This resource has been prepared by Nicholas dePencier Wright of Wright Business Law for educational purposes. This information is current as of the date of writing and does not constitute legal advice, which should be obtained prior to relying on anything herein.
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Ontario’s Friends, Family, and Close Business Associates Exemption (FFBA)
Ontario’s Friends, Family, and Close Business Associates (“FFBA”) exemption offers a flexible and practical path for certain issuers to raise capital from individuals within their trusted networks. This exemption allows companies to raise funds from personal connections without going through the costly and complex process of filing a prospectus, making it particularly valuable for startups and small businesses looking to leverage existing relationships for initial financing. However, the exemption comes with specific rules and requirements to prevent misuse and ensure that only genuinely close connections are involved.
This article provides an overview of the FFBA exemption, including its eligibility requirements, benefits, risks, and compliance obligations for issuers in Ontario.
- What is the FFBA Exemption?
Under National Instrument 45-106 – Prospectus Exemptions (NI 45-106), the Friends, Family, and Close Business Associates exemption allows Ontario-based companies to issue securities to a specific group of people with whom they have a close relationship. Unlike the Accredited Investor Exemption, which focuses on an investor’s financial sophistication and resources, the FFBA exemption emphasizes the nature of the relationship between the investor and the issuer or the company’s directors, officers, or control persons. This distinction aims to reduce the risk of investment misrepresentation since the investors are assumed to have a personal or professional familiarity with the issuer.
- Eligibility Criteria for the FFBA Exemption
The FFBA exemption is designed to restrict eligible investors to individuals who have a genuine personal or professional connection to the issuer. Here are the key eligible categories:
Family Members: This category includes:
• Spouses, parents, children, and siblings of directors, executive officers, or control persons of the issuer
• Other family members (e.g., in-laws, grandparents, aunts, uncles) may be included if they meet specific relational criteria as defined by NI 45-106.
Friends: This category is limited to individuals with a close personal relationship with the director, executive officer, or control person. Courts have interpreted “close personal relationship” to mean an established, long-term relationship where trust and familiarity have developed, beyond casual acquaintances.
Close Business Associates: A close business associate is someone with a meaningful, longstanding business relationship with a director, executive officer, or control person of the issuer. This category is not intended for casual professional relationships but rather for those where mutual trust has developed over time. This could include former colleagues, business partners, or clients if a close business connection exists.
Important Note: The FFBA exemption does not apply to broad investor networks or individuals reached through public advertising. The Ontario Securities Commission (OSC) monitors the interpretation of these relationships in an attempt to prevent misuse, and issuers must be prepared to justify these connections if audited or investigated.
- Benefits of the FFBA Exemption
For Issuers:
Cost and Time Savings: Raising funds from friends, family, and close business associates without the need for a prospectus can significantly reduce both legal and administrative costs.
Simplified Compliance: FFBA exemptions typically involve fewer regulatory requirements compared to other exemptions, like the Accredited Investor Exemption, thus lowering compliance costs.
Trusted Investor Pool: By focusing on personal and professional relationships, issuers may find investors who understand and believe in the business, which can lead to greater trust and long-term support.
For Investors:
Access to Exclusive Opportunities: Investors within the friends, family, and close associates network may have the chance to invest in early-stage companies or small businesses that they have a personal connection with, potentially benefiting from high growth opportunities.
More Informed Decisions: Investors who know the issuer well may be more familiar with the business’s strengths and risks, allowing them to make more informed investment decisions.
- Risks and Considerations
For Issuers:
Potential for OSC Scrutiny: The FFBA exemption requires a strong basis for each relationship claimed. The OSC may scrutinize claims of “close relationship” to ensure compliance. Misuse of this exemption, such as by claiming acquaintances as close friends, can lead to penalties and legal consequences.
Limitation on Investor Pool: Since only those with a qualifying personal or business relationship can invest, companies may face restrictions on the amount of capital they can raise, which may not be sufficient for larger-scale projects.
For Investors:
Higher Investment Risk: The FFBA exemption does not require a prospectus, which means investors often receive less formal disclosure than they would for publicly offered securities. This increases the risk of information asymmetry and financial loss, particularly in high-risk startups.
Potential for Bias: Given that investors may be personally connected to the issuer, there’s a risk of emotional bias. Investors might overlook risks due to personal loyalty or attachment to the people behind the business.
- Compliance Requirements for Issuers
Issuers using the FFBA exemption in Ontario are still subject to several important compliance obligations to ensure transparency and legality:
Risk Acknowledgement Form: Ontario law requires that all investors under the FFBA exemption complete a Risk Acknowledgement Form (Form 45-106F12). This form confirms that the investor understands the risks associated with the investment, particularly in the absence of a prospectus.
Filing a Report of Exempt Distribution: Issuers must file a Report of Exempt Distribution (Form 45-106F1) with the OSC within 10 days of issuing securities under this exemption. This report outlines the details of the distribution, including the number and types of investors involved, and may incur a filing fee.
Record-Keeping: Issuers should maintain detailed records of their relationships with investors to demonstrate compliance with the FFBA requirements. Proper record-keeping can help protect the issuer in the event of an OSC investigation or audit.
Avoiding Public Solicitation: To qualify for the FFBA exemption, issuers must avoid any form of public solicitation or advertising. This exemption is limited to personal and professional networks, and advertising to find “close business associates” or “friends” would be deemed a violation of securities laws.
- Examples of How the FFBA Exemption Works
To provide more context, let’s consider two examples of how the FFBA exemption might be applied:
Example 1: A startup tech company wants to raise capital from friends and family of its founders. The founders approach their parents, siblings, and two close friends with whom they’ve shared a personal relationship for over a decade. These individuals qualify under the FFBA exemption, allowing the startup to raise funds without filing a prospectus.
Example 2: A small business owner is raising funds and approaches a former colleague with whom they’ve had a long-standing business relationship for 15 years. The former colleague qualifies as a “close business associate,” allowing the owner to offer shares without a prospectus under the FFBA exemption.
- Conclusion
The Ontario Friends, Family, and Close Business Associates exemption offers a valuable pathway for Ontario-based businesses to raise capital within their personal networks, saving time and resources that would otherwise go toward prospectus preparation and filing. However, it’s crucial for issuers to ensure they have a legitimate and demonstrable connection with each investor, as misuse of the exemption can lead to regulatory action by the OSC.
Investors considering opportunities under the FFBA exemption should conduct thorough due diligence and weigh the risks involved, particularly since these investments do not carry the same disclosure requirements as publicly offered securities. Working with legal or financial professionals can help both issuers and investors navigate the complexities of the FFBA exemption and make well-informed decisions in Ontario’s exempt market.
Sources:
Ontario Securities Commission
NI 45-106 Prospectus Exemptions
Canadian Securities Administrators
Private Capital Markets Association of Canadan