For many Alberta entrepreneurs, raising capital from friends and family is the first step in launching a business. These early supporters often provide critical financial backing based on trust and personal relationships, rather than detailed financial statements or business forecasts. While this funding route feels informal, it is subject to the same securities laws that govern larger, more traditional capital raises. Failing to understand and comply with these laws can have serious legal consequences, even when dealing with close personal contacts.
Knowing the legal rules around early-stage funding is essential, whether you’re starting a tech startup, opening a restaurant, or scaling an existing enterprise.
Securities Law Applies to All Sales of Securities (Even Personal Ones)
In Alberta, any distribution of securities, whether shares, convertible debt, partnership interests, or other investment instruments, is governed by the province’s Securities Act and related regulations. A “security” is broadly defined and can include almost any investment arrangement, not just public stock offerings.
A business must comply with securities laws when it offers or issues securities, even to a single investor. This includes:
- Filing a prospectus (unless an exemption applies);
- Registering as a dealer (unless exempt);
- Providing appropriate disclosure; and
- Ensuring investors qualify under the applicable exemption.
This legal framework is designed to protect investors, ensure transparency, and maintain integrity in capital markets, even where there is a close personal connection between the parties.
The Prospectus Requirement and Exemptions
Generally, businesses that issue securities must file a prospectus. A prospectus is a formal document that discloses financial information, business risks, and management details. However, preparing a prospectus is costly, time-consuming, and impractical for small private companies. Fortunately, several exemptions are available under National Instrument 45-106 – Prospectus Exemptions (NI 45-106).
These exemptions allow companies to raise funds without a prospectus, provided they meet specific conditions. Commonly used exemptions for friends-and-family fundraising include:
- Private Issuer Exemption
- Family, Friends, and Business Associates Exemption
- Accredited Investor Exemption
- Offering Memorandum Exemption
Each exemption has its own criteria and limitations. It is critical to choose the right one and ensure compliance with its conditions.
The Private Issuer Exemption
Many startups and early-stage companies qualify as “private issuers.” Under the Private Issuer Exemption, companies can issue securities without a prospectus if they:
- Have no more than 50 shareholders (excluding employees);
- Have never sold securities to the public;
- Have restrictions on transferring shares in their constating documents; and
- Only issue securities to specified types of investors, including close personal friends, family members, and business associates.
If your company meets these criteria, you can sell securities to family and friends without triggering registration or disclosure requirements. However, losing private issuer status (for example, by selling shares to someone outside the permitted categories) means you can no longer use this exemption in the future.
Keeping careful records and vetting potential investors is essential for preserving your status as a private issuer.
The Family, Friends, and Business Associates Exemption
This exemption under NI 45-106 allows you to raise capital from people with whom you have a close personal relationship. Categories of qualifying investors include:
- Immediate family (parents, siblings, children, spouse);
- Close personal friends (based on frequent interactions and mutual trust);
- Close business associates (with a history of business dealings); and
- A trust or estate of which all beneficiaries or a majority of the trustees or executors are immediate family, close friends or business associates.
It’s important to understand that proximity alone doesn’t qualify someone as a close personal friend or business associate. Regulators will look for evidence of a genuine and ongoing relationship, not just social media connections or casual acquaintances.
To reduce risk, keep a detailed record of each investor’s relationship history and consider obtaining a signed representation confirming their relationship to the company and understanding of the investment risks.
The Accredited Investor Exemption
While less commonly used for fundraising by friends and family, the Accredited Investor Exemption may sometimes apply. An accredited investor includes individuals who meet specific financial criteria, such as:
- Net financial assets of more than $1 million (excluding primary residence);
- Net income exceeding $200,000 in each of the past two years (or $300,000 with a spouse); or
- Net assets of at least $5 million.
If your friends or family members meet these thresholds, they can invest under this exemption, which allows greater flexibility but does not require a formal prospectus.
