Effective May 5, 2015 the Ontario Securities Commission (“OSC”) introduced a friends and business associates prospectus exemption (“FFBA Exemption”) to allow issuers (other than investment funds) to raise capital from their networks of family, close personal friends and close business associates. The FFBA Exemption is available to reporting issuers as well as non-reporting issuers and to issuers as well as selling securityholders.
The FFBA Exemption permits issuers to distribute securities to the issuer’s directors, executive officers, control persons and founders as well as certain family members, close personal friends and close business associates of such persons, subject to a number of conditions. The new exemption in Ontario is largely harmonized with an exemption that is currently available in other Canadian jurisdictions. It allows for the sale of securities by a selling security holder or an issuer to principals of the issuer as well as certain family members, close personal friends and close business associates. The exemption is based on investors having a sufficiently close relationship with a principal of the issuer to assess the capabilities and trustworthiness of the principals and access information about their investment.
As a condition to the exemption, a signed risk acknowledgement form must be obtained, setting out the key risks related to the investment and confirming how the investor qualifies to make the investment. Guidance in 45-106CP explains that in Ontario, the use of registrants, finders or advertising, as well as payment of fees or commissions to any person to find purchasers is inconsistent with the use of the FFBA Exemption.
Expanded guidance in 45-106CP on the meaning of close personal friend and close business associate provides that the onus is on the issuer or selling security holder to establish whether a close personal relationship exists, various factors will be considered relevant in making this determination, and we will not generally consider an individual with whom a friendship is primarily founded on participation in an internet forum or social media to be a close personal friend or close business associate.
The risk acknowledgement form, Form 45-106F12 Risk Acknowledgement Form for Family, Friend and Business Associate Investors (Form 45-106F12), must be signed by (1) the investor, (2) the director, executive officer, control person or founder of the issuer with whom the investor has asserted the relationship (either directly or through the spouse of the director, executive officer, founder or control person), if applicable, and (3) the issuer.
The investor must acknowledge certain risks associated with the investment The investor must also disclose as applicable the identity of the director, executive officer, control person or founder of the issuer with whom they assert a relationship, that person’s position at or relationship with the issuer, the category of the relationship asserted by the investor and how long the investor has known that person. Risk acknowledgement form must be retained by the person making the distribution for a period of eight years after the distribution