Nick Wright, BA JD MBA LLM (Tax)
Wright Business Law

For many early-stage companies, raising capital begins with people who already know the founders. Family members, friends, business colleagues, and long-time professional contacts are often the first investors willing to finance a new venture. Recognizing this reality, National Instrument 45-106 'Prospectus Exemptions' (“NI 45-106”) includes the family, friends and business associates (“FFBA”) exemption, which permits certain private placements without filing a prospectus.

The exemption is widely used in private financings, yet it is also one of the most frequently misunderstood prospectus exemptions under NI 45-106. Misapplying the exemption can result in a distribution made in breach of the prospectus requirement.

Many issuers assume that anyone they know personally or professionally qualifies under the exemption. Others believe that the exemption applies whenever an investor has some connection to the company or its management. Neither assumption is correct.

The FFBA exemption is intentionally narrow. It is available only where the purchaser has a specified relationship with a director, executive officer, founder or control person of the issuer. In the case of “close personal friends” and “close business associates,” the relationship must be sufficiently close to enable the purchaser to assess the individual’s capabilities and trustworthiness and obtain information about the investment directly from them. The NI 45-106 Companion Policy makes clear that casual acquaintances, clients, customers, co-workers and social media contacts do not qualify simply because of those relationships.

The exemption also differs from other capital-raising exemptions in an important respect. Eligibility depends on the existence of a genuine relationship, not an investor’s wealth or sophistication. Unlike the accredited investor exemption, there are no income or asset thresholds. The policy rationale is that a sufficiently close personal or business relationship may provide an investor with access to information about the issuer and its principals that reduces the need for the protections ordinarily provided by a prospectus.

Because the exemption depends on factual relationships rather than objective financial tests, it is frequently scrutinized by securities regulators. An issuer relying on the exemption bears the burden of demonstrating that every purchaser qualified at the time of the distribution. Simply obtaining a representation in a subscription agreement will rarely be sufficient.

What Is the Family, Friends and Business Associates Exemption?

The FFBA exemption is one of the capital-raising exemptions contained in Part 2 of NI 45-106. It allows an issuer to distribute securities without a prospectus where the purchaser falls within one of the prescribed relationship categories set out in the Instrument. In Ontario, section 2.6.1 of NI 45-106 imposes additional conditions on reliance upon the exemption.

Like every prospectus exemption, the FFBA exemption only relieves the issuer from the prospectus requirement. It does not provide relief from dealer registration requirements. An issuer or other person engaged in the business of trading securities must separately determine whether registration is required under National Instrument 31-103 or another exemption is available. The Companion Policy expressly reminds issuers that reliance on a prospectus exemption does not eliminate registration obligations. 

However, it should not be viewed as a substitute for broader prospectus exemptions such as the accredited investor exemption or the private issuer exemption. Its availability depends entirely upon the purchaser’s relationship with specified principals of the issuer.

Who May Rely on the Exemption?

The exemption is available to any issuer distributing securities in reliance on NI 45-106, provided all of its conditions are satisfied.

Unlike the private issuer exemption, the issuer does not need to maintain private issuer status before relying on the FFBA exemption. An issuer that has previously lost its private issuer status may continue to rely on the FFBA exemption for future financings, assuming the purchasers satisfy the applicable relationship requirements.

Likewise, there is no monetary limit on the amount that may be raised under the exemption. The critical question is not the size of the investment, but whether each purchaser independently qualifies.

Issuers should remember that eligibility is determined separately for every purchaser. One purchaser may qualify as a sibling of a founder while another qualifies as a close business associate of a director. Each purchaser must independently satisfy the exemption.

Who May Invest Under the Exemption?

The exemption applies only where the purchaser has a prescribed relationship with a director, executive officer, founder or control person of the issuer. Those individuals serve as the reference point for determining whether the purchaser qualifies. Broadly speaking, purchasers fall into three categories.

The first consists of individuals whose family relationship is objectively defined by the Instrument. These include spouses, parents, grandparents, siblings, children and grandchildren of the relevant principal, together with comparable relationships involving a spouse.

