Part One: Relying on the Close Personal Friends, Family and Business Associates Exemptions to Raise Private Placement Capital

– *updated March 24, 2022 –

Friends, Family and Business AssociatesOn Facebook I have over 150 “friends”. On LinkedIn, I have over 1,600 business connections or “business associates”. Only twenty people are on both lists. Unfortunately for me, and for you, being a friend of someone on Facebook or connected as a business associate on LinkedIn is not enough to determine if someone is one of your close personal friends, family or business associates as defined by National Instrument 45-106 Prospectus and Registration Exemptions (“NI 45-106”). Identifying someone as a friend or business associate is not enough to allow them to make a private placement investment in your company. They need to be a close personal friend or a close business associate for you to rely on the friends, family and business associates exemption.

Who is a “close personal friend”?

Subsection 2.7 of the Companion Policy to NI 45-106 (“45-106CP”) states the regulators’ views of the meaning of “close personal friend” of a person who is a director, officer or founder.

Essentially, a “close personal friend” is someone, at the time of investment (1) knows you well enough, and (2) has known you for a sufficient period of time, to be able to (3) assess your capabilities and trustworthiness. Their relationship to you is also a (4) direct relationship.

A person is not a close personal friend solely because they are a relative, member of the same organization, association or religious group, or a client, customer, former client or former customer or a friend of a friend.

The four required elements to be considered a close personal friend of someone seems fairly straightforward. There are, however, a couple of twists.

I don’t know about you, but I am still friends with people I knew in grade one. I have also have added dozens of friendships along the way I value dearly. I would not dare, however, to consider all of these people close personal friends. Certainly, they know me well enough and for a sufficient period of time in which to be able to assess my capabilities and trustworthiness. Our friendships are also direct, but are we really close? Does it matter for the purposes of NI 45-106? I believe it does matter.

What I tell my clients is that if a person does not know how to get to your bathroom in your home without directions, they are not a close personal friend for the purposes of NI 45-106. It is not enough to be acquainted with or social friends with someone, no matter how long the relationship, or how well they know you socially. It is also irrelevant how close you view your friendship. What is important is how that person would describe their relationship to you to a third party. More on that last statement a bit later.

Who is a “close business associate”?

Under subsection 2.8 of 45-106CP, a “close business associate” is someone who has (1) sufficient prior business dealings with you to (2) assess your capabilities and trustworthiness. Again, this must be a (3) direct relationship.

Again, someone is not a close business associate solely because they are a member of the same organization, association or religious group, or a client, customer, former client or former customer.

I would say about forty of my LinkedIn contacts would meet all three elements required to be considered a close business associates as defined by NI 45-106. Be honest, how many of your business connections rise to the level of being a close business associate? Again, this is only our assessment of our past and current business relationship with each of these individuals. The key is how these individuals would describe their business relationship to us to a third party.

BTW: Several of my closest business associates and friends are not LinkedIn or were ever part of my Facebook group of friends. I don’t believe the Commission or any other securities regulator has ever viewed the status of one’s online contacts on one of these forums as evidence one way or the other of how “close” you really are to one another for the purposes of NI 45-106. It will be interesting to see if it ever is raised in the future.

How close are we? So close I got it in writing.

The onus is on you as the issuer of securities to confirm that an exemption is available (subsection 1.9 of 45-106CP, Bilinski 2002 BCSECCOM 102 and Limelight Entertainment Inc. 31 OSCB 1727). It is not enough for you to know in your mind that you are a close personal friend or a close business associate with a particular investor in your company. You need a paper trail or documentation to confirm you made a proper determination that each investor has the necessary relationship to you to be considered a close personal friend or a close business associate as defined in NI 45-106 at the time of their investment in your company.

Subsection 1.9 of 45-109CP allows you to rely on the factual representations by an investor as to whether they meet the requirements of a particular exemption, provided that you have no knowledge or reasonable grounds to believe that those representations are false.

Most issuers, when conducting a private placement sale of securities, provide each investor with a subscription agreement, investor questionnaire and certificate. The subscription agreement usually contains representation and warranty requirements to be affirmed by the investor. The questionnaire and certificate are required to be filled out by the investor and are used to determine whether a particular investor meets the requirements of a particular exemption. These documents alone are not enough for you to rely safely on any exemption.

When you are dealing with close personal friends or close business associates, you need to go one step further and get a written paragraph or signed letter setting out what makes their relationship to you a close personal friendship or close business relationship within the meaning of the exemption. If you are truly close personal friends or close business associates, you will probably get an “are you kidding me” response from your friend or associate. Explain to them that the paragraph you are asking them for is for the company file should a regulator ever knock on your door to confirm you properly relied on that exemption. In an ideal world, the paragraph or letter should cover each of the required elements to rely on the particular exemption you intend to rely on to sell and issue your securities. For example:


Address of Company

Dear Sirs and Madams,

Re: My relationship to Mr. Big, CEO of Company

I met Mr. Big in September 1998 at the Faculty of Commerce at UBC. We were both first year freshmen. [Establish time, place and context.] We became instant friends. [Establish direct relationship and type of relationship – friends.]  He was the best man at my wedding. [Establish how well you know him.] Over the years, Mr. Big has shown himself to me to be capable and trustworthy as a businessperson and as a friend. [This may be too direct, but you need something that establishes belief of capability and trust is present in the relationship.]


Commerce Buddy

Same relationship, different understanding.

I once dated a fellow for three weeks. It was over Christmas and he brought me home to his family, who welcomed me with open arms. When we returned home, he broke off our relationship over the phone two days later saying: “It’s not like we dated or were boyfriend, girlfriend or anything. Just two people getting to know one another.” I was pissed, and I do not get angry easily. We obviously had two very different views of what type of relationship we had or were having and totally different value systems.

Where issuers often go wrong and get into regulatory trouble is that they too believe they are on the same page as their investor, who they see as a close personal friend or close business associate. Unfortunately for them, if or when that investor is asked by a securities regulator “how you do you know Mr. X and company?” that investor may respond with a vague I don’t really know him answer, such as “He plays tennis at my club and one day at a tournament he mentioned this investment in his company” or worse, “Mr. Who? Mr. Mutual Friend got me involved with this investment.” Unless that investor confirms he is a close personal friend or close business associate by positive affirmative statements, you as an issuer are in trouble.


A subscription agreement, questionnaire and even a certificate alone are not enough to verify someone is a close personal friend or close business associate. You need that extra hand written or typed paragraph or letter verifying the three or four elements necessary to rely on the exemptions are present. Better to find out at the pre-investment stage than down the road that your investor and you view your relationship in a totally different way. If the regulators send a letter or call up your close personal friend or close business associate you want to make sure he indeed views you exactly like a close personal friend or close business associate and not some random person, he runs into every once in a while in town.

In Part Two of this three-part series, we will explore everyone’s favorite private placement exemption: the accredited investor.

Links to the other articles in this series:

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