The Offering Memorandum (OM) Exemption
If you want to raise a larger sum or offer investment opportunities to people outside the inner circle of friends and family, the Offering Memorandum Exemption may be appropriate. This exemption requires the issuer to prepare a detailed offering memorandum, which includes:
- Issuer information;
- Business plan and offering summary;
- Financial statements;
- Use of proceeds;
- Investment risk assessment;
- Investor rights and required disclosures.
Although preparing an OM is more work than relying on other exemptions, it can open access to a broader range of investors. In Alberta, investors under this exemption must also sign risk acknowledgment forms, and there are investment limits for non-accredited investors.
Investor Rights and Disclosure Obligations
Even when using an exemption, businesses must not misrepresent material facts and must provide investors with enough information to make an informed decision. Misleading or incomplete disclosures, even if unintentional, can expose the company and its directors to lawsuits and regulatory penalties.
Investors also have statutory rescission rights in certain cases, allowing them to cancel the investment if the information provided contains a material misstatement or omission.
To reduce liability, consider the following best practices:
- Prepare a simple investor package explaining the business, financials, risks, and use of funds.
- Keep detailed records of all communications and investor acknowledgments.
- Ensure all investors sign written agreements and exemption declarations.
Registration as a Dealer: Do You Need It?
Another area of potential compliance risk involves the requirement to register as a dealer when selling securities. If the company or its representatives are in the business of trading securities, registration may be required unless an exemption applies.
However, most early-stage companies raising funds from friends and family fall outside the scope of dealer registration, provided that they are not in the business of trading, no commissions are being paid for selling the securities, and fundraising efforts are occasional and not marketed to the general public.
Still, legal advice is highly recommended to assess whether your specific situation requires dealer registration.
Penalties for Non-Compliance
Violating securities laws, even unintentionally, can result in severe consequences, including fines and sanctions from the Alberta Securities Commission. Business directors and officers can be held personally liable, including in investor lawsuits arising from misrepresentation or breach of fiduciary duty. The business can also lose its exemption eligibility, making future fundraising more difficult.
Additionally, improperly issued securities may be subject to rescission, requiring the company to return the investor’s money, sometimes years after the fact.
Given the risks, even small-scale fundraising efforts deserve proper legal oversight.
Best Practices for Raising Capital from Friends and Family
To raise money safely and legally from personal contacts, follow these best practices:
- Carefully choose your exemption: Ensure the exemption is appropriate for your circumstances, and every investor qualifies.
- Provide clear, written information: Ensure your business, the nature of the investment, and any risks are set out in detail.
- Avoid promises: Do not promise guaranteed returns or engage in information “handshake” deals.
- Document everything: Keep detailed records, including your relationship history with the investors and signed subscription agreements.
- Get legal counsel: Consult an experienced business and securities lawyer before issuing any securities.
Educating your investors is also important. Many friends and family members may not understand that they are taking on a genuine investment risk. Encourage them to review all documents carefully and consider seeking independent advice.
Good Intentions Don’t Replace Legal Compliance
Entrepreneurs often view friends and family fundraising as a casual, low-risk way to get a business off the ground. But in the eyes of the law, these transactions are still securities offerings. That means full compliance with Alberta’s securities laws is required, no matter how informal or supportive the relationship.
Remember that the practices set out above are only general guidelines. Only consulting with a qualified business lawyer can ensure full compliance with securities laws and help minimize your risk.
With the proper preparation, documentation, and legal guidance, raising capital from your inner circle can be done safely and set the foundation for future success.
Contact the Calgary Securities Lawyers at DBH Law for Innovative Business Law Advice
At DBH Law, our experienced securities lawyers offer strategic advice on corporate finance, mergers and acquisitions, and securities matters. Drawing on our deep knowledge of corporate and business law, we deliver practical, results-oriented guidance tailored to our clients’ needs. Our modern, professional approach ensures efficient and effective legal service. To book a consultation, please call 403-252-9937 or contact us online.