substantiating performance claims, avoiding unqualified statements about strategy or risk, and ensuring consistency between marketing materials and offering documents. OSC compliance reviews in Ontario routinely examine the use of outdated materials, unsupported performance data and selective disclosure.

Continuous offerings create additional complexity. Each capital call may constitute a new distribution, requiring exemption confirmation at each close. Funds often mistakenly rely on stale investor certifications or fail to confirm ongoing eligibility when re-ups occur. Staff reviews also examine whether changes to strategy, governance, or service providers trigger material changes that must be disclosed in OM-based offerings under NI 45-106, s. 2.9(17).

Finally, cross-border capital raising, particularly involving U.S. investors, raises conflicts between Regulation D requirements and NI 45-106. While both systems rely heavily on accredited investor concepts, differences in definitions and marketing rules can create misalignment.

Interactions with Adjacent Regimes

NI 81-106 governs continuous disclosure for investment funds that are reporting issuers. Private funds that distribute solely under prospectus exemptions and do not become reporting issuers are generally outside NI 81-106. Where a private fund relies on the OM exemption in Ontario and certain other jurisdictions, it must deliver an OM in the prescribed form and provide annual audited financial statements to investors, but this obligation arises under NI 45-106 and does not, in itself, trigger NI 81-106 or MRFP-style reporting.

Derivatives activities can trigger NI 94-102 and local OTC derivatives rules. Funds trading swaps, futures, or forwards may face reporting obligations independent of their fundraising structure. Although derivatives regulation is not directly tied to prospectus exemptions, the operational realities of compliance often converge.

Tax structuring adds another layer. Partnership structures, flow-through entities, fund-on-fund arrangements, and feeder funds must ensure that their securities law exemptions are compatible with tax elections, jurisdictional presence, and investor types (e.g., charities, pension entities, non-resident LPs). Cross-border tax-driven entity splits frequently create parallel securities law exemptions that must be managed consistently.

Illustrative Scenarios

Consider a first-time private credit fund raising $75 million from a mix of high net worth (HNW) investors and family offices. The sponsor plans quarterly closes. Each close triggers a new distribution, requiring the fund to confirm exemption eligibility for each investor and file Form 45-106F1 within 10 days. A returning investor who changes from corporate to personal investment must re-qualify under a personal Accredited Investor category; relying on the previous corporate certification would be insufficient.

In a second scenario, a real estate development fund wishes to broaden its investor base and decides to rely on the OM exemption in Ontario and Alberta. The fund prepares an OM but continues using a marketing deck prepared for its accredited investor offering. Because discrepancies exist between projected returns in the deck and conservative assumptions in the OM, the fund inadvertently creates exposure to statutory civil liability for misrepresentation under the OM regime. Regulators would likely consider this a compliance deficiency during a review.

In a third scenario, a venture capital fund markets in Ontario and Quebec. Quebec’s Civil Code and AMF rules require French translation of certain documents unless a waiver is obtained. The fund must coordinate the accredited investor exemption with Quebec’s French language requirements and file separate Autorité des marchés financiers (AMF) distribution reports, complicating timelines. A failure to comply with Quebec-specific requirements can lead to costly remediation even where the underlying exemption is straightforward.

Compliance Checklist

• Map each investor category to a specific NI 45-106 prospectus exemption and document the factual basis for reliance at the time of distribution.
• Obtain contemporaneous eligibility support, including detailed investor questionnaires, tailored representation certificates and risk acknowledgements where required.
• Implement risk-based verification procedures calibrated to the exemption relied upon and the investor’s profile.
• Review all marketing materials for consistency with the subscription agreement, PPM or OM, and update materials regularly to reflect current strategy, portfolio and risk disclosure.
• For continuous or rolling offerings, maintain a calendared compliance process for each closing that includes re-validating exemption eligibility, tracking investor status changes and filing Form 45-106F1 within prescribed timelines.
• Where relying on the OM exemption, ensure delivery of the prescribed Form 45-106F2 disclosure in the OM, monitor applicable investment limits, incorporate OM marketing materials as required and update the OM for any material change before further distributions.
• Maintain structured coordination with registrant compliance personnel to align onboarding, marketing practices and suitability processes with NI 31-103 obligations.

What’s Changing

CSA consultations have examined modernization of prospectus exemptions, including aspects of the OM exemption’s disclosure requirements and potential refinements to the Accredited Investor definition. The CSA has also proposed updates to Form 45-106F1 to enhance exempt market data collection. In Ontario, OSC compliance reviews continue to focus on dealer registration, suitability and marketing practices in continuous private fund offerings. Québec maintains enhanced French language compliance expectations that may affect national exempt offerings. Certain Western jurisdictions have explored sophistication-based exemptions for early-stage capital formation, though their scope and application to private funds remain limited and evolving.

Conclusion & Next Steps

Prospectus exemptions are indispensable tools for private fund sponsors operating in Canada, particularly in Ontario’s sophisticated exempt market. However, their proper use demands precise interpretation, rigorous verification, aligned marketing practices, and an understanding of how exemptions interlock with registration and investment fund rules. For sponsors, disciplined compliance is not merely a defensive strategy; it enables cleaner closings, smoother audits, and greater credibility. As regulatory expectations evolve, sponsors should regularly revisit their exemption strategies, subscription processes, marketing review protocols, and registrant obligations.

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If you are forming, restructuring, or operating a private investment fund in Canada, contact us to schedule an initial consultation with Nick Wright.