The second category consists of close personal friends. This is not defined by reference to blood or marriage. Instead, it depends upon the nature and quality of the relationship between the purchaser and the relevant principal.

The third category consists of close business associates, which likewise depends upon the history and substance of prior business dealings rather than any formal title or professional designation.

These last two categories generate the greatest uncertainty in practice and are the subject of extensive guidance in Companion Policy 45-106CP. Because they require a factual assessment in every case, issuers should exercise particular care before relying upon them. Those concepts are examined in detail in the next part of this article.

What Is a “Close Personal Friend”?

The concept of a “close personal friend” is central to the Family, Friends and Business Associates exemption and is one of the most frequently misunderstood aspects of NI 45-106.

The term is intentionally not defined by a bright-line test. Instead, the Companion Policy adopts a principles-based approach that requires issuers to assess the substance of the relationship rather than simply its existence.

According to Companion Policy 45-106CP, a close personal friend is an individual who knows a director, executive officer, founder or control person of the issuer well enough, and has known that individual for a sufficient period of time, to be able to assess their capabilities and trustworthiness and to obtain information directly from them about the investment.

This definition reflects the policy objective underlying the exemption. The exemption is not intended to reward friendship. Rather, it recognizes that a genuinely close relationship may give an investor access to information about the issuer that is similar, in practical terms, to the information that would otherwise be provided through a prospectus.

There Is No Minimum Time Requirement

One common misconception is that individuals become close personal friends simply by knowing one another for a certain number of years.

The Companion Policy imposes no minimum duration. Instead, regulators consider the overall quality of the relationship, including:

• how long the parties have known one another;
• the nature of their relationship;
• the frequency of their interactions;
• the degree of trust and reliance between them; and
• the number of persons to whom the issuer has previously sold securities as “close personal friends” of the same principal.

No single factor is determinative. A relatively recent friendship may qualify if it is genuinely close, while a relationship spanning decades may still fall short if the parties have only limited contact.

Relationships That Generally Do Not Qualify

The Companion Policy also identifies several relationships that, by themselves, are insufficient. An individual is not a close personal friend solely because they are:

• a relative;
• a member of the same club, association or religious organization;
• a co-worker;
• a colleague;
• a client or former client;
• a customer or former customer;
• a casual acquaintance; or
• connected through social media platforms such as LinkedIn, Facebook or X.

These examples are particularly important because many issuers incorrectly assume that a long-standing business client, golf partner or LinkedIn connection automatically satisfies the exemption.

Similarly, the relationship must be direct. A purchaser cannot qualify merely because they are a close friend of another investor who happens to know the founder. The exemption does not extend to “friends of friends.”

Practical Examples

Although every case depends on its own facts, the following examples illustrate how the exemption may apply.

A university roommate who has remained a close friend of the founder for many years, regularly socializes with the founder, and is familiar with the founder’s business experience and integrity may qualify as a close personal friend.

By contrast, someone who met the founder through an industry conference, exchanged occasional emails over several years, and follows the founder on LinkedIn would almost certainly not qualify.

Likewise, membership in the same professional association, country club, charitable organization or alumni group does not, without more, establish the necessary relationship.

The Burden Rests With the Issuer

Issuers should remember that it is their responsibility to establish that the exemption is available.

The Companion Policy makes clear that simply obtaining a representation in a subscription agreement stating “I am a close personal friend” is generally insufficient. Issuers are expected to make reasonable inquiries into the nature of the relationship and retain documentation supporting their conclusion. Regulators expect issuers to ask questions about the relationship, verify the information with the relevant director, executive officer, founder or control person where appropriate, and maintain records demonstrating why reliance on the exemption was justified.

Accordingly, issuers should view the close personal friend category as a factual determination requiring reasonable due diligence, rather than a box to be checked on a subscription agreement.

What Is a “Close Business Associate”?

Like the close personal friend category, the concept of a close business associate depends upon the substance of the relationship rather than its label.

The Companion Policy states that a close business associate is an individual who has had sufficient prior business dealings with a director, executive officer, founder or control person of the issuer to be in a position to assess that individual’s capabilities and trustworthiness and to obtain information directly from them about the investment.

The focus is not simply whether the parties have done business together. Rather, the prior business relationship must have been substantial enough to enable the purchaser to make an informed assessment of the principal’s competence, integrity and judgment.

In determining whether this standard has been met, regulators consider the duration of the relationship, the nature of the business dealings, the frequency of contact, the degree of trust developed between the parties, and the number of investors qualifying as close business associates of the same principal.

Ontario’s Additional Requirements

Ontario has adopted additional investor protection measures for the Family, Friends and Business Associates exemption that do not apply in every Canadian jurisdiction.

First, the Ontario exemption is not available to investment funds. Unlike some other Canadian jurisdictions, an investment fund cannot rely on the FFBA exemption to distribute its securities in Ontario and must instead rely on another available prospectus exemption, such as the accredited investor exemption, where applicable.

Second, where the Ontario risk acknowledgement requirement applies, the purchaser must sign the prescribed Form 45-106F12 Risk Acknowledgement before or at the time the purchaser signs the agreement to purchase the securities. The form confirms that the purchaser understands the speculative nature of the investment, that no prospectus has been filed, and that the investment may be illiquid or lost entirely. The issuer must retain the signed Form 45-106F12 for eight years after the distribution.

Issuers should remember that obtaining a signed risk acknowledgement does not, by itself, establish compliance with the exemption. The issuer must still make reasonable inquiries and be satisfied that the purchaser genuinely qualifies under the applicable category of the exemption.

Common Mistakes

The FFBA exemption is frequently misunderstood. Some of the most common errors include:

• Assuming every friend qualifies. A casual friendship or social acquaintance is not sufficient.
• Treating LinkedIn contacts or networking relationships as close business associates. The Companion Policy specifically states that a social media connection, by itself, does not establish the required relationship.
• Relying solely on representations in a subscription agreement. Regulators expect issuers to take reasonable steps to verify that the exemption is available rather than simply accepting a purchaser’s assertion.
• Failing to document the relationship. If the availability of the exemption is questioned during an OSC compliance review, the issuer bears the burden of demonstrating that the exemption was properly available.
• Using public advertising to locate “friends” or “close business associates.” In Ontario, the OSC considers the use of advertising, finders or similar solicitation methods to identify purchasers under the FFBA exemption to be inconsistent with the relationship-based nature of the exemption. If advertising is required to locate the purchaser, it raises an obvious question whether the necessary relationship actually existed before the offering.

Practical Due Diligence Checklist

Before relying on the FFBA exemption, issuers should consider the following questions:

• Which director, executive officer, founder or control person does the purchaser know?
• Which category of the exemption is being relied upon?
• What facts support the conclusion that the purchaser qualifies?
• Has the issuer documented those facts?
• If required, has the purchaser completed and signed the prescribed Ontario risk acknowledgement?
• Have dealer registration requirements been separately considered?

A short conversation with the purchaser before closing the financing often provides the information necessary to confirm the exemption. Notes of that discussion should be retained together with the subscription documents.

Conclusion

The Family, Friends and Business Associates exemption is a valuable capital-raising tool for private companies, particularly during early-stage financings. At the same time, it is one of the most fact-specific exemptions in NI 45-106.

Unlike exemptions based on objective financial thresholds, the FFBA exemption depends upon genuine personal or business relationships. Those relationships must exist before the financing, be sufficiently close to enable the purchaser to assess the principal’s capabilities and trustworthiness, and be supported by appropriate documentation.

Issuers should therefore approach the exemption with the same level of diligence they would apply to any other prospectus exemption. Proper verification and record keeping at the time of the financing will place the issuer in a much stronger position if its reliance on the exemption is later reviewed by the Ontario Securities Commission. 

Book a Consultation

If you are planning a private financing or have questions about relying on the Family, Friends and Business Associates exemption, contact us to schedule an initial consultation with Nick Wright.